REG - Macau Prop Opp Fund - Annual Financial Report <Origin Href="QuoteRef">MPO.L</Origin> - Part 3
28/09/2017 07:07
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of investment property requires specialist expertise and the use of significant estimates and judgements giving rise to a higher risk of misstatement. There was no change in the risk compared to prior year. Refer to the Audit Committee Report; Accounting policies; and Note 6 of the Consolidated Financial Statements We performed full scope audit procedures over the valuation of investment property. Audit procedures We confirmed that there were no material matters arising from our audit work on the inputs used and the judgments made by the Specialists that we wished to bring to the attention of the Audit Committee. We confirmed that investment property is not materially misstated.
performed by component audit teams are based on instructions issued by the Group audit team. Those
procedures are described below: · We documented our understanding of the processes and performed
walkthrough tests to confirm our understanding of the systems and controls implemented; · We
agreed the valuations recorded in the consolidated financial statements to the values reported by the
management's independent specialists (the "Specialists"); · We tested all significant inputs to the
valuation for consistency with underlying tenancy agreements; · We have engaged our real estate
specialists in Hong Kong to verify whether the valuation methodology used was consistent with
valuation best practice and appropriate under the circumstances by ensuring that the recorded fair
value is within the acceptance range of values calculated by our real estate specialists; · We
tested the calculation of gain on revaluation of the year and verified the appropriateness of the
recording and reporting of these amounts; and · We engaged our own real estate specialists from
Hong Kong to: - use their knowledge of the market to compare and corroborate the market related
judgements and valuation inputs (including discount rates, exit yields and sales values) used by the
Specialists; and- assist us in determining whether the Specialists were appropriately qualified and
independent.
Risk Our Response to the Risk Key Observations Communicated to the Audit Committee
Carrying value of inventory properties (US$64.0 million; 2016 - US$67.4 million) Inventory properties are stated at lower of cost and net realisable value. The valuation of inventory properties is the key driver to determine the net realisable value of properties. Valuation of property requires specialist expertise and the use of significant estimates and judgements giving rise to a higher risk of misstatement. There was no change in the risk compared to prior year. Refer to the Audit Committee Report; Accounting policies; and Note 7 of the Consolidated Financial Statements We performed full scope audit procedures over the carrying value of inventory properties. Audit We confirmed that there were no material matters arising from our audit work on the inputs used and the judgments made by the Specialists that we wished to bring to the attention of the Audit Committee. We confirmed that the carrying value of inventory properties is not materially misstated.
procedures performed by component audit team are based on instructions issued by the Group audit team.
Those procedures are described below: · We documented our understanding of the processes for
valuing inventory properties and performed walkthrough tests to confirm our understanding of the
systems and controls implemented; · We agreed a sample of the significant inputs used by the
Specialists to value the properties, particularly development cost, projected capital expenditure, to
contractual documentation and development plans and agreements and we checked their purpose, business
rationale and whether allowable for inclusion in inventory under IFRS; · We have agreed additions
and disposals of inventories to general ledger and tested individual items above 25% of performance
materiality; · We tested headroom of market value over cost. We have not identified any properties
that have a higher risk of impairment; and · We engaged our own internal real estate valuation
experts from Hong Kong to: - use their knowledge of the market to compare and corroborate the market
related judgements and valuation inputs (including discount rates, exit yields and sales values) used
by the Specialists; and- assist us in determining whether the Specialists were appropriately qualified
and independent.
Risk Our Response to the Risk Key Observations Communicated to the Audit Committee
Recognition of rental income (US$2.1 million; 2016 - US$2.1 million)/Income on sale of inventories (US$6.4 million; 2016 - US$1.0 million) Management may seek to overstate revenue generated from rental income by changing the timing of revenue recognition and on disposal of inventory properties by overstating the selling price or lowering the cost of sales, as it is a significant metric and indicator of the Group's progress giving rise to a higher risk of misstatement. There was no change in the risk compared to prior year. Refer to the Audit Committee Report; Accounting policies; and Note 6 and 7 of the Consolidated Financial Statements · Rental income - We have agreed a sample of tenancy agreements selected based on 25% of We confirmed that there were no matters identified during our audit work on revenue recognition that we wished to bring to the attention of the Audit Committee. We confirmed that revenue from rental income and on disposal of properties was recognised in accordance with IFRS.
