For the purposes of this assignment, you are to imagine that you work as Audit Manager for a company called Amazing Accountants. Your new audit client is a listed company in Australian or Singapore Stock Exchange ( ABACUS REAL ESTATE ). The client has asked you to perform their financial report audit for the financial year ended 31 December 2020.
PART 3
Identify or assume TWO (2) high level/detective internal controls and propose a control test for each control in ANY of the following processes.
* Cash receipt and payment
* Sales and accounts receivables
* Purchase and accounts payables
* Inventory and Cost of goods sold
* Payrolls
* Non-current assets and Depreciation
Part 4 Question
Design FIVE (5) substantive procedures for the transactions and balances discussed in question (3) and justify why you select these substantive procedures for the following scenarios:
1. Your proposed tests of controls in question (3) PASSED.
2. Your proposed tests of controls in question (3) FAILED.
Part 5 Question
Assume that the global pandemic COVID-19 will cause a material impact to your audit client. What additional audit procedures and disclosures are required in your audit planning and audit opinion.
ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) GROUP RESULTS SUMMARY The Board monitors a range of financial information and operating performance indicators to measure performance over time. We use several measures to monitor the financial success of our overall strategy. The key measure is underlying profit. Revenue (5 million) income (5 million) Statutory net profit excluding non-controlling Interests ($ million) Underlying profit ($ million) Underlying profit per security (c) Cashflow from operating activities (5 million) Cashflow from operating activities per security (c) Distributions per security (c) Interest cover ratio Weighted securities on issue (million) A Abacus 2016 263.7 402.9 185.9 124.0 22.36 91.5 16.50 17.00 4.2x 554.7 2015 287.8 375.9 1335 128.3 24.53 119.3 22.75 17.00 5.1x 524.4 The Group earned a statutory net profit excluding non-controlling interests of $185.9 million for the year ended 30 June 2016 (2015: $133.5 million). This profit has been calculated in accordance with Australian Accounting Standards. It includes certain significant items that need adjustment to enable securityholders to obtain an understanding of Abacus' underlying profit of $124.0 million, a 3.4% decrease on the 2015 underlying profit of $128.3 milion The underlying profit reflects the statutory profit as adjusted in order to present a figure which reflects the Directors' assessment of the result for the ongoing business activities of Abacus, in accordance with the AICD/ Finsia principles for reporting underlying profit. The consolidated profits/(losses) which belong to the securityholders of Abacus Hospitality Fund, Abacus Diversified Income Fund II and Abacus Wodonga Land Fund are excluded as these profits cannot and do not form part of the distributable income of Abacus. The calculation of underlying profit excludes items such as unrealised fair value gains / losses on investment properties, unrealised provision gains / losses, adjustments arising from the effect of revaluing assets/Wabilities carried at fair value (such as derivatives, financial instruments and investments), the consolidated profits/(losses) of managed funds which do not form part of the assessable or distributable profits of Abacus and other adjustments in the determination of underlying profit including transactions that occur infrequently and those that are outside the scope of Abacus' core ongoing business activities. Underlying profit is the basis on which distributions are determined The reconciliation between the Group's statutory profit excluding non-controlling interests and Abacus' underlying profit is below. This reconciliation and the underlying profit has not been reviewed or audited by the Group's auditor ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) GROUP RESULTS SUMMARY The Board monitors a range of financial information and operating performance indicators to measure performance over time. We use several measures to monitor the financial success of our overall strategy. The key measure is underlying profit. Revenue ($ million) Total income ($ million) Statutory net profit excluding non-controlling interests ($ million) Underlying profit ($ million) Underlying profit per security (c) Cashflow from operating activities ($ million) Cashflow from operating activities per security (c) Distributions per security (c) Interest cover ratio Weighted securities on issue (million) Abacus 2016 263.7 402.9 185.9 124.0 22.36 91.5 16.50 17.00 4.2x 554.7 2015 287.8 375.9 133.5 128.3 24.53 119.3 22.75 17.00 5.1x 524.4 The Group earned a statutory net profit excluding non-controlling interests of $185.9 million for the year ended 30 June 2016 (2015: $133.5 million). This profit has been calculated in accordance with Australian Accounting Standards. It includes certain significant items that need adjustment to enable securityholders to obtain an understanding of Abacus' underlying profit of $124.0 million, a 3.4% decrease on the 2015 underlying profit of $128.3 million The underlying profit reflects the statutory profit as adjusted in order to present a figure which reflects the Directors' assessment of the result for the ongoing business activities of Abacus, in accordance with the AICDI Finsia principles for reporting underlying profit. The consolidated profits/(losses) which belong to the securityholders of Abacus Hospitality Fund, Abacus Diversified Income Fund II and Abacus Wodonga Land Fund are excluded as these profits cannot and do not form part of the distributable income of Abacus. The calculation of underlying profit excludes items such as unrealised fair value gains / losses on investment properties, unrealised provision gains / losses, adjustments arising from the effect of revaluing assets / liabilities carried at fair value (such as derivatives, financial instruments and investments), the consolidated profits/(losses) of managed funds which do not form part