AL-SALAM REIT ANNUAL REPORT 2017

AL-SALĀM REIT ANNUAL REPORT 2017 117 Key audit matters Valuation of investment properties Investment properties of the Fund amounting to RM927.5 million as at 31 December 2017 (2016: RM922.1 million) are the most quantitatively material account balance in the financial statements. Further, the investment properties are measured at fair value which inherently is subject to significant valuation estimates. The fair values of the Fund’s investment properties, as determined by a firm of independent valuers, are primarily based on the capitalisation of net income method with comparison and cost methodologies used as a secondary check. The accounting policy and key sources of estimation uncertainty for valuation of investment properties are set out in Note 3 and Note 4.2(a) to the Financial Statements, respectively, and the details of the investment properties of the Fund have been disclosed in Note 11 to the Financial Statements. Revenue recognition - percentage rent Certain tenancy agreements between the Fund and its tenants contain clauses relating to “percentage rent” whereby rent received and/or receivable is the higher of base rent and a percentage of sales earned by the tenant during the financial year. A reliable estimate of percentage rent is necessarily reliant on the availability of tenants’ audited financial statements and historical sales trends. Percentage rent is only recognised by the Fund when it can be reliably measured. The accounting policy and critical judgement in applying the policy for rental revenue are set out in Note 3 and Note 4.1(a) to the Financial Statements, respectively, and the different revenue streams of the Fund have been disclosed in Note 5 to the Financial Statements. Our audit performed and responses thereon We assessed the appropriateness of the independent valuer’s scope of work and independence and evaluated whether the independent valuers had sufficient expertise and resources to competently perform the said valuation of the Fund’s investment properties. We obtained the source information provided by the Manager of the Fund to the independent valuers to evaluate the accuracy of the inputs to the valuation model. We further challenged the significant estimates included by the independent valuers in their valuation models, namely the capitalisation rate and estimated net market rent of the Fund’s investment properties. Based on our procedures, we believe that the fair value position taken by the Fund is appropriate. We have also assessed the adequacy and appropriateness of the disclosures made in the Financial Statements. We have read the tenancy agreements between the Fund and a sample of its tenants. We have obtained the reconciliations prepared by the Manager of the Fund pertaining to the calculation of percentage rent and assessed the appropriateness of percentage rent revenue recognition against the accounting policies of the Fund. Our evaluation of revenue recognition includes an assessment of availability of the tenants’ audited financial statements and historical sales trends of the tenants as reported to the property manager of the Fund. Based on our procedures, the percentage rent revenue recognised by the Fund, to the extent it is recognised, is reasonable. We have also assessed the adequacy and appropriateness of the related disclosures made in the Financial Statements. Number of Units in the Fund The Manager’s Directors and shareholders As of 1.1.2017 Acquired Disposed As of 31.12.2017 Dato’ Kamaruzzaman bin Abu Kassim - Direct 6,150 - - 6,150 - Indirect 120,000 40,100 - 160,100 Lukman bin Abu Bakar 2,960 - (2,960) - INDEPENDENT AUDITORS’ REPORT TO THE UNITHOLDERS OF AL-SALĀM REIT - CONT’D