performance materiality to amounts recorded as rental income in the general ledger and from the
general ledger to tenancy agreements; - Performed analytical procedures on rental income to identify
any inconsistencies in rental income patterns or rent holiday periods; and - Determined that the
accounting policy for rental income was in compliance with IFRS as adopted by the EU. · Income on
sale of inventories - We have re-performed calculations of the realised gain on disposal of
properties by taking the selling price from final sales and purchase agreements and cost of properties
sold from allocation schedule and underlying supporting documents and checked that the resulting gain
on sale of properties agrees to the recorded gain in the general ledger.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our
audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated
financial statements.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate
quantitative coverage of significant accounts in the financial statements, we performed an audit of the complete financial
information of all components covering entities within Macau, Hong Kong, BVI and the Channel Islands which represent all
business units of the Group.
Changes from the prior year
There has been no change in scope of our audit from prior year.
Team structure
The overall audit strategy is determined by the audit partner who is based in the Channel Islands. Since the Group's
operations are principally located in Hong Kong/Macau, the audit team includes EY team members from Hong Kong.
Involvement with component team
We identified the risks of material misstatement described above as those that had the greatest effect on our overall audit
strategy, the allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these
risks, we have performed the procedures above which were designed in the context of the financial statements as a whole
and, consequently, we do not express any opinion on these individual areas.
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at
each of the components by the Group audit team, or by the Component audit team from other EY global network firms operating
under our instruction. We determined the appropriate level of involvement to enable us to determine that sufficient audit
evidence had been obtained as a basis for our opinion on the Group as a whole.
The Group audit team, assisted by our real estate specialists in Hong Kong, performed procedures on the valuations of the
Group's investment property and inventories.
The Group audit team interacted regularly with the component team where appropriate during various stages of the audit,
reviewed key working papers and were responsible for the scope and direction of the audit process. This, together with the
additional procedures performed at Group level, gave us appropriate evidence for our opinion on the Group's financial
statements.
Our application of audit materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified
misstatements on the audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to
influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the
nature and extent of our audit procedures.
We determined planning materiality for the Group to be US$1.3 million (2016: US$1.1 million), which is 1% (2016: 1%) of
NAV. We believe that NAV provides us with an appropriate basis for audit materiality as it is a key published performance
measure and is a key metric used by management in assessing and reporting on overall performance.
It was considered inappropriate to determine materiality based on the Group's profit before tax as the primary performance
measures of the Group for internal and external reporting are based on equity.
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an
appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds
materiality.
On the basis of our risk assessments, together with our assessment of the Group's overall control environment, our
judgement was that tolerable error was 75% (2016: 75%) of our planning materiality, namely US$0.97 million (2016: US$0.80
million). We have set performance materiality at this percentage due to the investment strategy remaining consistent with
our previous experience and limited identification of audit findings in previous periods.
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of US$64,000
(2016: US$53,000), which is set at 5% of materiality, as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in
light of other relevant qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the Annual Report including Manager's Report, Directors' Report
and Corporate Governance Report, other than the financial statements and our auditor's report thereon. The Directors are
responsible for the other information.