of the assessable or distributable profits of Abacus and other adjustments in the determination of underlying profit including transactions that occur infrequently and those that are outside the scope of Abacus' core ongoing business activities. Underlying profit is the basis on which distributions are determined. The reconciliation between the Group's statutory profit excluding non-controlling interests and Abacus' underlying profit is below. This reconciliation and the underlying profit has not been reviewed or audited by the Group's auditor ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) GROUP RESULTS SUMMARY (continued) 2016 $000 105.886 2015 $'000 133,496 Consolidated statutory net profit after tax attributable to members of the Group add back: Consolidated (profits losses relating to the managed funds (these profits losses are excluded as the profitshosses of the managed funds cannot and do not form part of the assessable and distributable income of Abacus) Net profit attributable to Abacus securityholders (16 154) 169,732 14,135 147,033 (74,029) Certain significant items: Net change in fair value of investment properties held at balance date Net change in property, plant and equipment remeasured at fair value Net change in fair value of investments and financial instruments held at balance date Net change in fair value of derivatives Net change in fair value of property, plant and equipment and investment properties included in equity accounted investments Impairment of land development Net tax benefit on significant items Underlying profit attributable to Abacus securityholders (14) 8.250 (11,575) (29,430) (435) (1,323) 10.949 940 40.622 (8.983) 124,011 128,334 Basic eamings per security cents) Basic underlying earnings per security (cents) Distribution per security (cents including proposed distribution) Weighted average securities on issue million) Abacus 2016 33.51 22 36 17.00 554.7 2015 25.46 24.47 17.00 524.4 FY16 saw the continuation of the market fundamentals that we saw in 2015. Markets remained challenging as the economy continues to adjust to the reduced contribution from the resources sector and lower global economic growth. As a result the low interest rate environment continued in Australia and sustained strong demand for higher yielding real estate assets. The weight of global capital seeking yield in a low yield global environment saw further cap rate compression and further exacerbated the search for good value amongst the acquisition opportunities the Group reviewed during the year. The leasing market showed signs of improvement with stronger fundamentals amongst the Eastem Seaboard CBD office markets, particularly across Sydney and Melbourne which saw positive momentum with office demand and rental growth. Brisbane is seeing improved office demand fundamentals. Retail trade growth continues to improve due to the low interest rate environment and strong house price growth Abacus continued its cautious investment approach during the year, focusing on its self-self-storage investment strategy and acquiring 7 stabilised self-storage facilities and industrial assets we intend to convert into self- storage for $62 million. Abacus was able to secure two commercial properties that met our investment criteria: Lutwyche City Shopping Centre in Brisbane for $65 million in joint venture with the Zenonos Group (ABP interest 75%) and an office and retail building at 201 Pacific Highway, St Leonards for $115 million in joint venture with The Goldman Sachs Group (ABP interest 50%), as part of our third party capital platform. These assets exhibit strong core plus opportunities to drive capital value while providing a strong income yield. The low interest rate environment sustained the residential market throughout the year. Markets around Australia did experience a pullback in demand mid-year as markets took a breather following a sustained period of very strong growth. Levels of demand for stock remained high particularly in Sydney, towards the end of the year. As reported in the half-year, the residential and sub-division at Muswellbrook has been adversely affected by the sharp decline in the coal Industry. Muswellbrook has been deeply affected by this decine which has resulted in increased unemployment and a poor economic outlook particularly for the residential market in this part of NSW. This has resulted in a non-recurring Impalment of $40.6 million. This impairment has been driven by the specific conditions within the coal industry and the Muswelbrook area ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) GROUP RESULTS SUMMARY (continued) The increase in the Group's statutory net profit excluding non-controlling interests was principally due to the net change in fair value of investment properties. The impact of both year-end fair value adjustments and the Group's performance on its financial position were as follows: 2016 2015 Total assets (5 million) 2,450.3 2.137.2 Gearing (%) 25.8 18 2 Net assets (5 million) 1,516.0 1.407.1 Net tangible assets (5 million) 1.480.0 1,377.7 NTA per security ($) 2.66 249 NTA per security post distribution (5) 2.59 241 A Abacus - gearing calculated as debt minus cash divided by total assets minus cash Excluding extemal non-controlling interests of 543.3 milion (2015: $31.0 milion) The increase in net assets of the Group by 8% reflects the improved performance compared to the previous year. During the year, the Group's total assets increased $313 million Capital management The Abacus balance sheet continues to be strong with gearing remaining conservative at 25.8%, well within our target gearing limit of 35%. At 30 June 2016, Abacus had $78.3 million of available liquidity that provides capacity for use for up to $150.6 million of accretive acquisitions. We continue to improve and reweight the balance sheet to larger, higher quality assets with a focus on disciplined capital management strategies. We anticipate Abacus' weighted average interest rate will remain relatively stable as current capacity is utilised and anticipate it should be no greater than 5.75% over the next