Discuss, based only on the information provided in section 1, the factors that increase the risk of material misstatement at the assertion level for investment properties in the financial statements of Beeprop for FY2021.
Shorter summary of the risks:
Geographic Spread
Mixed Use
Development Costs
Valuation accuracy.
Classifying, measuring, and valuing
COVID-19 Impact
Management Bias
Optimistic Outlook
VAT Error
Shorter summary of the risks:
Geographic Spread: Hard to confirm existence of properties across SA.
Mixed Use: Risk of incorrect classification between investment property and own-use assets.
Development Costs: Incorrect capitalization of development costs (e.g., Covid-19 costs) impacting accuracy.
Weak Controls: Poor cost controls for developments affect valuation accuracy.
Leased IP: Complexities in classifying, measuring, and valuing the leased investment property.
COVID-19 Impact: Office vacancies due to COVID-19 risk overstating fair value.
Management Bias: Financial director's desire to improve financials might lead to overstating valuation.
Optimistic Outlook: Belief in "normality" returning for office space risks overstating valuation.
VAT Error: Incorrectly including reclaimable VAT in capitalized costs inflates valuation.
Explanation:
Geographic Dispersion: Investment properties spread "across South Africa" (image_44e9aa.png) increase the risk of overstating their existence due to difficulties in physical verification and management.
Diverse Portfolio & Own Use: A "diverse investment property portfolio" (image_44e9aa.png), with some offices "vacant and occupied by Beeprop itself" (image_44e9aa.png), raises the risk of incorrect classification between investment property and PPE.
Incorrect Capitalization of Development Costs: Beeprop develops properties, and there's a risk that "initial cost (development cost) is not correctly capitalised" (as seen with Covid-19 costs, image_44ea23.png), affecting the accuracy, valuation, and allocation of investment property.
Weak Cost Controls: "Controls around the accumulation of costs are weak" (image_44e9aa.png), leading to inefficiencies and an inability to manage costs, increasing the risk of incorrect valuation and allocation of developed properties.
Leased Investment Property Complexities: Beeprop has a leased office building used as investment property (image_44ea23.png), creating risks in:
5.1 Classification & Disclosure: Misclassifying it as a standard IFRS 16 ROU asset instead of an investment property.
5.2 Initial Measurement: Inaccurate present value calculation due to complexity in determining the lease rate, affecting accuracy.
5.3 Subsequent Measurement: Not re-measuring to fair value under IAS 40 (instead using cost less depreciation), impacting valuation, allocation, and accuracy.
5.4 Fair Value of ROU Asset: The complex valuation of ROU assets based on "cash flows from the use rather than the residual ownership" leads to a risk in valuation accuracy.
Covid-19 Impact on Office Buildings: Office buildings "hit the hardest by the Covid 19 challenges" with tenant vacancies (image_44e9aa.png) pose a risk of a lower fair value not being adequately reflected, leading to overstatement of valuation, allocation, and accuracy.
Management Bias (Delien's Outlook): The financial director's commitment to "strengthening Beeprop’s statement of financial position" (image_44e9aa.png) creates a risk of overstating investment property existence or valuation to achieve this goal, despite industry challenges.
Optimistic Assumptions on Recovery: Delien's view that "office space will return to ‘normality’" (image_44e9aa.png) increases the risk that property values are overstated based on an overly optimistic assumption, impacting valuation, allocation, and accuracy.
Incorrect VAT Capitalization: There's a risk that costs incorrectly include non-recoverable VAT as part of capitalization, overstating the investment property balance in terms of valuation and classification.
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