EY IFRS Real Estate Survey 2019

IFRS real estate survey

December 2019

Contents1. Executivesummaryandkeyfindings .......................................................... 1

2. The survey ............................................................................................... 3

3. Measurement of investment property ......................................................... 6

3.1 Introduction....................................................................................... 6

3.2 Fair value model versus cost model ..................................................... 6

3.3 External or internal valuation .............................................................. 6

3.4 Valuationmethodology....................................................................... 6

3.5 Highestandbestuseassumption ........................................................ 7

3.6 Disclosures on assumptions and sensitivity .......................................... 8

4. Recently adopted IFRS ............................................................................ 10

4.1 Impact from application of IFRS 9 ..................................................... 10

4.2 Impact from application of IFRS 15 ................................................... 13

4.3 Impact from application of IAS 7 ....................................................... 16

5. IFRSissuedbutnotyeteffective .............................................................. 17

5.1 Expected impact from application of IFRS 16 ..................................... 17

5.2 Expected impact from application of the amendments to IFRIC 23 and IFRS 3 .................................................19

6. Goodwill and impairment ......................................................................... 20

7. Alternative performance measures (APMs) ............................................... 21

8. Key audit matters (KAMs) ........................................................................ 22

9. Lookingahead ........................................................................................ 23

10. Area IFRS contacts .................................................................................. 24

1. Executive summary and keyfindings

The2018financialstatementssurvey(hereinafterreferredtoasthe2018Survey)istheseventhsurveypublishedbyEYGlobalIFRSRealEstateSectorGroup.Inthissurvey,weprovideananalysisofsomeofthekeyfinancialreportingissuesof53realestateentitiesreportingunderInternationalFinancialReportingStandards(IFRS).Ofthese53entities,wecategorised43entitiesas“investmentpropertyholdingentities”and10as“development&constructionentities”.Thedistinctionbetweenthetwocategoriesisimportantbecausetheentitiesineachcategoryhavedifferentbusinessmodelsandareexposedtodifferentrisksandaccountingissues.

Theeconomicandregulatoryenvironmenthaschangedsignificantlyoverthelastfewyearsandthevaluationof,andreportingoninvestmentproperties,continuestoevolve.

Inprevioussurveys,weanalysedwhetherthechangingenvironmentimpactedthelevelofdisclosuresinthefinancialreportsofrealestateinvestmententities,inparticular,withrespect to the adoption of IFRS 13 Fair Value Measurement in 2012andcrisis-relatedissuessuchasvaluationuncertainty,debtcovenantsand“goingconcern”issues.

Inthisyear’ssurvey,wecontinuedtofocusonmeasurement/valuation of investment properties and the related disclosures. Inaddition,weaddressedotherareasoffinancialreportingthat have recently attracted attention in the sector:

• We looked at the impact on real estate entities of the new accountingstandardsIFRS9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers that becameeffectiveformostentitiesin2018.

• Weconsideredtheexpectedimpactofaccountingstandardsandinterpretationsthatwillbecomeeffectiveformostentitiesin2019and2020,inparticular,IFRS16Leases,IFRIC23Uncertainty over Income Tax Treatments and amendments to IFRS 3: Definition of a Business.

• A few real estate entities in the survey have recorded goodwillimpairmentsinthelastcoupleofyears.Weanalysedhowsignificantgoodwillcontinuestobeforrealestateentitiesandtowhatextentgoodwillimpairmentshavebeenrecorded.

• Alternativeperformancemeasures(APMs),suchasfundsfromoperations(FFO)orthemeasurespublishedbytheEuropeanPublicRealEstateAssociation(EPRA),maysupplementfinancialreportingforrealestateentitiesandoftenrepresentaneffectivewayofcommunicatingimportantentity-specificdevelopments.WeexploredtheextenttowhichAPMshavebeenusedbyrealestateentities.

• InJanuary2015,theInternationalAuditingandAssuranceStandards Board (IAASB) issued its new and revised auditor reportingstandards,whichrequireauditorstoprovidemore transparent and informative reports on the entities theyaudit.Thesestandardshavebeenissuedinresponsetodemandfromusersoffinancialstatements,inthewakeofthefinancialcrisis,formorerelevantinformationonaudits. A particular area of focus within the new standards aretherequirementsofthenewISA701Communicating Key Audit Matters in the Independent Auditor’s Report. Forauditsoflistedentities,anewsectioninthereportcalledKeyAuditMatters(KAMs),highlightsthoseissuesthat,intheauditor’sprofessionaljudgement,wereofmostsignificanceintheaudit.Formostofthefinancialstatementsincludedinthissurvey,theauditor’sreportsincludedKAMs.WehaveinvestigatedhowmanyKAMswere included in the respective reports and which risks werehighlighted.

Our2018Surveyfoundthat:

• Nearlyunchangedcomparedtoour2012survey,almostallsurveyedentitiesbelongingtothecategory“investmentpropertyholdingentities”measuredtheirinvestmentpropertiesusingthefairvaluemodel(incontrasttothecostmodel).Thetechniquesusedtomeasurefairvaluewereeitherdiscountedcashflow(DCF)methodsorincomecapitalisationmethods,oramixofbothofthesevaluationmethods.Comparedtoour2012survey,wedidnotfindanysignificantchanges.

• Almostthreeoutoffourinvestmentpropertyholdingentities(74%)assignedexternalexpertstovaluesubstantiallythewholeportfolioofinvestmentproperty,while only 11% of the entities relied (almost) exclusively on internal valuations.

1IFRS real estate survey |

• Almostallofthesurveyedinvestmentpropertyholdingentitiescategorisedthefairvaluemeasurementsoftheir investment property within Level 3 of the IFRS 13 fairvaluehierarchy,i.e.,fairvaluemeasurementsforwhichunobservableinputsaresignificanttotheentiremeasurement.

• Thenumberofinputsforwhichquantitativeinformationwasdisclosedvariedacrosstheentitiessurveyed.However,themajorityofinvestmentpropertyholdingentitiesprovidedbetweenthreeandsevenquantitativeinputs.

• Themaininputs,forthoseentitiesthatdisclosedquantitativeinformation,werediscountrate,followedbynetrentpersqm,exityield,rentalincomeandrentalgrowth.

• While it is clear that for investment property measured atfairvalue,IFRS13requiresonlynarrativeinformationwithrespecttosensitivity,quantitativeinformationonsensitivitymaybeusefulfortheusersoffinancialstatements. 74% of the surveyed investment property holdingentitiesprovidedquantitativeinformationonsensitivity.

• OftheentitiesinoursurveythatadoptedIFRS9in2018,thevastmajorityreportedno,oronlyanimmaterial,effectontheequityasaresultoftheadoptionofIFRS9.

• Of36surveyedinvestmentpropertyholdingentitiesthathaveadoptedIFRS15,fiveentitiesreportedthattheyhavechangedtheiraccountingpolicieswithrespecttothepresentationofservicecharges.

• Fordevelopment&constructionentities,thechangesbroughtbyIFRS15weremoresignificantthanforinvestmentpropertyholdingentities,giventhatthemajorrevenuestreamforadevelopment&constructionentitytypically comes from contracts with customers that are in

the scope of IFRS 15. For two entities that were impacted byIFRS15,wehaveincludedabstractsfromtheirfinancialstatementsinwhichtheydescribedtheresultingchanges.

• Withrespecttotherequirementsinparagraph44AofIAS 7 Statement of Cash Flows,66%ofthesurveyedentitieshavedisclosedareconciliationbetweentheopeningandclosingbalancesoffinancingliabilitiestodisclosechangesinliabilitiesfromfinancingactivities.

• OnlyoneentityreportedthatithasadoptedIFRS16early.ForentitiesthatplantoadoptIFRS16inthefuture,theaverageincreaseinassetsasaresultofadoptionisexpectedtobeimmaterial.

• With respect to the expected effects from the adoption oftheamendmentstoIFRS3andIFRIC23,noneofthesurveyed entities indicated that it expects a material impact fromeitherofthesestandards/amendments.