year. CORE SEGMENT RESULTS SUMMARY Business activities that specifically contributed to the Abacus' operating performance and financial condition for the financial year were: Property Abacus' property segment delivered a result of $110.5 million for the year ended 30 June 2016 which was slightly lower than the previous period by 1.4%. The 32 assets (2015: 37 assets) that make up the commercial portfolio had a total value of $994 million at year end (2015: $861 million). Pursuant to the 2016 portfolio valuation process, 8 out of 19 of the commercial properties (excluding equity accounted properties) or 44.4% by value were independently valued during the year to 30 June 2016. The remaining properties were subject to internal review and, where appropriate, their values were adjusted. The valuation process resulted in a net full year revaluation gain of $37.4 million (2015: $10.2 million gain) or 4.8% of investment properties. A significant contributor to this increase was the Group's retail portfolio contributing $20.0 million for the period, ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) CORE SEGMENT RESULTS SUMMARY (continued) The storage portfolio's stabilised assets are the key contributor to underlying growth across the portfolio. They continue to deliver improved operating performances across Australian and New Zealand markets. The stabilised portfolio occupancy grew to 87.4% from 86.0% and average rental rate increased to $259m from $256m. The increased rental and occupancy improved portfolio RevPAM to 5227m from $220m in 2015, a 3.2% increase assuming a stabilised New Zealand exchange rate. RevPAM measures the profitability and efficiency of your portfolio Abacus focused its acquisition strategy on the self-storage sector during the year, acquiring seven assets. These include four stabilised facilities for $44.7 million and $17.5 million of assets for conversion into self-storage facilities. These facilities to be converted were acquired in metropolitan areas in NSW and Victoria. We remain focused on investment opportunities in metro locations that will deliver higher average rental rates than the current portfolio average to drive portfolio returns. During the year, the self-storage sector has continued to be seen as an additional institutional asset class alongside Office, Retail and Industrial sectors. This increased institutional recognition has driven strong pricing of assets as demand for facilities has increased as new and existing entrants to the sector seek assets and market share. This has driven strong capitalisation rate compression across assets as a result Property Ventures The Property Ventures business invests in projects and provides finance solutions that focus on select residential and commercial development opportunities in core locations directly and with experienced local joint venture partners. Abacus has total assets of $500 million invested across a number of residential opportunities in inner city markets across the eastem seaboard of Australia, Abacus control over 9,000 apartment units or land lots which equates to c$55,000 cost base per unit/land lot. This low average price provides evidence that the property ventures business has prospects for strong returns. Abacus has a number of projects under construction due for settlement over the next 12 months, including: The Prince, Canberra ACT (current investment $3.1 million) - Development to build 152 residential apartments in the affluent mixed use Kingston Foreshore precinct, overlooking Lake Burley Griffin. The project is a 50/50 joint venture with the Crafted Group. All apartments have been presold to mix of local owner occuplers and investors. Construction is anticipated to be completed ahead of schedule in August 2016 - Spice Apartments, South Brisbane QLD ($37.1 milion) - Development to build 274 apartments. All apartments have been presold. Construction commenced in December 2014 with completion anticipated in September 2016. Abacus is a lender to the development with associated profit rights Abacus also has a number of joint ventures that own land sites, largely in Metropolitan Sydney areas, undergoing residential rezoning. It is anticipated that a number of these sites will receive their approvals in 2017 and will either be sold to developers or built with our joint venture partners. The recent council amalgamations and subsequent court actions have created headwinds for developers seeking development approvals. Administrators placed into councils affected by amalgamations have caused a back log of approvals while mergers are implemented. This has caused delays to a number of rezoning applications and has created uncertainty to delivery and realisation timings. Funds Management The funds management business generated a result of $10.7 million for the year. Abacus continues to manage these unlisted funds to try to optimise the returns with selective sales and acquisitions of assets where opportunities and market conditions allow The progress of the management for each of the funds is set out in the non-core segment results summary below ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) FUTURE PROSPECTS AND RISKS (continued) Abacus remains committed to delivering transactional returns to securityholders in addition to returns from recurring income. The Abacus balance sheet is exposed to transactional returns from both investment properties and also development projects. The timing and nature of transactional returns are unpredictable and uncertain therefore making it difficult to forecast. There are a number of risk factors associated with property-related businesses that may have an impact on the financial prospects of Abacus. Some of the key risks are outlined below. This outline is not exhaustive, and performance may be affected adversely by any of these risk and other factors. Returns from investment - Returns from investment in real property and other related property exposures depend largely on the amount of rental income that can be generated from the property, the expenses incurred in operations, including the management and