REA Group Limited: A Leading Multinational Real Estate Advertising Company

Innovation in Property Technology

Question 1.

• Main Business Activity of the REA GROUP LIMITED:

It is a leading Australian based multinational public company listed on Australian Stock Exchange (ASX: REA) providing services relating to online advertising of commercial, residential and share properties services on websitesand on mobile applicationscovering markets of Australia, Asia, North-America and Europe. In 2016, it has expanded its investment in international market of Malaysia, Indonesia, Thailand, Singapore and Hong Kong with the acquisition of iProperty group (iProperty, 2016).  It main motto is to make the property simple, efficient and tax-free.

• From market point of view,

REA GROUP LTD has shown a tremendous growth in market through the innovation in technologies in the property world making it easier for the people of the 56 countries to search properties wherever they are in the world. This can be said with the extreme growth in 2016 in financial performance that is 20% in revenue growth and 16% in net profit growth from its core operations (REA Group Annual Report, 2016). Thus it can be said that company has launched the global property network so that people from around the world can access to the company’s website and also through mobile applications.

• Main services from which company derives its income:

It is a leading Digital Real Estate Advertising company specialising in Commercial, residential and share property websites. Company has 4 flagship websites: realestate.com.au, realcommercial.com.au and Flatmates.com.au. Company has also significant shareholdings in myfun.com of China, Move Inc. of United States and Prop Tigerof India. Thus, company derives its income from these services.

• Disclosures of operating segment:

Yes, REA GROUP has disclosed segment information at point no. 6 in notes to the financial statements (Source: AASB 8; REA Group Annual Report, 2016, pp. 74-75).

Segment Information for theyear ended 30 June 2016:

Segment Information for the year ended 30 June 2015:

• As per AASB-8 ‘Operating Segments’ defined as a component:
• from which entities earn revenues and incur expenses,
• whose results and performance are continuously reviewed by entity’s decision maker so that decisions about allocated segments can be taken, and
• Whoseseparate financial information is available.
• Entity shall disclose segment information only if meeting quantitative thresholds:
• A segment is reportable only if both inter-segment sales and sales to external customers is 10% or more of the total revenue of all segments, or
• A segment is reportable only if its operating result whether profit or loss is 10% or more of the combined result of all operating segments in profit or all operating segments in loss whichever is greater in amount, or
• A segment is reportable only if its segment assets are 10% or more of combined assets of all segments.

If entity does not meet its threshold limits, then also it can be reportable if management believes that the segment information would provide useful information to the users of financial statements.

Question 2.

• As per AASB 3 (2005), Contributed Equity represents the amount that the shareholders of the company paid for acquiring stake in the company. It is reported under ‘stockholder’s equity’ head in statement of financial position and also further detailed description regarding contributed equity of REA Group is given under point no. 20 in notes to the financial statements.
• Contributed Equity has changed from the following transaction that took place during the year ended 30 June 2016:

PARTICULARS	AMOUNT ($’000)
Balance at 1 July 2015	98,355
Less: Acquisitions/Settlements during the year: 1. Acquisition of treasury shares 2. Settlement of vested performance rights	1,012 234
Balance at 30 June 2016	97,109

(Source: REA Group Annual Report, 2016, pp.57).

Reason for change in contributed equity is because REA Group has acquired its treasury shares and settled its performance rights.

• Reserve Account means an account that represents net profit or loss amount which is kept accumulated for future requirements of the company. It is the part of shareholders’ equity represented under Balance Sheet and also further detailed description is given under point no. 21 in notes to the financial statements. There are different types of reserves account such as capital reserve account, revenue reserve account, statutory reserve account etc. In REA Group, Reserves are represented as follows:

PARTICULARS	AMOUNT ($’000)
Balance at 1 July 2015	26,112
Other comprehensive income/(loss): 1. Foreign Currency translation reserve 2. Cash flow hedge reserve	6,198 (22)
Transactions with owners: 1. Share based payment expense 2. Settlement of vested performance rights	2,378 (1,824)
Balance at 30 June 2016	32,842

• Amount of retained earnings are:

PARTICULARS	AMOUNT ($’000)
2015	2016
Retained Earnings	433,078	585,274

• Retained earnings represent the balance of profit and loss account which is retained by the entity for some time. Amount of retained earning account can be positive or negative. In balance sheet, Retained earnings account is reported under stockholder’s equity head. 

Question 3.