• Thevastmajorityofsurveyedentitiesdidnotcarrysignificantamountsofgoodwillintheirbalancesheets.However,17ofthemcarriedmorethananinsignificantamountofgoodwillin2017(i.e.,aratioofmorethan1%incarryingamountofgoodwilltototalassets).Ofthese17entities,41%recognisedagoodwillimpairmentin2018.

• There is still a lot of diversity with respect to the use of APMsintheindustry.WhiletheuseofFFOisprominentinAustraliaandCanada,inEurope,theEPRAmeasuresaremorecommonlyused.DiversityisalsoobservedintheuseofAPMsbothwithinandoutsidethefinancialstatements.

• Almostallofthefinancialstatementsinour2018Survey(onallofwhichanunqualifiedauditopinionwasexpressed),includedKAMsintheauditor’sreports.Typically,theKAMsmostoftenaddressedintheauditreportswerevaluationofinvestmentproperty,revenuerecognitionandgoodwillimpairment.

2 | IFRS real estate survey

2. The survey

Figure 2: Number of entities by category

Figure 1: Geographical composition of the entire population by number of entities

Investment property holdingentities

Development&construction entities

10

43

Thefinancialstatementsincludedinoursurveystemfrom53publiclylistedrealestateentitiesfromallovertheworld.

Ofthese53entities,wehavecategorised43as“investmentpropertyholdingentities”and10entitiesas“development&construction entities”.

Thedistinctionbetweenthesetwocategoriesisimportantbecauseeachgrouphasadifferentbusinessmodelandisexposedtodifferentrisksandaccountingissues.

Forthe43“investmentpropertyholdingentities”inoursurvey,theproportionofinvestmentpropertiesinrelationtototalamountofassetwastypicallyfairlyhigh(i.e.,higherthan70%forthevastmajorityofsurveyedentities).ThetotalvalueoftheassetsheldbytheseentitiesineurosismorethanEUR600billion,withanaveragetotalvalueofEUR14billion per entity.

Brazil

Europe*

4

South Africa 4 Australia 7

Asia**28Canada 55

*Germany:4,UnitedKingdom:4;France:4;Spain:4;Switzerland:3;Poland:3;Netherlands:2;Belgium:2;CzechRepublic:1,Austria:1

**Singapore:4;Japan:1


Forthe10“development&constructionentities”inoursurvey,investmentpropertiestypicallydidnotpresentasignificantportionofthetotalassets.ThetotalamountofassetsoftheseentitieswasaroundEUR35billion,withanaveragetotalamountofassetsofEUR3.5billionperentity.Thisissignificantlylowerthantherespectiveamountfortheinvestmentpropertyholdingentities.

Whilethevastmajorityofthefinancialstatementsincludedinoursurveyhave31Decemberasthefiscalyearenddate,somehaveearlierfiscalyearenddates(e.g.,manyentitiesbasedinAustraliahavetheirfiscalyearenddateson30June).Accordingly,thereweresomedifferencesinrespectofthedateofinitialapplicationforcertainaccountingstandards,suchasIFRS15andIFRS9.Entitiesarerequiredtoapplythesestandardsforannualreportingperiodsbeginningonorafter1January2018.Thismeansthatanentitywithafiscalyearenddateof31Decemberwouldhaveadoptedthesestandardsintheir2018financialstatements,whileanentitywithafiscalyearenddateotherthan31Decemberwillonlyneedtoadoptthesestandardsforthefirsttimeintheir2019financialstatements.


Company name Country Fiscal year endGeneral Property Trust Australia 31 Dec 2018

Stockland Trust Australia 30 Jun 2018

Scentre Group Australia 31 Dec 2018

LendLease Group Australia 30 Jun 2018

Vicinity Centres Australia 30 Jun 2018

Goodman Group Australia 30 Jun 2018

AbacusPropertyGroup Australia 30 Jun 2018

CAImmobilienAnlagenAG Austria 31 Dec 2018

BefimmoSA Belgium 31 Dec 2018

CofinimmoSA Belgium 31 Dec 2018

MRVEngenhariaeParticipaçõesS.A Brazil 31 Dec 2018

Tecnisa S.A. Brazil 31 Dec 2018

Cyrela Brasil Realty S.A. Brazil 31 Dec 2018

GafisaS.A Brazil 31 Dec 2018

BrookfieldPropertyPartnersL.P. Canada 31 Dec 2018

Riocan REIT Canada 31 Dec 2018

DreamOfficeREIT Canada 31 Dec 2018

First Capital Realty Inc. Canada 31 Dec 2018

MorguardCorp. Canada 31 Dec 2018

CPI Property Group S.A. CzechR. 31 Dec 2018

Gecina S.A. France 31 Dec 2018

Klépierre SA France 31 Dec 2018

Icade SIIC France 31 Dec 2018

Unibail-Rodamco-WestfieldSE France 31 Dec 2018

Vonovia SE Germany 31 Dec 2018

Deutsche Wohnen SE Germany 31 Dec 2018

TLGImmobilienAG Germany 31 Dec 2018

Company name Country Fiscal year end

alstriaofficeREIT-AG Germany 31 Dec 2018

lidaGroupHoldingsCo.,Ltd. Japan 31 Mar 2019

Wereldhave N.V. Netherlands 31 Dec 2018

Vastned Retail N.V. Netherlands 31 Dec 2018

EPP N.V. Poland 31 Dec 2018

GlobeTradeCentreS.A. Poland 31 Dec 2018

GlobalworthRealEstateInvest.Ltd. Poland and Romania

31 Dec 2018

Ascendas-SingbridgePteLtd. Singapore 31 Mar 2018

City Developments Ltd. Singapore 31 Dec 2018

MapleTree Investments Pte Ltd Singapore 31 Mar 2019

CapitaLand Ltd. Singapore 31 Dec 2018

Growthpoint Properties Ltd. South Africa 30 Jun 2018

RedefinePropertiesLtd. South Africa 31Aug2018

Emira Property Fund Ltd. South Africa 30 Jun 2018

Accelerate Property Fund Ltd. South Africa 31 Mar 2019

MerlinPropertiesSOCIMIS.A. Spain 31 Dec 2018

Aedas Homes S.A. Spain 31 Dec 2018

Neinor Homes S.A. Spain 31 Dec 2018

InmobiliariaColonialSOCIMIS.A. Spain 31 Dec 2018

PSP Swiss Property AG Switzerland 31 Dec 2018

MobimoHoldingAG Switzerland 31 Dec 2018

Implenia AG Switzerland 31 Dec 2018

The British Land Company plc UK 31 Mar 2019

Hammerson plc UK 31 Dec 2018

Land Securities Group plc UK 31 Mar 2019

Derwent London plc UK 31 Dec 2018

Thetablebelowshowsalloftheentitiesincludedinour2018Survey,plusthecountrytheyarelocatedinandthefiscalyearenddatesofthefinancialstatements:


3.3 External or internal valuation

Entitiesholdinginvestmentpropertyandchoosingthefairvaluemodelareencouraged,butnotrequired,tomeasurethefairvalueoftheseinvestmentpropertiesonthebasisofavaluationbyanindependentvaluerwhoholdsarecognisedandrelevantprofessionalqualificationandhasrecentexperienceinthelocationandcategoryoftheinvestmentpropertybeingvalued(IAS40.32).Despitethefactthatthe involvement of an independent (external) valuer is not mandatory,thevastmajorityofentitiessurveyeddidinvolveindependent (external) valuers: 74% of the entities surveyed assignedexternalexpertstovaluesubstantiallythewholeportfolioofinvestmentproperty,whileafurther19%assignedexternalexpertstovalueatleasta(substantial)portionoftheirinvestmentproperty.Only7%oftheentitiessurveyedperformed (almost) exclusively internal valuations.

3.4 Valuation methodologyOurprevioussurveyshaveshownthatinvestmentpropertyholdingentitiestypicallyapplyoneormoreofthefollowingthreevaluationtechniquestodeterminethefairvalueoftheirinvestment property:

3. Measurement of investment property

3.1 IntroductionInthissection,wefocusonlyonthefinancialstatementsofthe43entitiesinthe“investmentpropertyholdingentities”category,forwhichtheproportionofinvestmentpropertiesinrelationtototalamountofassetistypicallyfairlyhigh.