maintenance of the property, as well as changes in the market value of the property. Factors which may adversely impact these returns include: the overall conditions in the national and local economy, such as changes in gross domestic product, employment trends, inflation and interest rates; local real estate conditions, such as the level of demand for and supply of retail, commercial and Industrial space: the perception of prospective tenants of the attractiveness, practicality and convenience of the rental space: changes in tenancy laws and planning approval requirements: external factors including major world events such as war, terrorist attacks or force majeure events; unforeseen capital expenditures: supply of new property and other investment assets; cost of property outgoings and recoverability from tenants; and investor demand/liquidity in investment markets. Development - Abacus is involved in the development of real estate. Generally, property development projects have a number of risks including: The risk that planning consents and regulatory approvals are not obtained or, if obtained, are received later than expected, or are adverse to Abacus' Interests, or are not properly adhered to: The escalation of development costs beyond those originally expected: Project delays: Anticipated sales prices or timing on sales not being achieved: Defaults on pre-sales contracts: Non-performance/breach of contract by a contractor, sub-contractor or joint venture partner, and Competing development projects adversely affecting the overall return achieved by Abacus developments. A sustained downturn in property markets caused by any deterioration in the economic climate could result in reduced development profits through reduced selling prices or delays in achieving sales. Increases in supply or fals in demand in any of the sectors of the property market in which Abacus operates or invests could influence the acquisition of sites, the timing and value of sales and carrying value of projects The residential property market in particular may be adversely affected by declining consumer sentiment and Increasing interest rates. In the short term this may affect, for example, project enquiry levels or rates of sale. In the medium-term factors such as the oversupply or undersupply of various markets may materially impact Abacus' development operations A number of factors affect the eamings, cashflows and valuations of Abacus' commercial property development, including construction costs, scheduled completion dates, estimated rental income and occupancy levels and the ability of tenants to meet rental and other contractual obligations ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) FUTURE PROSPECTS AND RISKS (continued) Leasing terms and tenant defaults - The future financial performance of Abacus will depend, in part, on its ability to continue to lease existing retail, office, industrial, self-storage and hotel space that is vacant or becomes vacant on economically favourable terms. In addition, its ability to lease new asset space in line with expected terms will impact on the financial performance of Abacus. The ability of major tenants to meet their rental and other contractual commitments to Abacus (such as in situations of insolvency or closure of their businesses) may have an adverse impact on the income from properties, which may result in an adverse impact on the financial performance of Abacus This risk is managed through active asset management including ongoing liaison with tenants, regular maintenance and refurbishment of properties to attract tenants, timely marketing programs for vacant space and due diligence on the financial strength of prospective tenants prior to entering into leases. Funding - The property investment and development sector is highly capital intensive. The ability of Abacus to raise funds (equity and debt) on acceptable terms will depend on a number of factors including capital market conditions general economic and political conditions, Abacus' performance, and credit availability. Changes in the cost of current and future borrowings and equity raisings may impact the eamings of Abacus, and impact the availability of funding for new acquisitions and projects, or increase refinancing risk as debt facilities mature. Abacus uses debt funding provided by major banks. Any downgrade of Abacus' bank credit assessment may increase overall debt funding costs and adversely affect Abacus' access to debt funding and the terms on which that funding is offered. Abacus staggers the debt maturity profile to reduce the concentration of refinancing risks at any point in time and obtains funding through different banks to reduce credit and counterparty risks Insurance-While Abacus carries property insurance, there are types of losses (such as against floods and earthquakes) that are generally not insured at full replacement cost or that are insured subject to larger deductibles or insurance may not be able to be obtained. Additionally, Abacus will face risks associated with the financial strength of its insurers to meet their indemnity obligations when called upon which could lead to an adverse effect on earnings Abacus mitigates this risk through the use of insurance brokers to seek to place cover with well rated Insurers and ensure that this insurance risk is diversified across various insurers. The diversification of the property portfolio across geographical regions reduces the impact of any potential losses to Abacus Environmental - Abacus may from time to time be exposed to a range of environmental risks including those resulting from soil and water contamination, construction, cultural heritage and flora and fauna (0.g. native vegetation). In addition, there is a risk that property owned by or projects undertaken by Abacus from time to time may be contaminated by materials harmful to human health (such as asbestos or other hazardous materials). Also, returns may be adversely impacted by changes to sustainability and environmental requirements and potentially costs associated with the carbon pricing or the introduction of