• Company’s Profit before income tax expense is as below:

PARTICULARS	AMOUNT ($’000)
2015	2016
Profit before Income Tax	286,526	343,756

• Company’s income tax expense is as below:

PARTICULARS	AMOUNT ($’000)
2015	2016
Income Tax expense	86,028	90,476

• Yes, REA Group made a profit for the year 2015 as well as in 2016.

PARTICULARS	AMOUNT ($’000)
2015	2016
Profit for the year	210,248	253,280

• Given information:

PARTICULARS	AMOUNT ($’000)
2015	2016
Profit before Income Tax (a)	286,526	343,756
Tax Rate (b)	30%	30%
Income Tax Expense  (c = a*b)	85,958	103,127
Income Tax expense reported in income statement (d)	86,028	90,476

Difference in income tax amount is because of adjustments relating to deferred tax and liabilities and unused tax losses which are attributable to the company.

• There is a difference in calculated income tax expense and reported income tax expense because of the following adjustments made in the income tax account:

PARTICULARS	AMOUNT ($’000)
2015	2016
Calculated income tax expense	85,958	103,127
Add/(Less): Adjustments of Tax effects which were not considered earlier in computing taxable income 1. Revaluation of iProperty subsidiary 2. Current year research and development tax expense 3. Share of associates losses 4. Prior period adjustments 5. Foreign tax rate effects 6. Tax losses not recognised 7. Other	– (2,863) 2,116 (323) (140) – 1,280	(12,248) (2,530) (2,525) (870) (15) 1,611 3,926
Reported Income Tax expense	86,028	90,476

Question 1.

• There are different types of investor – investee relationship depending upon the intension of the investor. These relationships are:

1. Held to maturity (HTM): It means investment held by the investor till the maturity date of the investment. This type of investment is not applicable to equity instruments because of no maturity value.

Accounting Treatment: This type of investment is initially recorded at cost along with adjustments of premium or discount which were realized at the time of purchase.

1. Trading Security: In this type of investment category, investor held the security for a short period to earn short term profit. This type of investment is applicable to both equity as well as debt instruments.

REA Group Ltd and its Flagship Websites

Accounting Treatment: This type of investment is initially recorded at cost and after the end of the accounting period it will be recorded at its fair value. Hence, any unrealized gain or loss will also be reported under income statement.

1. Available for sale (AFS): This type of investment is other than above two.

Accounting Treatment: This type of investment is initially recorded at cost and after the end of the accounting period it will be recorded at its fair value. Hence, any unrealized gain or loss will also be reported under other comprehensive statement.

1. Equity Method: Any investor having at least 20% interest in investee then equity method of investment is used.

Accounting Treatment: It is recorded at cost initially and afterwards share of profits or losses is recorded by investor. Further, if any dividend is declared then the investee deducts the amount of dividend from the respective investor’s investment.

• Control means having an ownership of more than 50% in other entity’s equity to get a benefit from its activities.

Basic difference in control and significant influence is that:

Control	Significant influence
Having ownership of more than 50% in other entity.	In this, controlling power is range from 20% -50%.
Power to control financial and operating decisions of other entity.	Power to participate in financial and operating decisions of other entity but cannot control it.

• Yes, REA Group is a part of consolidated group.

Significant shareholdings in individual companies are:

1. iProperty Group and myfun.com are leading Asian property portals.
2. Move Inc. of United States.
3. PropTiger of India

• As per AASB 10 ‘Consolidated financial statements’, an entity (called parent company or holding company) who control one or more entities operating and financial policies by more than 50% are required to prepare and present consolidated financial statements at the end of accounting period.

Parent company or holding company is required to prepare and present consolidated financial statements. In this case, REA Group Limited is the parent company. Subsidiary companies are those companies who are controlled by the parent company.iProperty Group and flatmates.com.au Pty Ltd is the subsidiary company.

• Procedure:

1. Assets, liabilities, incomes and expenses of parent company and Subsidiaries Company are recorded together by parent company in its consolidated financial statements.
2. Parent’s portion of equity and investment in every subsidiary company is removed from consolidated financial statements.
3. Adjustments related to intragroup assets, liabilities, incomes and expenses must not be included in consolidated financial statements.

The basic difference in equity method of accounting and consolidation method is that: otherwise it uses equity method of accounting.

Consolidated accounting	Equity method of accounting
When entity has controlling power of more than 50% then it uses consolidated accounting.	When entity has controlling stake between 20% – 50% then it uses equity method of accounting.