3.2 Fair value model versus cost modelFigure 3: Measurement basis for investment property

At fair value

At cost

2%

98%

IAS 40 Investment Property allows entities to choose as itsaccountingpolicyeitherthefairvaluemodelorthecost model and to apply that model to all of its investment properties.However,evenifthecostmodelisapplied,entitiesarerequiredtodisclosethefairvaluesoftheirinvestmentproperty(IAS40.79(e))and,therefore,needtodeterminethefair value. Almost all of the surveyed entities (98% or 42 out of43)appliedthefairvaluemodel,whichrepresentsaslightincrease in the popularity of the fair value model compared to ourlastsurveyin2012,when92%ofsurveyedentitiesappliedthatmodel.Onlyoneentity,Icade,stillappliesthecostmodel.However,Icadeprovidesextensivedisclosuresonthefairvaluemeasurement of its investment properties in the notes.

Figure 4: Extent to which portfolio of investment property is valued by external valuers

74%

19%

7% (Substantially)alloncea year

At least a portion once a year

Nosubstantialportion(internal valuation)

Discounted cash flow model (DCF

method)

Income capitalisation

method

(Drect) market comparison

method


Whilethefirsttwomethodsaremostoftenappliedwhenvaluingbuildingsandland,amarketcomparisonmethodisoftenappliedwhenvaluingundevelopedland. Thefollowingchartshowstheextenttowhichthedifferentvaluationtechniqueshavebeenappliedbytheentitiesinour2018Survey(multipleanswerswerepossible):

Figure 5: Valuation techniques used

DCF method

Income capitalisation

Market approach (comparableprices)

81%

72%

37%

Consistentwithourfindingsinrecentsurveys,theDCFmethodisstillthemethodappliedbymostentities,followedbytheincomecapitalisationmethodandthedirectmarketcomparison method.

However,asthenextchartshows,60%ofentitiesdonotrelyontheuseofasinglevaluationmethodtovaluealloftheirproperties,butratherusedifferenttechniquesfordifferentproperties:

Figure 6: Combinations of valuation techniques used

More than one

OnlyDCF

Onlyincomecapitalisation

60%26%

14%

Exclusiveuseofasinglevaluationmethodwasobservedby40%oftheentitieswesurveyed,ofwhich26%usedtheDCFmethod,whiletheremaining14%usedtheincomecapitalisation method.

3.5 Highest and best use assumptionWhendeterminingthefairvalueofaninvestmentproperty,anentityhastoconsideramarketparticipant’sabilitytogenerateeconomicbenefitsbyusingtheinvestmentpropertyinitshighestandbestuseorbysellingittoanothermarketparticipantthatwouldusetheassetinitshighestandbestuse(IFRS13.27).IFRS13definesthehighestandbestuseas“theuseofanon-financialassetbymarketparticipantsthatwouldmaximisethevalueoftheassetorthegroupofassetsandliabilities(e.g.,abusiness)withinwhichtheassetwouldbeused”(IFRS13,AppendixA).Anentity’scurrentuseofanon-financialassetispresumedtobeitshighestandbestuse,unlessmarketorotherfactorssuggestthatadifferentusebymarketparticipantswouldmaximisethevalueoftheasset(IFRS13.29).However,theremaybesituationsinwhichthehighestandbestuseofaninvestmentpropertydiffersfromitscurrentuse.Insuchasituation,anentityisrequiredtodisclosethatfactandwhytheinvestmentpropertyisbeingusedinamannerthatdiffersfromitshighestandbestuse.

Inour2018Survey,onlyfouroutof43entitiesvaluedanyoftheirinvestmentpropertybasedonahighestandbestuseassumption that differs from its current use.

Oneoftheseentities,PSPSwissProperty,madethefollowingdisclosuresoninvestmentpropertyforwhichthehighestandbestusewasdifferentfromitscurrentuse:

As at 31 December 2018, the independent valuation company identified eleven properties which may have significant optimization potential (2017: twelve Properties). The valuation company assessed these properties in accordance with IFRS 13 on the basis of the Highest and Best Use” concept as at the balance sheet date. At six of these properties in the Zurich region, specific clarifications are being made with regard to the implementation of potential usage optimizations. For three properties the basis for the usage optimization already exist. Likewise the optimizing of the use of one property in Lausanne was continued in dialogue with the city of Lausanne. At the remaining four properties (two in the area Basel and one in Zurich as well as one in Geneva), no concrete measures are planned at the moment.

Extract 1: PSP Swiss Property (2018)


3.6 Disclosures on assumptions and sensitivityThe disclosure of the assumptions used to measure the fair value of investment properties and the disclosure of thesensitivityoffairvaluemeasurementstochangesinunobservableinputscontinuetobeimportantinlightofboththecontinuingvolatilityand/orcontinuingriseofrealestatevaluesinmanyrealestatemarkets,andthedemandsfortransparencyfromboththeusersoffinancialstatementsandregulators.

TheextentofdisclosuresonfairvaluemeasurementrequiredbyIFRS13dependsontheLevel(1,2or3)ofthefairvalue hierarchy within which the fair value measurement foraproperty(asawhole)iscategorised.Inthissurvey,weexaminedhowtheentitiescategorisedthefairvaluemeasurements of their investment property:

Figure 7: Level of fair value measurement category

Level 3 only

Level 2 and 3142

WhilejustoneentitycategorisedthefairvaluemeasurementoftheirinvestmentpropertieswithintwoLevels(2and3),alloftheotherentitiesinthesurveyhadexclusivelycategorisedthe fair value measurement of their investment properties within Level 3.

ForLevel2andLevel3measurements,IFRS13requiresthedisclosure of the inputs used in the fair value measurement. Figure8showsthenumberofdifferentinputsthattheentitiesin the survey disclosed.

Figure 8: Total number of inputs used in fair value measurement that have been disclosed

1–2 >7

Thefollowingtableshowsthepercentageofentitiesthathaveprovided disclosures on each of the inputs:

1-2 inputs

3-4 inputs

5-7 inputs

More than 7 inputs

23%

35%21%

21%

Figure 9: Types of inputs disclosed

37%

12%

12%

16%

21%

23%

23%

26%26%

35%

42%

42%

49%

53%

74%Discount rate

Netrentpersqm

Exit yield

Rental income

Rentgrowth

Actual vacancy rate

Net initial yield

Cap rate

Longtermvacancyrate

Construction costs

Reversionary yield

Lengthofleasesinplace

Service costs

Passingrent

Estimated rental value

Equivalentyield

Other9%

10%


IFRS13doesnotprescribepreciselyhowthequantitativedisclosures of inputs used in the fair value measurement shouldbemade.Illustrativeexample17(valuationtechniquesandinputs)accompanyingIFRS13suggeststhatsuchdisclosurescouldbemadebyprovidingarangeofvalues,aswellasaweightedaveragevalueforeachinput.

Thefollowingchartshowshowthesurveyedentitieshaveprovidedthequantitativedisclosuresoninputsusedinthefairvaluemeasurement,i.e.,bypresentingarangeofvalues,bypresentinganaveragevalue,orbypresentingboth:

42%

30%

28% Range

Average

Both(oftheabove)

ForLevel3measurements,IFRS13requiresanarrativedescription of the sensitivity of the fair value measurement tochangesinunobservableinputsifachangeinthoseinputsmightresultinasignificantlydifferentamountand,ifapplicable,adescriptionofinterrelationshipsbetweenthoseinputsandotherunobservableinputsandofhowtheymightmagnifyormitigatetheeffectofchangesintheunobservableinputs.WhileitisclearthatIFRS13requiresonlynarrativeinformationwithrespecttosensitivities,quantitativeinformationonsensitivitiesmaybeusefulfortheusersoffinancialstatements.Thefollowingchartshowsthatthevastmajorityofentitiessurveyed(74%)havevoluntarilyprovidedquantitativeinformationonsensitivities:

Quantitative sensitivity analysis disclosed

Noquantitativesensitivity analysis disclosed

74%

26%

Forthoseentitiesthatdisclosedquantitativesensitivityinformation,weanalysedtheinputsforwhichthesensitivityinformationwasprovided.Thechartbelowshowsthatallofthese entities disclosed sensitivity information for at least discountrateoryield.However,wealsoobservedthatmanyentities provided additional sensitivity information for other inputs,suchasrentalincome,netrentpersqm,rentgrowthorconstruction costs:

Figure 12: Sensitivity analysis by input

100%

28%

22%

22%

9%

6%

6%

3%

3%

16%

Anydiscountrate/yield

Rental income

Netrentpersqmp.a

Rentgrowth

Construction costs

Estimated rental value

Longtermvacancyrate

Actual vacancy rate

Service costs

Other

Figure 11: Disclosure of quantitative sensitivity analysis

Figure 10: Disclosure approaches for input value parameters


4. First-time application of new standards and amendments4.1 Impact of application of IFRS 9IFRS9wasissuedin2014,bringingtogethertheclassificationandmeasurement,impairmentandhedgeaccountingsectionsoftheInternationalAccountingStandardsBoard’s(IASB)projecttoreplaceIAS39Financial Instruments: Recognition and Measurement.Thestandardbecameeffectiveforannualperiodsbeginningonorafter1January2018,whileearlyapplication was permitted.