new regulations referable to the property industry In these circumstances, Abacus may be required to undertake remedial works on contaminated sites. Additional expenses may result from changes in environmental regulations across the industry, Abacus as part of the property acquisition due diligence engages experts to advise on any potential environmental risks and factors these into the acquisition price of the property. Abacus also constantly monitors for any potential exposure in changes in environmental regulations to manage any costs and impacts associated with these risks ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) GROUP RESULTS SUMMARY The Board monitors a range of financial information and operating performance indicators to measure performance over time. We use several measures to monitor the financial success of our overall strategy. The key measure is underlying profit. Revenue (5 million) income (5 million) Statutory net profit excluding non-controlling Interests ($ million) Underlying profit ($ million) Underlying profit per security (c) Cashflow from operating activities (5 million) Cashflow from operating activities per security (c) Distributions per security (c) Interest cover ratio Weighted securities on issue (million) A Abacus 2016 263.7 402.9 185.9 124.0 22.36 91.5 16.50 17.00 4.2x 554.7 2015 287.8 375.9 1335 128.3 24.53 119.3 22.75 17.00 5.1x 524.4 The Group earned a statutory net profit excluding non-controlling interests of $185.9 million for the year ended 30 June 2016 (2015: $133.5 million). This profit has been calculated in accordance with Australian Accounting Standards. It includes certain significant items that need adjustment to enable securityholders to obtain an understanding of Abacus' underlying profit of $124.0 million, a 3.4% decrease on the 2015 underlying profit of $128.3 milion The underlying profit reflects the statutory profit as adjusted in order to present a figure which reflects the Directors' assessment of the result for the ongoing business activities of Abacus, in accordance with the AICD/ Finsia principles for reporting underlying profit. The consolidated profits/(losses) which belong to the securityholders of Abacus Hospitality Fund, Abacus Diversified Income Fund II and Abacus Wodonga Land Fund are excluded as these profits cannot and do not form part of the distributable income of Abacus. The calculation of underlying profit excludes items such as unrealised fair value gains / losses on investment properties, unrealised provision gains / losses, adjustments arising from the effect of revaluing assets/Wabilities carried at fair value (such as derivatives, financial instruments and investments), the consolidated profits/(losses) of managed funds which do not form part of the assessable or distributable profits of Abacus and other adjustments in the determination of underlying profit including transactions that occur infrequently and those that are outside the scope of Abacus' core ongoing business activities. Underlying profit is the basis on which distributions are determined The reconciliation between the Group's statutory profit excluding non-controlling interests and Abacus' underlying profit is below. This reconciliation and the underlying profit has not been reviewed or audited by the Group's auditor ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) GROUP RESULTS SUMMARY The Board monitors a range of financial information and operating performance indicators to measure performance over time. We use several measures to monitor the financial success of our overall strategy. The key measure is underlying profit. Revenue ($ million) Total income ($ million) Statutory net profit excluding non-controlling interests ($ million) Underlying profit ($ million) Underlying profit per security (c) Cashflow from operating activities ($ million) Cashflow from operating activities per security (c) Distributions per security (c) Interest cover ratio Weighted securities on issue (million) Abacus 2016 263.7 402.9 185.9 124.0 22.36 91.5 16.50 17.00 4.2x 554.7 2015 287.8 375.9 133.5 128.3 24.53 119.3 22.75 17.00 5.1x 524.4 The Group earned a statutory net profit excluding non-controlling interests of $185.9 million for the year ended 30 June 2016 (2015: $133.5 million). This profit has been calculated in accordance with Australian Accounting Standards. It includes certain significant items that need adjustment to enable securityholders to obtain an understanding of Abacus' underlying profit of $124.0 million, a 3.4% decrease on the 2015 underlying profit of $128.3 million The underlying profit reflects the statutory profit as adjusted in order to present a figure which reflects the Directors' assessment of the result for the ongoing business activities of Abacus, in accordance with the AICDI Finsia principles for reporting underlying profit. The consolidated profits/(losses) which belong to the securityholders of Abacus Hospitality Fund, Abacus Diversified Income Fund II and Abacus Wodonga Land Fund are excluded as these profits cannot and do not form part of the distributable income of Abacus. The calculation of underlying profit excludes items such as unrealised fair value gains / losses on investment properties, unrealised provision gains / losses, adjustments arising from the effect of revaluing assets / liabilities carried at fair value (such as derivatives, financial instruments and investments), the consolidated profits/(losses) of managed funds which do not form part of the assessable or distributable profits of Abacus and other adjustments in the determination of underlying profit including transactions that occur infrequently and those that are outside the scope of Abacus' core ongoing business activities. Underlying profit is the basis on which distributions are determined. The reconciliation between the Group's statutory profit excluding non-controlling interests and Abacus' underlying profit is below. This reconciliation and the underlying profit has not been reviewed or audited by the Group's auditor ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) GROUP RESULTS SUMMARY (continued) 2016 $000 105.886 2015 $'000 133,496 Consolidated statutory net profit after tax attributable to members of the Group add back: Consolidated (profits losses relating to the managed funds (these profits losses are excluded as the profitshosses of the managed funds cannot and do not form part of the assessable and distributable income of Abacus) Net profit attributable to Abacus securityholders (16 154) 169,732 14,135 147,033 (74,029) Certain significant items: Net change in fair value of investment properties held at balance date Net change in property, plant and equipment remeasured at fair value Net change in fair value of investments and financial instruments held at balance date Net change in fair value of derivatives Net change in fair value of property, plant and equipment and investment properties included in equity accounted investments Impairment of land development Net tax benefit on significant items Underlying profit attributable to Abacus securityholders (14) 8.250 (11,575) (29,430) (435) (1,323) 10.949 940 40.622 (8.983) 124,011 128,334 Basic eamings per security cents) Basic underlying earnings per security (cents) Distribution per security (cents including proposed distribution) Weighted average securities on issue million) Abacus 2016 33.51 22 36 17.00 554.7 2015 25.46 24.47 17.00 524.4 FY16 saw the continuation of the market fundamentals that we saw in 2015. Markets remained challenging as the economy continues to adjust to the reduced contribution from the resources sector and lower global economic growth. As a result the low interest rate environment continued in Australia and sustained strong demand for higher yielding real estate assets. The weight of global capital seeking yield in a low yield global environment saw further cap rate compression and further exacerbated the search for good value amongst the acquisition opportunities the Group reviewed during the year. The leasing market showed signs of improvement with stronger fundamentals amongst the Eastem Seaboard CBD office markets, particularly across Sydney and Melbourne which saw positive momentum with office demand and rental growth. Brisbane is seeing improved office demand fundamentals. Retail trade growth continues to improve due to the low interest rate environment and strong house price growth Abacus continued its cautious investment approach during the year, focusing on its self-self-storage investment strategy and acquiring 7 stabilised self-storage facilities and industrial assets we intend to convert into self- storage for $62 million. Abacus was able to secure two commercial properties that met our investment criteria: Lutwyche City Shopping Centre in Brisbane for $65 million in joint venture with the Zenonos Group (ABP interest 75%) and an office and retail building at 201 Pacific Highway, St Leonards for $115 million in joint venture with The Goldman Sachs Group (ABP interest 50%), as part of our third party capital platform. These assets exhibit strong core plus opportunities to drive capital value while providing a strong income yield. The low interest rate environment sustained the residential market throughout the year. Markets around Australia did experience a pullback in demand mid-year as markets took a breather following a sustained period of very strong growth. Levels of demand for stock remained high particularly in Sydney, towards the end of the year. As reported in the half-year, the residential and sub-division at Muswellbrook has been adversely affected by the sharp decline in the coal Industry. Muswellbrook has been deeply affected by this decine which has resulted in increased unemployment and a poor economic outlook particularly for the residential market in this part of NSW. This has resulted in a non-recurring Impalment of $40.6 million. This impairment has been driven by the specific conditions within the coal industry and the Muswelbrook area ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) GROUP RESULTS SUMMARY (continued) The increase in the Group's statutory net profit excluding non-controlling interests was principally due to the net change in fair value of investment properties. The impact of both year-end fair value adjustments and the Group's performance on its financial position were as follows: 2016 2015 Total assets (5 million) 2,450.3 2.137.2 Gearing (%) 25.8 18 2 Net assets (5 million) 1,516.0 1.407.1 Net tangible assets (5 million) 1.480.0 1,377.7 NTA per security ($) 2.66 249 NTA per security post distribution (5) 2.59 241 A Abacus - gearing calculated as debt minus cash divided by total assets minus cash Excluding extemal non-controlling interests of 543.3 milion (2015: $31.0 milion) The increase in net assets of the Group by 8% reflects the improved performance compared to the previous year. During the year, the Group's total assets increased $313 million Capital management The Abacus balance sheet continues to be strong with gearing remaining conservative at 25.8%, well within our target gearing limit of 35%. At 30 June 2016, Abacus had $78.3 million of available liquidity that provides capacity for use for up to $150.6 million of accretive acquisitions. We continue to improve and reweight the balance sheet to larger, higher quality assets with a focus on disciplined capital management strategies. We anticipate Abacus' weighted average interest rate will remain relatively stable as current capacity is utilised and anticipate it should be no greater than 5.75% over the next year. CORE SEGMENT RESULTS SUMMARY Business activities that specifically contributed to the Abacus' operating performance and financial condition for the financial year were: Property Abacus' property segment delivered a result of $110.5 million for the year ended 30 June 2016 which was slightly lower than the previous period by 1.4%. The 32 assets (2015: 37 assets) that make up the commercial portfolio had a total value of $994 million at year end (2015: $861 million). Pursuant to the 2016 portfolio valuation process, 8 out of 19 of the commercial properties (excluding equity accounted properties) or 44.4% by value were