L END L EASE C ORPORATION

Analysis Report 2009

ACCT3708: Auditing and Assurance Services

ACCT 3708 Major Assignment

Background Lend Lease is one of the leading property groups both in Australia and around the world. Their operations take place in America, UK, Europe, the Middle East, and the Asia Pacific region. The continuing success of Lend Lease has led to their establishment as one of the strongest companies in this field.

Internally, their business operations consist mainly within the real estate and development sector of the industry. Their revenue is derived from five lines of business; Retail, Communities, Public Private Partnerships, Investment Management, and Project Management and Construction. Income mainly consists of property management fees, investment advice fees, interest income, dividend income, and rental and sub-lease income.

(% Contribution to operating profit)

Retail (12.6%)

Project Management and Construction (28.1%)

Business operations

Communities (12.2%)

Investment Management (26.2%)

Public Private Partnerships (13.9%)

ACCT 3708 Major Assignment

Within their Retail segment, Lend Lease focuses on direct asset ownership in property, particularly retail properties such as shopping centres, as well as indirect ownership in a number of managed funds.

Communities is largely concerned with development projects that are integrated within a specific community and the urban regeneration of that community. This includes operating in the residential property sector through the development of housing. An important aspect in Communities is integrating an environmental aspect in developing property by ensuring that environmental sustainability is met. This includes waste management, water management, and energy efficiency.

Lend Leases Private Public Partnership line of business in the USA is primarily focused on military housing. This involves the development of suitable and affordable housing for military officials. In the UK, the projects are focused around health, education, waste and accommodation.

Lend Leases largest sector, Project Management and Construction, includes many services that focus on construction, project management and design of any new project. This line of business does not have any one area of focus; instead, it expands into commercial, retail and residential operations.

Investment Management is focused on managing and investing in equity. However, Lend Lease also provides a service in advising customers on how to manage their investment portfolios.

In the external environment, Lend Lease operates mainly in the retail estate holding and development industry, and competition is fierce between the top few companies. Lend Leases main competitors include the Westfield Group, Stockland, and the Mirvac Group. All of these companies have ownership in various asset properties around the world.

ACCT 3708 Major Assignment

Company name Westfield Group Stockland Lend Lease Mirvac Group

Market capitalisation1 30.88B 9.67B 4.95B 4.42B

The adoption of international accounting standards by Lend Lease ensures that the management of their financial records is in line with international regulations, helping to ensure that Lend Leases operations across the board are compliant and transparent within each operating nation. To prepare their consolidated financial report, they must comply with the Australian Accounting Standards, the Corporations Act 2001, and the International Financial Reporting Standards.

External Analysis

A useful method in summarising the external environment in which a company operates is through a PEST analysis. This consists of examining,in detail, the topics of Political, Economic, Social, and Technical influences.

Political As Lend Lease specialises in the area of property especially in the development of real estate, issues of environmental regulations should be considered. This includes compliance with noise and dust control, solid waste management and discharge into water systems. Furthermore, the increase importance in complying with emerging energy efficiency and greenhouse gas emissions legislation will impact on Lend Leases mandatory disclosure and reporting of their performance of all activities under operational and financial control.

InvestSMART www.investsmart.com.au
3

ACCT 3708 Major Assignment

Different countries also have different ways of calculating tax. Lend Lease must ensure that the correct regional corporate tax rates are used. Other considerations include differing employment law and competition regulation. This can affect the type of employee benefits that Lend Lease can offer, and its potential for expansion and taking over other companies. Before Lend Lease can start production on any project, they must have the approval of the countrys government.

Lend Lease must consider the risk ofneglecting to comply with the different regulations across all countries which they operate in. The failure to meet with the compliance and reporting standards within each country of operation may result in fines being incurred by Lend Lease.

Economic Lend Lease is extremely exposed to the movements of the global economy. Like many other companies, it was negatively affected by the economic downturn. This can be explained on several fronts. Firstly, the overall decrease in investor confidence led to a fall in the stock price of Lend Lease, reaching a low of $5 per share in March 2008. Furthermore, Lend Lease is a part of an industry that booms when the economy is doing well. Strong economic growth generally leads to more construction of infrastructure and hence the growth of the real estate and development industry. Adversely, a contracting global economy will generally seea large drop in these companies profits. However, Lend Lease positioned itself very favourably, retained a lot of cash on hand, and is now investing at funds at much cheaper prices. This outcome gives it an advantage compared to its competitors.