ThefollowingchartshowsthenumberofentitiessurveyedthathaveearlyappliedIFRS9,appliedIFRS9atitseffectivedateorthathavenotyetappliedIFRS9,giventhatthoseentitieshadafiscalyearbeginningbefore1January2018:

Figure 13: Date of application of IFRS 9

ForthoseentitiesthatappliedIFRS9in2018,themajorityexperiencedno,oronlyanimmaterial,impactonequityasaresultoftheapplicationofIFRS9.Inparticular,noneoftheentitiesreportedasignificantimpactfromapplyingthenewimpairment loss model under IFRS 9.

However,asanexception,oneentity,CityDevelopmentLtd.reported a material effect from the adoption of IFRS 9 in respectofunquotedequityinstrumentsthathadpreviouslybeenmeasuredatcost(underIAS39)andnowhadtobemeasured at fair value (under IFRS 9). City Development Ltd. disclosedthefollowing:

4.2 Impact of application of IFRS 15IFRS15wasissuedin2014andbecameeffectiveforannualperiodsbeginningonorafter1January2018,withearlyadoptionpermitted.IFRS15allowsbothfullretrospectiveapplication,inwhichIFRS15mustbeappliedforallperiodspresentedinthefinancialstatements(withsomelimitedreliefprovided),ormodifiedretrospectiveapplication,inwhichIFRS 15 is only applied in the current period presented in the financialstatements(i.e.,theinitialperiodofapplication),withthecumulativeeffectofinitiallyapplyingIFRS15recordedasanadjustmenttotheopeningbalanceofretainedearningsinthe current period.

ThefollowingchartshowsthenumberofentitiessurveyedthathaveappliedIFRS15using:thefullretrospectivemethod;themodifiedretrospectivemethod;entitiesthathavenotyetappliedIFRS15(giventhatthoseentitieshadafiscalyearendbefore31December2018)*:

Figure 14: Transition method applied under IFRS 15

4.2.1 Investment property holding entitiesThemajorrevenuestreamforaninvestmentpropertyholdingentityistypicallyrentalincomegeneratedfromitstenants.TheaccountingforrentalincomeisscopedoutofIFRS15,as it falls within the scope of IAS 17 Leases or IFRS 16. However,servicesincludedinleasecontracts(e.g.,commonareamaintenance)giverisetorevenuefromnon-leasecomponentsthatneedtobesplitoutandaccountedforseparately in accordance with IFRS 15. When more than one partyisinvolvedinprovidinggoodsorservicestoacustomer,IFRS15requiresanentitytodeterminewhetheritisaprincipaloranagentinthesetransactionsbyevaluating

the nature of its promise to the customer. An entity is a principal(and,therefore,recordsrevenueonagrossbasis)ifitcontrolsapromisedgoodorservicebeforetransferringthatgoodorservicetothecustomer.Anentityisanagent

6%

79%

15% Earlyappliedbefore 1 January 2018

Applied in year ended 31December2018

Not yet applied 17

23

9

Full retrospective method

Modifiedretrospectivemethod

Not yet applied

These equity investments represent investments that the Group and the Company intend to hold for the long term for strategic purposes. As permitted by SFRS(I) 9, the Group and the Company have designated these investments at the date of initial application as measured at FVOCI. Unlike FRS 39, the accumulated fair value reserve related to these investments will never be reclassified to profit or loss.

Extract 2: City Development Ltd (2018)

*InBrazil,realestatedevelopmententities,registeredwiththeBrazilianSecuritiesandExchangeCommission(CVM),havetoprepareconsolidatedfinancialstatementsinaccordancewithAccountingPracticesAdoptedinBrazilandwithInternationalFinancialReportingStandards(IFRS),applicabletorealestatedevelopmententities,inaccordancewiththeguidancecontainedinCVM/SNC/SEPCircularLetterNo.02/2018,dated12December2018,whichprovidesguidancefortheaccountingproceduresrelatedtotherecognition,measurementanddisclosureofcertaintypesoftransactionsarisingfromcontractsforthepurchaseandsaleofrealestateunitsunderconstruction.Theyhavebeenexcludedfromthisgraph.


Net versus gross revenue recognition

Before the adoption of IFRS 15, the Group analysed principal versus agent criteria stipulated by IAS 18 and concluded that it does not have an exposure to the significant risks and rewards associated with service charges and accounted for these transactions as if it was an agent. Under IFRS 15, control of the specified goods or services is the overarching principle to consider in determination whether an entity acts as a principal or an agent. The Group evaluated individual service charge arrangements and determined that it does control the services before they are transferred to tenants and therefore that the Group rather acts as a principal in the arrangements. Consequently, the Group changed, in respect of service charges, revenue recognition from net to gross, before deduction of costs of services.

Management also concluded that service revenue should no longer be presented separately from other service charges, because combined presentation of the service charges provides more relevant information about the business. More detail on service charge and other income is provided in note 2.2.

There is no impact of the IFRS 15 adoption on the statement of financial position as at 1 January 2017 and 31 December 2017. The presentation of the statement of profit or loss for the year ended 31 December 2017 was adjusted due to changes in accounting policy as follows:

(and,therefore,recordsrevenueatthenetamountthatitretainsforitsagencyservices)ifitsroleistoarrangeforanotherentitytoprovidethegoodsorservices.TheapplicationguidancecontainedwithinIFRS15todeterminewhetheranentityisactingasaprincipalorasanagenthaschangedcomparedtolegacyrevenuerequirementsinIAS18.Hence,wehaveinvestigatedwhether,underIFRS15,entities reached different conclusions on transition than theydidpreviously.Inthisrespect,wefocusedonlyonthoseentitiesintheinvestmentpropertyholdingentitiescategoryinthis survey.

ThefollowingchartshowsthenumberofinvestmentpropertyholdingentitiessurveyedthatappliedIFRS15in2018thatchangedtheirpresentationofservicechargesinconnectionwiththeapplicationofIFRS15becausetheyreachedadifferentconclusionaboutwhethertheyareaprincipaloranagent:

31.12.2017

Effect of IFRS 15

adoption31.12.2017

adjusted

Gross rental income 262.1 – 262.1

Service revenue 10.8 (10.8) –

Netservicechargeincome 14.7 (14.7) –

Servicechargeandotherincome – 102.6 102.6

Cost of service and other charges – (77.1) (77.1)

Propertyoperatingexpense (55.9) – (55.9)

Net rental income 231.7 – 231.7

Total revenues 438.2 77.1 515.4

Totaldirectbusinessoperatingexpenses (166.4) (77.1) (243.6)

Netbusinessincome 271.8 – 271.8

14%

86%

ChangeinpresentationNochangeinpresentation

Ofthoseentitiesthatchangedthepresentation,weonlyobservedoneentitythatchangedthepresentationforsomeelementsofservicechargeincomeandexpensefromagrosstoanetbasis,whileforallotherentities,thechangewasfromanettoagrossbasis.OneoftheentitiesthatchangeditspresentationisCPIPropertyGroupS.A.whichdescribedthischangeintheir2018financialstatements,asfollows:

Extract 3: CPI Property Group S.A. (2018)

Figure 15: Change in presentation of service charges


AnotherentitythathaschangeditspresentationwithrespecttoservicechargesisalstriaofficeREITAG,whichdescribedthischangeintheir2018financialstatements,asfollows:

The Group mainly generates revenues from the long-term leasing of real estate space. The accounting of these revenues is based on IAS 17 or, in the future, on IFRS 16 and is not subject to the requirements of IFRS 15. In addition, revenues are generated from the Group’s own provision of real estate management services, which, however, are of subordinate importance in relation to the Group’s total revenues. Proceeds from the sale of real estate assets are not reported under sales but in a separate line item, Net result from the disposal of investment property” and are also subject to the regulations of IFRS 15.

