AL-SALAM REIT ANNUAL REPORT 2018

AL-SALĀM REIT ANNUAL REPORT 2018 104 K e y audit matters Valuation of investment properties Investment properties of the Group and of the Fund amounting to RM1,092.7 million as at 31 December 2018 (2017: RM927.5 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 capitalisa- tion 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 dierent revenue streams of the Fund have been disclosed in Note 5 to the Financial Statements. Our audit performed and responses thereon Our audit procedures included the following: (a) Assessed and discussed with management their process for reviewing the work of the independent valuers. (b) Assessed the competency, independence and integrity of the independent valuers. (c) Obtained the valuation reports and discussed with the independent valuers the results of their work. (d) Tested the integrity of the data provided to the independent valuers to underlying lease agreements. (e) Benchmarked and challenged the key assumptions to external industry data and comparable property transactions, in particular the allowance for void, term yield rates, reversionary yield rates, capitalisation rates and discount rates. (f) We have also assessed the adequacy and appropriateness of the disclosures on valuation methodology and estimation made in the financial statements. Our audit procedures included the following: (a) Read the tenancy agreements between the Fund and a sample of its tenants. (b) 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 proper- ty manager of the Fund. (c) Assessed the adequacy and appropriateness of the related disclosures made in the Financial Statements. Independent Auditors’ Report To The Unitholders Of al-Salām Real Estate Investment Trust - Cont'd Information Other than the Financial Statements and Auditors’ Report Thereon The Manager of the Fund is responsible for the other information. The other information comprises information included in the 2018 Annual Report of the Group and of the Fund but does not include the inancial statements of the Group and of the Fund and our auditors’ report thereon.