Interest rates can also have a large effect. They play a part in calculating the cost of capital, which is a factor in how much Lend Lease is able to borrow to expand its operations. They also affect mortgages, which in turn can affect Lend Leases construction of residential property. And lastly, it affects the value of the financial assets, such as bonds, that Lend Lease holds.

Exchange rates also affect the whole of Lend leases operations. Movements in the exchange rates can affect the totals in the financial statements, such as the cost of importing raw

ACCT 3708 Major Assignment

materials, or the true parity value of their different currency income streams. Lend Leases greatest exposures are the United States Dollar, Great British Pound, Singapore Dollar and Euro. Lend Lease aims to have enough hedging in place to minimise foreign currency risk.

Social The changes in consumer behaviour may directly influence the way Lend Lease operates and also the choice of projects that they accept. For instance, if there was a shift in cultural attitudes, andconsumers no longer visited any of Lend Leases shopping centres and facilities, Lend Lease will be directly and negatively affected.

A change in population demographics would lead to various demands for infrastructure. Lend Lease may need to change their organisation strategies to become more flexible to adapt to these social trends. For example, Australians ageing population may require an increase in the amount of pharmaceutical construction. Furthermore, one of the most obvious links would be that increases in birth rate, leading to an increase in the population, wouldnecessitate an increase in all kinds of constructions of buildings

Technological Given the global approach to the conservation of the environment, in due time there may be a ban on certain technology, activities or materials that are considered to be harmful to the environment.Achange to more enhanced and environmentally friendly technology may prove to be costly to Lend Lease.

Furthermore, any improvements in the efficiency of certain technology in the external environment may result in pressure on Lend Lease to change their internal equipment to a more efficient structure, or risk losing competitive advantage to better performing rivals in the same industry. This is an important aspect for Lend Lease to consider as technologies play a huge role in organisation structures.

ACCT 3708 Major Assignment

Potential Audit Risks Lend Leases most significant business segment is Project Management and Construction, as evidenced by its percentage contribution to operating profit.

Account Key audit risk Explanation most affected Incorrect valuation considering the economic climate y Given the recent downturn in the economy, it would not be surprising if revenue fell over the year y However, according to the financial statements, revenue increased y Requires further investigation into the key contributors to gross profit margin Improper calculation of costs y Fire occurring at former Deutsche Bank in New York y Costs of dismantling the building negatively impacted on profit after tax y Given that it is a rare occurrence, errors could exist in the calculation of Expenses Revenue

ACCT 3708 Major Assignment

costs Insufficient provisions y An $118.8M after tax provision was taken against certain UK projects y Despite this, Lend Lease still significantly increased its profit after tax from last year Exchange rate exposure y Revenue was negatively impacted by foreign exchange movements to the sum of $1.3B y Clearly this is a significant amount y May be understated, given the economic conditions and the volatility of the global foreign exchange market Performance of Europe y The operating profit after tax in Europe operations experienced the highest turnaround, from ($77.2M) to $18.5M y Considering that the American operations profit fell, and that Europe also includes the loss-making UK Revenue Revenue Provisions

ACCT 3708 Major Assignment

projects, this figure is surprising

Impairment Of Assets (AASB 136)

There are a number of criteria to determine impairment. Firstly to identify whether an asset may be impaired, the company must refer to external or internal sources of information. External sources include factors like the market value of the asset, effects from a progressive change in technology, or effects from the rise in interest rates. Internal sources include factors like obsolescence and physical damage to the asset, or discontinued operations.

If there is any indication that an asset is impaired, then the company must estimate the recoverable amount. This amount is the higher of fair value less costs to sell and value in use. Fair value less costs can either be based on a price in a binding sale contract, the price of the most recent transaction of a similar asset, or the best information available that an entity could obtain. Value in use is based on discounting the estimated future cash flows expected from the use of the asset. These estimates must be based on reasonable and supportable assumptions and thus represent the managements best estimate. Risk can be factored into the discount rate.

The substantive audit procedures necessary to determine if Lend Leases impairment write-down was reasonable is to: y y Take a sample of the inventory of Crosby Lend Lease Calculate the recoverable amounts, and check that it is less than the carrying amount If the carrying amount is not lower, then the impairment write-down was not reasonable.

ACCT 3708 Major Assignment

References

Lend Lease 2008 Annual Report to Shareholders

Lateline Lend Lease chief sees reasons to smile http://www.abc.net.au/lateline/business/items/200809/s2374637.htm

Chartered Accountants Analysis of AASB Standards http://www.charteredaccountants.com.au/financial_reporting/analysis_of_aasb_standards/

CPA Australia Australian Accounting Standards Fact Sheet AASB 136