As part of the conclusion — also taking emerging industry best practices into consideration — it emerged that alstria assumes a principal position with regard to the service charge costs of letting and that these ancillary costs charged to the tenants are to be presented as revenues. The costs incurred relating to the provision of services in this context are presented as real estate operating expenses. This does not result in a change in net rental income. The following table shows how revenues and the corresponding expenses from property management increased in the 2017 and 2018 financial years compared to the balance sheet to be applied up to December 31, 2017.

EUR k 2018 2017

Revenue in accordance with IAS 18 193,193 193,680

Revenue in accordance with IFRS 15 232,353 231,067

Increase in revenue as result of application of IFRS 15 39,160 37,387

Expensesfrompropertyoperatingexpenses due to presentation in accordance with IAS 18 (24,125) (20,769)

Expensesfrompropertyoperatingexpenses due to presentation in accordance with IFRS 15 (63,285) (58,156)

Increaseinoperatingexpensesdueto presentation in accordance with IFRS 15 (39,160) (37,387)

Since alstria applies the retrospective approach with regard to the first-time application of IFRS 15, the comparative information in the consolidated financial statements 2018 has been adjusted for the corresponding periods of the 2017 financial year. Expenses and income from service charges in accordance with IFRS 15 are now presented gross, but their amount does not change. Therefore, the first-time application of IFRS 15 has no impact on the earnings position of the Group.

Extract 4: alstria office REIT (2018)


4.2.2 Development & construction entitiesThechangesbroughtbyIFRS15weremoresignificantfordevelopment&constructionentities,thanforinvestmentpropertyholdingentities.Thisisbecausethemajorrevenuestreamforadevelopment&constructionentitytypicallyresults from contracts with customers that are in the scope ofIFRS15,whileforinvestmentpropertyholdingsentities,themajorrevenuestreamistypicallyrentalincome,whichisaccounted for under IAS 17 or IFRS 16.

While many of the principles in IFRS 15 are similar to the legacyrevenuerequirementsunderIAS11Construction Contracts,IAS18,andrelatedInterpretations(includingIFRIC 15 Agreements for the Construction of Real Estate) whichwereallreplacedbyIFRS15,forsomeentitiesthepatternofrevenuerecognitionforsomeoralloftheirarrangementshaschanged.UnderIFRS15,somedevelopment&constructionentitieswererequiredtomakeadditionaljudgementsthattheydidnothavetomakeunderlegacyrevenuerequirements.IFRS15alsospecifiestheaccountingtreatmentforcertainitemsnottypicallythoughtofasrevenue,suchascertaincostsassociatedwithobtainingandfulfillingacontractandthedisposalofcertainnon-financialassets(includinginvestmentproperty).Keyissuesfordevelopment&constructionentitiesinclude:

• Identifyingperformanceobligations

• Recognitionofrevenueatapointintimeorovertime.Refertoextract5whereImpleniadescribesitsaccountingpolicyincludingthecriteriafordeterminingatwhichpointintimerevenueisrecognised

• Accountingforcontractmodificationsandtheconstraintonvariableconsideration.Refertoextract5whereImpleniaexplainsthatithaschangeditsaccountingpolicydue to IFRS 15.

• Evaluatingsignificantfinancingcomponents

• Measuringprogressovertimetowardsatisfactionofaperformanceobligation

• Recognisingcontractcostassets(includingcostsofobtainingacontract).Refertoextract6whereCityDevelopments explains that sales commissions are no longerexpensedasincurred,butcapitalisedascoststoobtainacontract

• Presentationofcontractassetsandliabilities.Referto extract 6 where City Development Ltd. explains the changesitmadetothepresentationofcontractassetsandliabilitiesduetoIFRS15

• Addressingdisclosurerequirements

ItisalsoworthnotingthatunderIAS11,entitieshadtorecordassetsforunbilledaccountsreceivablewhenrevenuewasrecognised,butnotbilled.Oncetheinvoicewassubmittedtothecustomer,theunbilledreceivablewasreclassifiedasabilledaccountsreceivable.Similarly,billingsinexcessofcostsweregenerallyrecognisedasliabilities.Incontrasttothis,IFRS15isbasedonthenotionthatacontractassetoracontractliabilityisgeneratedwheneitherpartytoacontractperforms.Inaddition,anentitydoesnotrecogniseareceivableuntilithasanunconditionalrighttoreceiveconsiderationfromthecustomer.Entitiesarerequiredtopresentcontractassetsorcontractliabilitiesinthestatementoffinancialpositionordisclosetheminthenotestothefinancialstatements.

FurtherinformationonIFRS15canbefoundinourpublicationApplyingIFRS,AcloserlookatIFRS15,therevenuerecognitionstandard(updatedSeptember2019).


IFRS 15 Revenue from Contracts with Customers

IFRS 15 Revenue from Contracts with Customers” replaces the standards IAS 11 Construction Contracts” and IAS 18 Revenue” as well as associated interpretations and aretobeappliedtorevenuestreamsfromcontractswithcustomers.Theprovisionsenvisageafive-stepmodelforrecognizingrevenue,whichisapplicabletoallcontractswithcustomers.Revenueforservicessuppliedistoberecognizedintheamountoftheexpectedconsideration.Thepointintimeorperiodforrecognizingrevenueisbasedon the transfer of control to the customer.

InGeneralContracting,inConstructionWorksandforservices,contractuallyagreedrevenueisrecognizedovertime.Salesofrealestatearerecognizedatthemomentinwhichcontrolistransferred,i.e.atthetimetitleistransferred,whichisnormallyuponentryintheofficiallandregister.Nomaterialconversioneffectsresultedfrom this.

IFRS15containsmorestringentguidelinesregardingaccountingforcontractmodifications.AccordingtoIFRS15,revenueisonlytoberecognizedifitishighlyprobablethatsignificantamountsofrevenuewillnotbereversedatalaterdate.Claimswerepreviouslycapitalizedifapprovalfromthecustomerwasprobable.ThereassessmentofclaimspreviouslyrecognizedasassetsledtoareductioninequityofCHF14.2millionaftertaxasat1January2018.ThebalancesheetitemtradereceivablesdecreasedbyCHF11.2millionasaresult,workinprogressbyCHF7.5millionanddeferredtaxliabilitiesbyCHF4.5million.

Guarantee retentions are now reported under work inprogress,sincethereisnounconditionalrighttoconsiderationonsuchreceivables.Asaresult,tradereceivableswerereducedbyCHF66.8millionasat1January2018,whileworkinprogressincreasedaccordingly.

ThebalancesheetitemfortradereceivableswasreducedbyatotalofCHF78.1millionfortheabovementionedreasonsandthebalancesheetitemforworkinprogressincreasedbyatotalofCHF59.3million.TheseadjustmentsresultedinareductionindeferredtaxliabilitiesofCHF4.5million.Non-controllinginterestsdecreasedbyCHF0.4million as a result.

Afurtherdeviationemergesfromthereportingofclaimsthathavenotyetbeenapproved.Thesewillnolongerbereportedasvalue-adjustedreceivables,asthereisnounconditionalrighttoconsideration.Tradereceivablesonlycontainunconditionalrightstoconsideration.Theallowanceforexpectedcreditlossesontradereceivablesonlycontainsallowancesforunconditionalreceivables.Thecorrespondingreceivablesandallowancesassociatedtherewith of CHF 78.0 million each were offset as at 1January2018.Thebalancesheetitemfortradereceivablesdidnotchangeasaresult.

Impleniaappliesthemodifiedretrospectivemethodforthe conversion to IFRS 15. If Implenia had applied the replacedstandardsinthereportingperiod,grouprevenueandconsequentlyprofitbeforetaxwouldhavebeenaroundCHF20millionhigher.ConsolidatedprofitandequitywouldhaverisenbyaroundCHF15million.