• The main reason is that parent – subsidiary is operating together and so they should report their operating results as a single entity.
• Assets are revalue in consolidated statements because to achieve maximum tax benefits.
• Any entity which is neither a subsidiary nor a joint venture, an investor is having a significant influence over that entity is called as an associate entity (AASB 128, 2011).

According to this case, Move Inc. is an associate company of REA Group having a 20% stake.

• As per AASB 11, jointly control of an arrangement is called as joint arrangement. Joint arrangement can be joint operation or joint venture.

Joint Venture	Joint Operation
A joint venture is created by two or more entities for carrying out a particular project. Parties of Joint Venture are called as co-venturers.	Any operations conducted for the proper maintenance or proper development of any property by two or more entities jointly.

• No, company is not a party to joint arrangement.

Question2.

• In simple words, Goodwill is an intangible asset and is defined as excess amount which is paid by one entity for the acquisition of other entity.

As per AASB138, ‘Intangible assets’ it stated that acquirer entity’s can only recognize externally generated goodwill through business combinations or acquisitions.

Under IFRS 3, ‘Business Combinations’, Goodwill calculation is set out below:

Goodwill = Consideration transferred + Amount of Minority interest + fair value of previous equity interests – Net assets recognized.

• In Non-Current Assets head, goodwill is disclosed under Intangible assets head.
• Yes, REA group reported the amount of goodwill.

PARTICULARS	AMOUNT ($’000)
2015	2016
Goodwill	59,283	787,680

• Yes, there is increase in the amount of goodwill in 2016.Increment in amount ($’000) is $728,015 and $382 which is related to business combinations and exchange difference.
• Changes are due to acquisition of 86.9% share of iProperty Group on 2 February, 2016 and acquisition of 100% share of Flatmates.com.au Pty Ltd on 31 May, 2016. 

References

Australian Government. (2015). AASB 8 Operating segments. Retrieved on 13 April 2017 from https://www.aasb.gov.au/admin/file/content105/c9/AASB8_08-15_COMPnov15_01-16.pdf.

Australian Government. (2010). AASB 3 Business Combinations. Retrieved on 13 April 2017 from https://www.aasb.gov.au/admin/file/content102/c3/AASB3_03-08_ERDRjun10_07-09.pdf.

Australian Government. (2016). AASB 10 Consolidated Financial Statements. Retrieved on 13 April 2017 from https://www.aasb.gov.au/admin/file/content105/c9/AASB10_07-15_COMPdec15_01-18.pdf.

Australian Government. (2011). AASB 128 Investments in Associates and joint ventures. Retrieved on 13 April 2017 from https://www.aasb.gov.au/admin/file/content105/c9/AASB128_08-11.pdf.

Australian Government. (2013). AASB 11 Joint Arrangements. Retrieved on 13 April 2017 from https://www.legislation.gov.au/Details/F2013C00410.

Australian Government. (2007). AASB 138 Intangible Assets. Retrieved on 13 April 2017 from https://www.aasb.gov.au/admin/file/content105/c9/AASB138_07-04_COMPapr07_07-07.pdf.

Australian Government. (2017). Accounting Standards. Retrieved on 13 April 2017 from https://www.aasb.gov.au/Pronouncements/Current-standards.aspx.

https://www.realestate.com.au/buy.

Realcommercial.com.au. (2017). About Realcommercial.com.au. Retrieved on 13 April 2017 from https://www.realcommercial.com.au/static/rca/about-us.html?fullSiteOnly=true.

Flatmates.com.au. (2017). Welcome to flatmates.com.au. Retrieved on 13 April 2017 from https://flatmates.com.au/info/about.

iProperty Group. (2016). About the Group. Retrieved on 13 April 2017 from https://www.iproperty-group.com/about-the-group.

ASX. (2017). REA GROUP LTD. Retrieved on 13 April 2017 from https://search.asx.com.au/s/search.html?query=rea&collection=asx-meta&profile=web.

REA Group. (2016). ASX Announcement. Retrieved on 13 April 2017 from  https://www.rea-group.com/irm/PDF/1903/REAGroupAnnouncesFY16Results.

REA Group. (2016). Annual reports. Retrieved on 13 April 2017 from https://www.rea-group.com/annualreport/2016/.

Realestate.com.au. (2017). Realestate.com.au. Retrieved on 13 April 2017 from

Myfun.com. (2017). About myfun. Retrieved on 13 April 2017 from https://www.myfun.com/en/about-myfun.