The Wharf (Holdings) Limited (‘Wharf’) is a Hong Kong listed Real Estate Development Company. Exhibit 1, below, offers a brief description adapted from the company’s 2010 and 2011 annual reports and from public information. Excerpted from the 2010 and 2011 annual reports the following information for the years 2009, 2010 and 2011 is provided:
1. Consolidated income statements.
2. Consolidated statements of cash flows.
3. The Notes on the reconciliation of operating profit to cash generated from operations. Note 9 on fixed assets on pages 145–47 in the 2011 annual report, indicates that:
1. Between 1 Jan., 2010 and 31 Dec., 2010, the gross value of fixed assets increased from 148.035 billion HK dollar to 181.607 billion HK dollar. This increase includes 3.693 billion of new fixed assets addition and 29.249 billion of fair value revaluation surpluses.
2. Between 1 Jan., 2011 and 31 Dec., 2011, the gross value of fixed assets increased from 181.607 billion HK dollar to 219.210 billion HK dollar. This increase includes 11.934 billion of new fixed assets addition and 24.968 billion of fair value revaluation surpluses.
3. Note 9.d. states that: ‘The Group’s investment properties under development are stated at fair value at the earlier of when the fair value first becomes reliably measurable or the date of completion of the property. Those investment properties stated at fair value as at 31 December 2011 were revalued by (. . .) ‘Knight Frank’, an independent firm of professional surveyors (. . .) with extensive experience in valuing properties in Hong Kong and the PRC. Knight Frank has valued the investment properties on a market value basis and has taken into account the net income of the respective properties, allowing for reversionary potential and the redevelopment potential of the properties where appropriate. The surplus or deficit arising on revaluation is recognized directly in the Consolidated income statement. Gross rental revenue from investment properties amounted to HK$8,808 million (2010: HK$7,513 million)’.
Required
1. In the income statement, evaluate the evolution of performance between 2009 and 2011 and comment.
2. In the statement of cash flows, analyze the cash flow linkages among the three types of activities and comment.
3. By linking operating profit to operating cash flow, evaluate earnings quality for the period.