Extract 5: Implenia AG (2018)


1. Success-based sales commissions

TheGroupandtheCompanypaysalescommissionstobothexternalandinternalpropertysalesagentsforsecuringpropertysalescontractsfortheGrouponasuccessbasis.TheGroupandtheCompanypreviouslyrecognizedsalescommissionsasanexpensewhenincurred,butnowcapitalizessuchcostsascostsofobtainingacontractunder SFRS(I) 15 i.e. contract costs as they are incremental andareexpectedtoberecovered.Thecapitalizedcostsareamortizedconsistentlywiththepatternofrevenuerecognizedfortherelatedcontract.

2. Amortization of development costs

TheGroupandtheCompanypreviouslyrecognizedcostofsalesonthesoldunitsinitsdevelopmentprojectsbyapplyingthepercentageofcompletionontherelevantprojects’totalestimatedconstructioncosts.OnadoptionofSFRS(I)15,theGroupandtheCompanyrecognizesuchcostsinprofitorlosswhenincurredtotheextentofunitssoldinadevelopmentproject.

3. Borrowing costs

ArisingfromthetentativeagendadecisionissuedbytheIFRSInterpretationCommittee(IFRIC)relatingtothecapitalizationofborrowingcostsfortheconstructionofaresidential multi-unit estate development where revenue is recognizedovertime,theGrouphasceasedcapitalizationofborrowingcostsonitsdevelopmentproperties.

4. Presentation of contract assets and liabilities

OnadoptingSFRS(I)15,theGroupandtheCompanyhavealsochangedthepresentationofthefollowingamounts:

• Contract assets in respect of the property development businesswhichrelateprimarilytotheGroup’sandtheCompany’srighttoconsiderationforworkcompletedbuthavenotbeenbilledatthereportingdate.

Group:Asat31December2017,$139.5millionand$168.9million(1January2017:$223.8millionand$371.2million)whichwerepresentedastradereceivables”anddevelopmentproperties”respectively,underFRShavebeenreclassifiedtocontractassets.

Company:Asat31December2017,$8.8millionand$168.9million(1January2017:$9.2millionand$272.1million)whichwerepresentedastradereceivables”anddevelopmentproperties”respectivelyunderFRShavebeenreclassifiedtocontractassets.

• Contractliabilitiesinrespectofthepropertydevelopmentbusinesswhichrelatemainlytoadvance consideration received from customers and progressbillingsinexcessoftheGroup’srighttotheconsideration.

Group:Asat31December2017,$356.3million(1January2017:$403.2million)whichwaspresentedastradeandotherpayables”underFRShasbeenreclassifiedtocontractliabilities.”

Extract 6: City Developments Ltd (2018)


4.3 Impact of application of amendment of IAS 7InJanuary2016,theIASBpublishedamendmentstoIAS7.Theamendmentsrequireanentitytoprovidedisclosuresthatenableusersoffinancialstatementstoevaluatechangesinliabilitiesarisingfromfinancingactivities,includingbothchangesarisingfromcashflowsandnon-cashchanges.Theamendmentswereapplicableforannualperiodsbeginningonorafter1January2017.UnderIAS7,onewaytofulfilthesedisclosurerequirementsisbyprovidingareconciliationbetweentheopeningandclosingbalancesinthestatementoffinancialpositionforliabilitiesarisingfromfinancingactivities.

Asrealestateentitiestypicallyhavesignificantliabilitiesfromfinancingactivities,welookedathowthesenewdisclosurerequirementshavebeenimplemented,i.e.,whetherornottheinformationprovidedbytheentitieswasintheformofareconciliationbetweentheopeningandclosingbalancesoftheseliabilities.Theoutcomeisshowninthechartbelow:

Figure 16: Use of a reconciliation to provide information on changes in financing liabilities

Yes

No66%

34%


5.IFRSissuedbutnotyeteffective

5.1 Expected impact of application of IFRS 16Realestateentitieswillneedtochangecertainleaseaccountingpracticeswhenimplementingthenewleasesstandard,IFRS16,issuedbytheIASBin2016,whichbecomeseffectiveforannualperiodsbeginningonorafter1January2019.

WhileIFRS16significantlychangestheaccountingforlesseesthatarerealestatetenants,requiringthemtorecognisemostleases(i.e.,rentalcontracts)ontheirbalancesheetsasleaseliabilitieswithcorrespondingright-of-use-assets,landlord/lessoraccountingissubstantiallyunchangedfromcurrentaccounting.AswithIAS17,IFRS16requireslandlordstoclassifytheirrentalcontractsintotwotypes:financeleasesandoperatingleases.Leaseclassificationdetermineshowandwhenalandlordrecognisesleaserevenueandwhatassetsalandlordrecords.Inmostcircumstances,theprofitorlossrecognitionpatternforlandlordsisnotexpectedtochange.

UnderIFRS16,anintermediatelandlordaccountsfortheheadleasebyrecognisingleaseliabilitieswithacorrespondingright-of-use-assetandforthesubleasessimilartoleasesoverownedassets.However,anintermediatelandlordconsiderstheleaseclassificationcriteriawithreferencetotheremainingright-of-useassetratherthantheunderlyingasset(e.g.,abuildingsubjecttoalease)arisingfromtheheadleasewhenclassifyingasubleaseasfinanceoroperating.Ifaleasedpropertymeetsthedefinitionofinvestmentproperty,thesubleaseisclassifiedasanoperatingleaseandtheintermediatelandlordelectsthefairvaluemodelinIAS40asanaccountingpolicy,IFRS16requirestheintermediatelandlordtomeasureright-of-useassetsarisingfromleasedpropertyinaccordancewithIAS40.ThisrepresentsachangefromthecurrentscopeofIAS40.Underexistingrequirements,thisisanelectionthatisavailableonaproperty-by-propertybasis.

IFRS 16’s transition provisions permit lessees to use either the fullretrospectiveorthemodifiedretrospectiveapproachforleasesexistingatthedateofinitialapplicationofthestandard(i.e.,thebeginningoftheannualreportingperiodinwhichanentityfirstappliesthestandard),withoptionstousecertaintransitionreliefs.OnlyoneoftheentitiessurveyedhasadoptedIFRS 16 early.

In respect of disclosure of the different transition approaches theentitiesintendtoapplywhenadoptingIFRS16,themajorityofentitiessurveyed(62%)intendtoapplythemodifiedretrospectiveapproach,whileonlyasmallproportionoftheentities surveyed (6%) intend to apply the full retrospective approach. Approximately a third of the entities did not provide therelateddisclosure,presumablyforreasonsofmateriality.

Figure 17: Transition method to be applied under IFRS 16

Modifiedretrospectiveapproach

Fully retrospective approach

Not disclosed

62%

32%

6%

Thevastmajorityofentitiessurveyed(49of53)madequalitativeorquantitativedisclosuresontheexpectedeffects that the adoption of IFRS 16 would have on their balancesheetsand/ortheirequity.However,wefoundveryfew disclosures of the potential effects of IFRS 16 on the


IFRS 16 Leases

Thenewstandardconcerningleaseswillbeappliedfrom1 January 2019 and replaces IAS 17 Leases” as well as interpretations associated therewith.

UnderIFRS16,allassetsandliabilitiesarisingfromleasesmustberecognizedinthebalancesheetunlesstheleaseterm is not more than twelve months or the asset is of minorvalue.Thecapitalizationofleasedassetsandtherecognitionofleaseobligationsasliabilitieswillexpandthebalancesheet.

Impleniahasmaterialleasesforrealestate,large-scaleequipment,vehiclesandsmallmachineryaswellassiteequipment.Leasesforsmallmachineryandsiteequipmentoften have a term of less than one year and are therefore notpostedonthebalancesheetunderthenewstandardeither.

