
Governance Financial Statements Additional InformationStrategic ReportOverview
Independent Auditor’s report to the members
of LXi REIT plc
Key audit matter How the scope of our audit addressed the key audit matter
Investment property valuations
Refer to notes 2 and 3 in relation to
significant estimates and accounting policies.
Refer to Note 8 in relation to investment
property.
The valuation of Investment property
requires significant judgement and estimates
by the Directors and the independent valuer
appointed by Manager and is therefore
considered akey audit matter due to the
subjective nature of certain assumptions
inherent in each valuation.
Any input inaccuracies or unreasonable bases
used in the valuation judgements (such as in
respect of estimated rental value and yield
profile applied) could result in amaterial
misstatement of the financial statements.
There is also arisk of fraud in relation to
thevaluation of the property portfolio
wherethe Directors may influence the
significant judgements and estimates in
respect of property valuations in order
to achieve property valuation and other
performance targets.
Additionally, properties under construction
involve license fee income receivable from
the developer during the construction phase.
Accounting for such assets is typically more
complex than for standing assets.
The valuation of investment properties was
therefore considered to be a key audit matter.
Experience of valuer and relevance of its work
• We obtained the valuation report prepared by the independent valuer and discussed the basis of the
valuations with them. We determined whether the basis of the valuations was in accordance with the
requirements of accounting standards.
• We assessed the external valuer’s qualifications, independence and basis of valuation.
• We obtained acopy of the instructions provided to the independent valuer and reviewed for any limitations
in scope or for evidence of management bias.
Data provided to the valuer
• We validated the underlying data provided to the valuer by the Manager. This data included inputs such as
current rent and lease term, for which we agreed all to the executed lease agreements as part of our audit work.
Assumptions and estimates used by the valuer
• With the assistance of internal RICS-qualified experts we developed yield expectations on each property
using available independent industry data, reports and comparable transactions in the market around the
period end. They also attended the audit meetings with the Group’s valuers to assist us in assessing that
explanations provided were appropriate and in line with market knowledge.
• We discussed the assumptions used and the valuation movement in the period with both the Manager
and the independent valuer. Where the valuation was outside of our expected range we challenged the
independent valuer on specific assumptions and reasoning for the yields applied and corroborated their
explanations where relevant, including agreeing to third party documentation. We also challenged the
valuer regarding their views on the impact of wider macroeconomic events on the valuation of these assets.
Further, we challenged the appropriateness of the discount rates applied to the valuations with the valuer
and where possible obtained evidence of comparable market transactions through independent sources.
• For properties under construction we assessed the project costs and progress of development, by agreeing
funding drawdowns during the year to third part documentation, and verified the forecast costs to complete
included in the valuations to third party documentation.
Accounting for assets under construction
• We examined all forward funding agreements entered into during the year for assets under construction
and determined whether the accounting treatment of the asset recognition and the license fee income was
appropriate under accounting standards.
Key observations
Based on our work we have not noted any material instance which may indicate that the assumptions adopted
by the Directors in the valuation of investment property were unreasonable or that the methodology applied
was inappropriate.
Acquisition of Secure Income
REITplc
Refer to Note 2 and 3 in relation to significant
estimates and accounting policies.
Refer to Note 27 in relation to the acquisition
of Secure Income REIT plc.
During the year, the Parent Company
acquired the entire issued share capital of the
company formerly known as Secure Income
REIT plc (“SIR”). The consideration for the
acquisition was based on apre-agreed share-
for-share ratio with apartial cash alternative.
The accounting entries and judgment
regarding the accounting treatment for
the acquisition, together with the related
disclosures is considered a key audit
matter given the significant and subjective
judgments made by the Directors as to
whether the acquisition is accounted for as a
business combination or an asset acquisition
and in the determination of any fair value
adjustments to the acquired assets and
liabilities.
An incorrect judgment with regards to
the accounting treatment, or incorrect
estimate as to the fair values of the assets or
liabilities acquired, could result in a material
misstatement of the financial statements.
• We obtained the Manager’s formal assessment of the accounting for the acquisition which included the
basis for treating the acquisition as an asset acquisition.
• We challenged the Manager on various specific points of interpretation within the accounting requirements
of IFRS 3 Business Combinations relating to the treatment of the acquisition, including the following:
- Whether the conditions of the optional concentration test under IFRS 3 Business Combinations applied to
the acquisition or not.
- Having concluded that the optional concentration test did not apply to the acquisition, whether the
acquisition included substantive processes such that outputs could be generated from the asset and
therefore a business had been acquired.
• We verified the consideration paid to the relevant acquisition documentation, including but not limited to,
the acquisition facility agreement, the share and purchase agreement and other supporting documentation.
• We obtained the opening balance sheet for SIR and we assessed the accuracy of any fair value adjustments,
noting that as a share-based payment, the consideration was measured with reference to the fair value of
the acquired assets and liabilities. Our procedures included:
- We obtained valuations from the Group’s independent experts in respect of the acquired Investment
property, derivative instruments and fixed-rate bank borrowings.
- We set expectations for the investment property valuations based on market movements and challenged
the Manager and the Valuer where there were differences.
- With the use of our internal valuation experts we assessed the adequacy of the fair value adjustments
made in respect of the derivative instruments and fixed-rate bank borrowings.
• For all other acquired assets and liabilities, we challenged the Manager’s assessment that the carrying
value reflected the fair value with reference to the requirements of the applicable accounting standard and
agreed a sample where relevant to supporting documentation to confirm the carrying values.
• We considered the adequacy of the disclosures made by the Directors in relation to the acquisition with
regards to the requirements of the applicable accounting standard. This included the disclosures relating
tothe significant judgments in respect of the treatment of the acquisition as an asset acquisition as opposed
to a business combination.
Key observations
Based on our work we have not noted any material instance which may indicate that the judgments made
bythe Directors in the accounting treatment of the acquisition were unreasonable or inappropriate.
80 LXi REIT plc Annual Report 2023