independently valued during the year to 30 June 2016. The remaining properties were subject to internal review and, where appropriate, their values were adjusted. The valuation process resulted in a net full year revaluation gain of $37.4 million (2015: $10.2 million gain) or 4.8% of investment properties. A significant contributor to this increase was the Group's retail portfolio contributing $20.0 million for the period, ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) CORE SEGMENT RESULTS SUMMARY (continued) The storage portfolio's stabilised assets are the key contributor to underlying growth across the portfolio. They continue to deliver improved operating performances across Australian and New Zealand markets. The stabilised portfolio occupancy grew to 87.4% from 86.0% and average rental rate increased to $259m from $256m. The increased rental and occupancy improved portfolio RevPAM to 5227m from $220m in 2015, a 3.2% increase assuming a stabilised New Zealand exchange rate. RevPAM measures the profitability and efficiency of your portfolio Abacus focused its acquisition strategy on the self-storage sector during the year, acquiring seven assets. These include four stabilised facilities for $44.7 million and $17.5 million of assets for conversion into self-storage facilities. These facilities to be converted were acquired in metropolitan areas in NSW and Victoria. We remain focused on investment opportunities in metro locations that will deliver higher average rental rates than the current portfolio average to drive portfolio returns. During the year, the self-storage sector has continued to be seen as an additional institutional asset class alongside Office, Retail and Industrial sectors. This increased institutional recognition has driven strong pricing of assets as demand for facilities has increased as new and existing entrants to the sector seek assets and market share. This has driven strong capitalisation rate compression across assets as a result Property Ventures The Property Ventures business invests in projects and provides finance solutions that focus on select residential and commercial development opportunities in core locations directly and with experienced local joint venture partners. Abacus has total assets of $500 million invested across a number of residential opportunities in inner city markets across the eastem seaboard of Australia, Abacus control over 9,000 apartment units or land lots which equates to c$55,000 cost base per unit/land lot. This low average price provides evidence that the property ventures business has prospects for strong returns. Abacus has a number of projects under construction due for settlement over the next 12 months, including: The Prince, Canberra ACT (current investment $3.1 million) - Development to build 152 residential apartments in the affluent mixed use Kingston Foreshore precinct, overlooking Lake Burley Griffin. The project is a 50/50 joint venture with the Crafted Group. All apartments have been presold to mix of local owner occuplers and investors. Construction is anticipated to be completed ahead of schedule in August 2016 - Spice Apartments, South Brisbane QLD ($37.1 milion) - Development to build 274 apartments. All apartments have been presold. Construction commenced in December 2014 with completion anticipated in September 2016. Abacus is a lender to the development with associated profit rights Abacus also has a number of joint ventures that own land sites, largely in Metropolitan Sydney areas, undergoing residential rezoning. It is anticipated that a number of these sites will receive their approvals in 2017 and will either be sold to developers or built with our joint venture partners. The recent council amalgamations and subsequent court actions have created headwinds for developers seeking development approvals. Administrators placed into councils affected by amalgamations have caused a back log of approvals while mergers are implemented. This has caused delays to a number of rezoning applications and has created uncertainty to delivery and realisation timings. Funds Management The funds management business generated a result of $10.7 million for the year. Abacus continues to manage these unlisted funds to try to optimise the returns with selective sales and acquisitions of assets where opportunities and market conditions allow The progress of the management for each of the funds is set out in the non-core segment results summary below ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) FUTURE PROSPECTS AND RISKS (continued) Abacus remains committed to delivering transactional returns to securityholders in addition to returns from recurring income. The Abacus balance sheet is exposed to transactional returns from both investment properties and also development projects. The timing and nature of transactional returns are unpredictable and uncertain therefore making it difficult to forecast. There are a number of risk factors associated with property-related businesses that may have an impact on the financial prospects of Abacus. Some of the key risks are outlined below. This outline is not exhaustive, and performance may be affected adversely by any of these risk and other factors. Returns from investment - Returns from investment in real property and other related property exposures depend largely on the amount of rental income that can be generated from the property, the expenses incurred in operations, including the management and maintenance of the property, as well as changes in the market value of the property. Factors which may adversely impact these returns include: the overall conditions in the national and local economy, such as changes in gross domestic product, employment trends, inflation and interest rates; local real estate conditions, such as the level of demand for and supply of retail, commercial and Industrial space: the perception of prospective tenants of the attractiveness, practicality and convenience of the rental space: changes in tenancy laws and planning approval requirements: external factors including major world events such