RightsofuseandleaseliabilitiesofaroundCHF160millionwouldhavetoberecognizedatthereportingdate.Recognitionofrightsofusewouldmainlyrelateto

realestateandlarge-scaleequipment.Asaresultofthisbalancesheetexpansion,theequityratiowoulddecreasebyapproximately1.1%atthereportingdatewhileequitywouldremainvirtuallyunchanged.OperatingincomebeforedepreciationandamortizationwouldhaveimprovedbyCHF68million.Operatingincomeinthereportingperiodwouldhavebeenmarginallyhigher.Conversionwillleadtoareductioninrentalexpense.Incontrast,depreciationandinterestexpensewillbehigher.Theimpactonprofitbeforetaxwouldbeimmaterialinthereportingperiod.CashflowfromoperatingactivitieswouldincreasebyCHF65millioninthereportingperiodandcashflowfromfinancingactivitieswoulddecreaseaccordingly.

Theextentofthebalancesheetexpansiondependsonthenumberofpiecesoflarge-scaleequipmentleasedasatthereportingdate,thecompany-specificinterestrateandtheassessmentregardingtheexerciseofpossibleextension,purchase or cancellation options.

ImpleniawillapplythemodifiedretrospectivemethodforIFRS 16.

Accordingly,onaveragethefootprintofIFRS16infinancialstatementsofentitiesintherealestatesectorwillnotbeassignificantascanbeobservedinothersectorssuchasretail,utilities,telecommunicationandairlines.

Theentityinour2018SurveythatexpectedthehighestrelativeincreaseinassetsandliabilitiesfromtheapplicationofIFRS16wasImpleniaAG,adevelopmentandconstructionentityfromSwitzerland(i.e.,notaninvestmentpropertyholdingentity).ImpleniaAGprovidedthefollowingdisclosuresontheexpectedimpactofIFRS16inits2018financialstatements:

incomestatementorthestatementofcashflows.Underthe assumption that for those entities which stated that the adoption of IFRS 16 would not have a material effect on their balancesheetand/ortheirequity,therespectiveeffectisnil,wehavecalculatedtheunweightedaverageeffectsfromadoptingIFRS16,asfollows:

• Anaverageexpectedincreaseintotalassetsby0.7%

• Anaverageexpectedincreaseintotalliabilitiesby1.2%

• Theaverageexpectedimpactontotalequitywasonlymarginal

Extract 7: Implenia AG (2018)


5.2 Expected impact of the amendments to IFRIC 23 and IFRS 3

5.2.1 IFRIC 23 Uncertainty over Income Tax TreatmentsInJune2017,theIASBissuedIFRIC23.IFRIC23clarifiestheaccountingforuncertaintiesinincometaxes.Theinterpretationhastobeappliedtodeterminethetaxableprofit(taxloss),taxbases,unusedtaxlosses,unusedtaxcreditsandtaxrates,whenthereisuncertaintyoverincometax treatments under IAS 12 Income Taxes. IFRIC 23 is effectiveforannualreportingperiodsbeginningonorafter1 January 2019.

Oursurveylookedatthesurveyedentities’disclosureofthepossibleimpactthatapplicationofIFRIC23willhaveontheirfinancialstatementsintheperiodofinitialapplication.Noneof the entities surveyed indicated that they expect a material impactfromthisnewinterpretation.Oneentitywasnotinapositiontofinallyassessimpacteffectsasithadnotfinishedits analysis.

5.2.2 Amendments to IFRS 3 Definition of a BusinessIntherealestatesector,thequestionwhethertheacquisitionofrealestateconstitutesabusinesscombinationortheacquisitionofagroupofassetshasbeendiscussedforalongtime.Oneofourearliersurveyshighlightedsignificantdifferences in how entities in the real estate sector determine whetheranacquisitionqualifiesasabusinesscombination,whichreinforcestheviewthatthedeterminationwassubjecttojudgement.

InOctober2018,theIASBissuedamendmentstoIFRS3aimedatresolvingsomeofthedifficultiesthatarisewhenanentitydetermineswhetherithasacquiredabusinessoragroupofassets.Theamendmentsareeffectiveforbusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafter 1 January 2020.

Oursurveylookedatthesurveyedentities’disclosureofthepossibleimpactthatapplicationoftheamendmentstoIFRS3willhaveontheirfinancialstatementsintheperiodofinitialapplication. None of the entities surveyed indicated that it expectsamaterialimpactfromapplyingIFRS3.Oneentitywas not in a position to assess the effects of any impact as it had not completed its analysis.


6. Goodwill and impairment

Goodwill in the real estate sector typically arises on the acquisitionofabusinessasaresultofthefollowingfactors:

• Synergiesoftheacquiredportfolioandsynergiesofcombiningportfolios(e.g.,anticipatedabilitiesoftheacquiredmanagement/developmentteamtooutperformthe market or achieve economies of scale)

• Therequirementtomeasureidentifiableitemsusingameasurementbasisotherthanfairvalue—typicallydeferred taxes measured at nominal value

• Overpayments

Welookedattheextenttowhichgoodwillwasrecognisedintheentities’financialstatementsatyearend2018andforthecomparativeperiodbydeterminingthepercentageofthecarryingamountofgoodwillinrelationtototalassets.Wethencategorisedtheentities,asfollows:

• Entitieswithgoodwillamountingto5%oftotalassetsormore

• Entitieswithgoodwillamountingtomorethan1%butlessthan 5% of total assets

• Entitieswithgoodwillamountingtolessthan1%oftotalassets

Thefollowingchartshowstheoutcomeofthisanalysisfor2017and2018,whichdemonstratesthatthemajorityofsurveyedentitiesdonotcarrysignificantamountsofgoodwillontheirbalancesheets:

Forthoseentitiessurveyedthat,asofyear-end2017,hadgoodwillamountingto1%ormoreoftotalassets(17entitiesintotal)weinvestigated:

• Whetheranygoodwillimpairmentwasrecordedinthesubsequentyearof2018.And,ifso

• Howlargetheimpairmentwasrelativetothecarryingamountofgoodwillattheprecedingyearendin2017

Wefoundthat41%ofthoseentitiesincurredgoodwillimpairmentchargesin2018,andtheaverage(unweighted)impairmentchargeamountedto27%ofthecarryingamountofgoodwillattheprecedingyearend.Someentitiesexplainedthattheincreaseinrealestatevalueswasacauseforgoodwillimpairment.

Figure 18: Relative significance of goodwill

0

5

10

15

20

25

30

35

40

Relationgoodwill/total assets 5% or

bigger

Relationgoodwill/total assets 1%<x<5%

Relation goodwill/total

assetsbelow1%

2017 2018

7 710

8

3836


7. Alternative performance measures

Alternativeperformancemeasures(APMs),suchasFFO,orthemeasurespublishedbyEPRA,oftensupplementGAAP-reportingforrealestateentitiesandrepresentaneffectivewayofcommunicatingimportantentityspecificdevelopmentsandmakethemcomparablewithpeers.

TheEPRAisanon-profitorganisationbasedinBrusselsand represents the interests of listed European real estate entities.EPRA’spurposeisinbroadeningtheunderstandingofinvestment opportunities in listed real estate entities in Europe as an alternative to traditional assets. In order to improve the comparabilityofrealestateentitiesandtopresentproperty-specificissues,EPRAhascreatedaframeworkforstandardreportingbeyondIFRSrequirements.

WeanalysedtheextenttowhichAPMshavebeenusedbythe43entitiesthatwecategorisedas“investmentpropertyholdingentities”,forwhichtheproportionofinvestmentpropertiesinrelationtototalamountofassetistypicallyfairlyhigh.

Wefoundthefollowing:

• AllofthesurveyedentitiesusedsomekindofAPMs,eventhoughnotnecessarilyFFOoroneoftheEPRAmeasures

• FFOwaspresentedby40%ofthesurveyedentities,primarilybyentitieslocatedinAustralia,CanadaandGermany.MostoftheseentitiespresentedFFOin

theManagementDiscussionandAnalysis(MD&A)/managementcommentaryandothersectionsoftheannualreportoutsidethefinancialstatements.Interestingly,someentitiesinAustraliaalsopresentedFFOwithinthefinancialstatementsaspartoftheirsegmentreportingdisclosures.

• TheEPRAmeasureswerepresentedby50%ofsurveyedentities,inparticular,byEuropeanrealestateentities.