Our opinion on the financial statements does not cover the other information, except to the extent otherwise explicitly
stated in this report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing
so, consider whether the other information is materially inconsistent with the financial statements or our knowledge
obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or
apparent material misstatements, we are required to determine whether there is a material misstatement in the financial
statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that
there is a material misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items
in the other information and to report as uncorrected material misstatements of the other information where we conclude
that those items meet the following conditions:
· Fair, balanced and understandable set out in the Responsibility Statement of the Directors in respect of the Annual
Reports and Accounts - the statement given by the Directors that they consider the Annual Report and financial statements
taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the
Group's performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
· Audit committee reporting set out in the Audit Committee Report - the section describing the work of the Audit
Committee does not appropriately address matters communicated by us to the Audit Committee; or
· Directors' statement of compliance with the UK Corporate Governance Code set out in the Responsibility Statement of
the Directors in respect of the Annual Reports and Accounts - the parts of the Directors' statement required under the
Listing Rules relating to the Company's compliance with the UK Corporate Governance Code containing provisions specified
for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant
provision of the UK Corporate Governance Code.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters in relation to which the Companies (Guernsey) Law, 2008
requires us to report to you if, in our opinion:
· proper accounting records have not been kept by the Company; or
· the financial statements are not in agreement with the accounting records; or
· we have not received all the information and explanations we require for our audit.
Responsibilities of Directors
As explained more fully in the Directors' Responsibilities Statement, the Directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the
Directors determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group's ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless the Directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do
so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will
always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial
Reporting Council's website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor's report.
Andrew Dann
For and on behalf of Ernst & Young LLP
Guernsey, Channel Islands
27 September 2017
Note:
1. The maintenance and integrity of the Group's website is the responsibility of the directors; the work carried out by
the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for
any changes that may have occurred to the consolidated financial statements since they were initially presented on the
website.
2. Legislation in the Guernsey governing the preparation and dissemination of Group financial statements may differ from
legislation in other jurisdictions.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 June 2017
Note 2017US$'000 2016US$'000
ASSETS
Non-current assets
Investment property 6 241,193 206,595
Deposits with lenders 21 3,107 2,113
Trade and other receivables 111 111
244,411 208,819
Current assets
Inventories 7 63,994 67,410
Trade and other receivables 10 1,688 1,096
Deposits with lenders 21 205 -
Financial assets at fair value through profit or loss - interest rate swap 20 21 -
Cash and cash equivalents 13,093 12,741
79,001 81,247
Total assets 323,412 290,066
EQUITY
Capital and reserves attributable to the Company's equity holders
Share capital 12 764 764
Retained earnings 61,832 38,724
Distributable reserves 66,208 66,208
Foreign currency translation reserve (18) 947
Total equity 128,786 106,643
LIABILITIES
Non-current liabilities
Deferred taxation provision 9 17,003 12,782
Taxation provision 9 2,260 2,409
Interest-bearing loans 8 153,775 149,279
Financial liabilities at fair value through profit or loss - interest rate swap 20 - 23
173,038 164,493
Current liabilities
Taxation provision 9 - 2,514
Trade and other payables 11 1,941 1,891
Interest-bearing loans 8 19,617 14,444
Financial liabilities at fair value through profit or loss - interest rate swap 20 30 81
21,588 18,930
Total liabilities 194,626 183,423
Total equity and liabilities 323,412 290,066
Net Asset Value per share (US$) 17 1.69 1.40
Adjusted Net Asset Value per share (US$) 17 3.26 2.96
The accompanying notes are an integral part of these consolidated financial statements.
The consolidated financial statements were approved by the Board of Directors and authorised for issue on 27 September
2017.
Chris Russell
Director
Alan Clifton
Director
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 30 June 2017
Note 2017US$'000 2016US$'000
Income
Income on sale of inventories 7 6,351 1,045
Rental income 2,055 2,109
Net gain/(loss) from fair value adjustment on investment property 6 36,013 (38,227)
Other income 13 4
44,432 (35,069)
Expenses
Cost of sales of inventories 7 3,477 254
Management fee 19 4,867 5,528
Non-Executive Directors' fees 18 150 187
Auditors' remuneration: audit fees 23 101 110
Auditors' remuneration: non-audit fees 23 245 25
Property operating expenses 15 1,249 1,271
Sales and marketing expenses 250 77
General and administration expenses 13 1,524 1,155
(Gain)/Loss on foreign currency translation (164) 75
(11,699) (8,682)
Operating profit/(loss) for the year 32,733 (43,751)
Finance income and expenses
Net gain on valuation of interest rate swap 20 95 291
Bank loan interest (5,079) (4,827)
Interest expense on interest rate
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