as war, terrorist attacks or force majeure events; unforeseen capital expenditures: supply of new property and other investment assets; cost of property outgoings and recoverability from tenants; and investor demand/liquidity in investment markets. Development - Abacus is involved in the development of real estate. Generally, property development projects have a number of risks including: The risk that planning consents and regulatory approvals are not obtained or, if obtained, are received later than expected, or are adverse to Abacus' Interests, or are not properly adhered to: The escalation of development costs beyond those originally expected: Project delays: Anticipated sales prices or timing on sales not being achieved: Defaults on pre-sales contracts: Non-performance/breach of contract by a contractor, sub-contractor or joint venture partner, and Competing development projects adversely affecting the overall return achieved by Abacus developments. A sustained downturn in property markets caused by any deterioration in the economic climate could result in reduced development profits through reduced selling prices or delays in achieving sales. Increases in supply or fals in demand in any of the sectors of the property market in which Abacus operates or invests could influence the acquisition of sites, the timing and value of sales and carrying value of projects The residential property market in particular may be adversely affected by declining consumer sentiment and Increasing interest rates. In the short term this may affect, for example, project enquiry levels or rates of sale. In the medium-term factors such as the oversupply or undersupply of various markets may materially impact Abacus' development operations A number of factors affect the eamings, cashflows and valuations of Abacus' commercial property development, including construction costs, scheduled completion dates, estimated rental income and occupancy levels and the ability of tenants to meet rental and other contractual obligations ABACUS PROPERTY GROUP DIRECTORS' REPORT 30 June 2016 OPERATING AND FINANCIAL REVIEW (continued) FUTURE PROSPECTS AND RISKS (continued) Leasing terms and tenant defaults - The future financial performance of Abacus will depend, in part, on its ability to continue to lease existing retail, office, industrial, self-storage and hotel space that is vacant or becomes vacant on economically favourable terms. In addition, its ability to lease new asset space in line with expected terms will impact on the financial performance of Abacus. The ability of major tenants to meet their rental and other contractual commitments to Abacus (such as in situations of insolvency or closure of their businesses) may have an adverse impact on the income from properties, which may result in an adverse impact on the financial performance of Abacus This risk is managed through active asset management including ongoing liaison with tenants, regular maintenance and refurbishment of properties to attract tenants, timely marketing programs for vacant space and due diligence on the financial strength of prospective tenants prior to entering into leases. Funding - The property investment and development sector is highly capital intensive. The ability of Abacus to raise funds (equity and debt) on acceptable terms will depend on a number of factors including capital market conditions general economic and political conditions, Abacus' performance, and credit availability. Changes in the cost of current and future borrowings and equity raisings may impact the eamings of Abacus, and impact the availability of funding for new acquisitions and projects, or increase refinancing risk as debt facilities mature. Abacus uses debt funding provided by major banks. Any downgrade of Abacus' bank credit assessment may increase overall debt funding costs and adversely affect Abacus' access to debt funding and the terms on which that funding is offered. Abacus staggers the debt maturity profile to reduce the concentration of refinancing risks at any point in time and obtains funding through different banks to reduce credit and counterparty risks Insurance-While Abacus carries property insurance, there are types of losses (such as against floods and earthquakes) that are generally not insured at full replacement cost or that are insured subject to larger deductibles or insurance may not be able to be obtained. Additionally, Abacus will face risks associated with the financial strength of its insurers to meet their indemnity obligations when called upon which could lead to an adverse effect on earnings Abacus mitigates this risk through the use of insurance brokers to seek to place cover with well rated Insurers and ensure that this insurance risk is diversified across various insurers. The diversification of the property portfolio across geographical regions reduces the impact of any potential losses to Abacus Environmental - Abacus may from time to time be exposed to a range of environmental risks including those resulting from soil and water contamination, construction, cultural heritage and flora and fauna (0.g. native vegetation). In addition, there is a risk that property owned by or projects undertaken by Abacus from time to time may be contaminated by materials harmful to human health (such as asbestos or other hazardous materials). Also, returns may be adversely impacted by changes to sustainability and environmental requirements and potentially costs associated with the carbon pricing or the introduction of new regulations referable to the property industry In these circumstances, Abacus may be required to undertake remedial works on contaminated sites. Additional expenses may result from changes in environmental regulations across the industry, Abacus as part of the property acquisition due diligence engages experts to advise on any potential environmental risks and factors these into the acquisition price of the property. Abacus also constantly monitors for any potential exposure in changes in environmental regulations to manage any costs and impacts associated with these risks