• Typically,EPRAmeasureswerepresentedoutsidethefinancialstatements.However,afewentitiesalsopresentedEPRAmeasureswithinthefinancialstatements,oneofthoseentitiesbeingDerwentLondonplc(seebelow).

• Approximately 30% of the entities surveyed used a separate section in their annual report to present EPRA measures.

• Some of the entities located in South Africa did not use EPRAmeasures,but,instead,usedothersimilarmeasures.

Aspointedoutabove,DerwentLondonplcwasoneoftheentities that included EPRA measures in their notes to financialstatements.AnextractofthisnoteshowingthesummarytableofEPRAmeasuresispresentedbelow:

38 EPRA Performance measuresSummary table

2018 2017Pence per share

pPence per share

p

EPRAearnings £126.1m 113.07 £105.0m 94.23

EPRA net asset value £4,220.8m 3,776 £4,153.1m 3,716

EPRA triple net asset value £4,131.1m 3,696 £4,042.8m 3,617

EPRA vacancy rate 1.8% 1.3%

EPRAcostratio(includingdirectvacancycosts) 23.3% 20.8%

EPRA net initial yield 3.4% 3.4%

EPRA topped-up” net initial yield 4.6% 4.4%

Extract 8: Derwent London plc (2018)


8. Key audit matters (KAMs)

InJanuary2015,theInternationalAuditingandAssuranceStandardsBoardissueditsnewandrevisedauditorreportingstandards,whichrequireauditorstoprovidemoretransparentand informative reports on the entities they audit. These standardshavebeenissuedinresponsetodemandfromusersoffinancialstatements,inthewakeofthefinancialcrisis,for more relevant information on audits. A particular area offocuswithinthenewstandardsistherequirementsofthenewISA701.Forauditsoflistedentities,anewsectioninthereport,KeyAuditMatters,highlightsthoseissuesthat,intheauditor’sprofessionaljudgement,wereofmostsignificanceintheaudit.Theseareareaswheretheremightbeahigherriskofmaterialmisstatementorwheresignificantmanagementorauditorjudgementsareinvolved.ISA701includesajudgement-baseddecision-makingframeworktohelpauditorsdecide which issues from the audit would constitute KAMs.

Inalmostallofthefinancialstatementsinoursurvey(onallofwhichanunqualifiedauditopinionwasexpressed),theauditor’s report included KAMs. We analysed how many KAMs wereincludedintherespectivereports.Thechartbelowshowsthat most audit reports included two or three KAMs:

Figure 19: Number of KAMs that have been addressed in the audit reports

Thechartbelowshowsthethreetopicsthatweremostoftenaddressed as KAMs in the audit reports:

Figure 20: Areas for which KAMs have been prepared

Valuation of investment property

Revenuerecognition

Goodwill impairment

82%

31%

13%

Notsurprisingly,forthoseentitiesthatwecategorisedas“investmentpropertyholdingentities”thepercentageofauditreportsinwhichaKAM“valuationofinvestmentpropertywasincluded was almost 100%.

Asimilarobservationwasmadewithrespecttoauditreportsofentitiesinoursurveycategorisedas“development&constructionentities”forwhichtherelativefrequencyoftheKAM“Revenuerecognition”wassignificantlyhigherthanthatforthoseentitiescategorisedas“investmentpropertyholdingentities”:Fordevelopment&constructionentities”,sevenofnine (78%) audit reports that included KAM included a KAM on “RevenueRecognition”,whileforinvestmentpropertyholdingentitiesthecorrespondingnumberwasonly18%.

TherelativefrequencyoftheKAM“Goodwillimpairment”isquitesignificant,consideringthatthecarryingamountofgoodwilltypicallymakesuponlyaminorportionofarealestateentities’totalassets.However,thisisconsistentwithourobservationinsection6abovethat,fortheentitiessurveyedthatcarriedmorethananinsignificantamountofgoodwillin2017,therewasahighlikelihoodofasignificantgoodwillimpairmentin2018.

18%

42%22%

16%2% 1

2

3

4

6


9.Lookingahead

Oursurveyshowsthat,whileinsomeareasoffinancialreportingofrealestateentities,ahighdegreeofglobalconsistencyhasalreadybeenachieved(especiallyinrespect of the increased use of the fair value model comparedwiththecostmodel)andthereisgreaterconsistencyinrelateddisclosures,significantdiversityindisclosuresremainsinmanyareaswhichmakesitdifficultfor investors to directly compare entities.

Themajornewaccountingstandardsthathavebeenissuedintherecentyears—IFRS9,IFRS15andIFRS16—willlikelynotleaveasignificantfootprintinthefinancialstatementsofinvestmentpropertyholdingentities,whileinparticular,inrespectofIFRS15,theimpactfordevelopment&constructionentitiesmaybemoresignificant.Itremainstobeseentowhatextentthesenewstandardswillimpactthedegreeofconsistencyordiversityinfinancialreportingofrealestateentities.

Real estate entities should closely monitor the IASB’s PrimaryFinancialStatementsprojects,whichispartoftheIASB’splantopromote“BetterCommunicationinFinancialReporting”.Theobjectiveofthisprojectistoimprovetheprimaryfinancialstatementswithafocusonthestatementsoffinancialperformance.TheIASBisalsoproposingareductioninthenumberofpresentationchoicesforitemsinthestatementoffinancialperformanceandstatementofcashflowstomakeiteasierforinvestorsto compare entities’ performances and evaluate their futureprospects.Anumberofillustrativeexamplesofstatementsoffinancialperformanceareexpectedtobeincluded in an exposure draft in order to illustrate the IASB’sproposal.TheIASBexpectstopublishanexposuredraftattheendof2019.Thisprojectmayhavefarreachingconsequencesforrealestateentities.


10. Area IFRS contacts

Global

Victor Chan [email protected] +44 20 7980 0677

Europe, Middle East, India and Africa

Belgium Vincent van Caloen [email protected] +32 2 774 6498

France NathalieCordebar [email protected] +33 1 46 93 62 64

Germany ChristophPiesbergen [email protected] +49 40 36132 12343

Greece Christiana Panayidou [email protected] +30 2102886230

Israel GilKatz [email protected] +97 2 3 5680345

Italy Giuseppe Savoca [email protected] +39 02722122585

Kenya Frederick C Macharia [email protected] +25 4 20 2715300

South Africa DennisJEsterhuizen [email protected] +27 11 502 0079

Spain JesusFernandoPerezMolina [email protected] +3 4917493376

Sweden KatrineSöderberg [email protected] +46 8 520 598 12

Switzerland ElisaAlfieri [email protected] +41 58 286 3687

Switzerland DanielZaugg [email protected] +41 58 286 4686

UK Bernd Kremp [email protected] +44 20 7951 3142

UK Michael Varila [email protected] +44 20 7951 7297

Americas

Brazil Marcos Alexandre S. Pupo [email protected] +55 11 2573 3048

Canada Jeff Glassford [email protected] +1 4169433826

USA Derek VanEmon [email protected] +1 3176817490

Asia Pacific

Australia Peter H Barnikel [email protected] +61 2 9248 5243

Australia Mark J Conroy [email protected] +61 2 8295 6988

Indonesia Ma Cynthia D Belen [email protected] +62 21 5289 4911

Indonesia GibbsonBNiala [email protected] +63 2 8910307

Singapore SengChoonTan [email protected] +65 6309 6950

Japan YukikoKobayashi [email protected] +81 3 3503 1100

24 | IFRS real estate survey24 | IFRS real estate survey

Notes


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About EY’s Global Real Estate, Hospitality & Construction Sector Today’s real estate sector must adopt new approaches to address regulatoryrequirementsandfinancialriskswhilemeetingthechallengesofexpandinggloballyandachievingsustainablegrowth.EY’sGlobalRealEstate,Hospitality&ConstructionSectorbringstogetheraworldwideteamofprofessionalstohelpyousucceed—ateamwithdeeptechnicalexperienceinprovidingassurance,tax,transactionandadvisoryservices.TheSectorteamworkstoanticipatemarkettrends,identify their implications and develop points of view on relevant sector issues.Ultimately,thisteamenablesustohelpyoumeetyourgoalsandcompete more effectively.

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EY IFRS Real Estate Survey 2019

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Transcript of EY IFRS Real Estate Survey 2019