Issue 2 Volume 17 February 2021 DRIVING BUSINESS SUCCESS RECOGNIZING TRUE VALUE Special report: An in-depth look at developments in the valuation industry and how CPAs can join it PLUS: PROFILE Barry Dempsey, Chief Executive of Chartered Accountants Ireland ACCOUNTANT PLUS Eugene Liu, Managing Partner and Head of Consulting at RSM Hong Kong SECOND OPINIONS What should the top priority be for accountants in 2021? VALUATIONS:
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PRESIDENT’S MESSAGE APLUS February 2021 1 Happy year of the ox. I hope you were able to enjoy some festivities in a socially distanced manner. While it was a shame we couldn’t celebrate as we typically do, the loosening of social distancing restrictions since is sorely welcomed. With the vaccination drive also beginning this month, we can but hope that this was the last wave of the virus, and there will be no more stringent social distancing restrictions in the future. However it is important to remember that the pandemic isn’t over yet. It is up to all of us to maintain good personal hygiene, care for ourselves and others, remain vigilant and stay healthy. While we celebrated a restricted Chinese New Year, our counterparts in the Greater Bay Area (GBA) were able to come together to enjoy the festivities. I would have liked to join the Guangzhou Institute of Certified Public Accountants’ celebration event, unfortunately travel was not feasible. Instead I filmed a special video message for them. I look forward to the time when we can easily travel around the GBA again, and work closely with our counterparts there on further developing the area as one of the world’s leading economic regions. The GBA was mentioned in the Financial Secretary Paul Chan’s budget on 24 February. The GBA is a unique opportunity for Hong Kong to contribute our specialist experience and knowledge, including that of our members, to the continuing development and future prosperity of our country. The budget had to balance supporting the economy and relieving individuals’ burdens during the pandemic against the strained government’s finances. With the hope that we are now riding out the storm, the financial secretary focused on a number of areas the Institute had recommended in its own budget submission including job creation and career transition assistance, and maintaining Hong Kong’s status as an international commercial centre. I took part in the Institute’s budget commentary forum with the media afterwards, and shared our views about the budget. You can read more about them in this month’s thought leadership article on page 29. Early in February, I took part in a “meet the media” session organized by the Institute. I discussed a wide range of topics including: the role of Hong Kong accountants in the GBA; the upcoming consultation on the one member, one vote election of the President and Vice-Presidents, and our hope that members will contribute their views to the consultation; the new task forces to investigate issues of concern in the profession around long working hours and digitalization; handling legal issues for accountants such as right to check vehicle registrations and anti-money laundering compliance issues; and implementing the new Qualification Programme examinations. This month we set up the second of the new task forces investigating specific issues. The Task Force on the Financial Reporting Council (FRC) Assessment on HKICPA, which I chair, will review and address the findings made by the FRC from their oversight review of the HKICPA performance of specific functions of the Institute. The task force will oversee the implementations of new policies and procedures addressing the recommendations, and liaise with the FRC about future reviews. Finally, the Council held its annual strategy day in February, discussing how we are going to work diligently for our members, and work across the 10 focus areas the Leadership Team set out in our “First Letter to Members.” We are confident that we will end the year having made considerable progress in enhancing the Institute to better serve members. The Leadership Team will keep members informed throughout the year. “W e are confident that we will end the year having made considerable progress in enhancing the Institute to better serve members.” Raymond Cheng President Dear members,
a CONTENTS Issue 2 Volume 17 February 2021 NEWS 01 President’s message 04 Institute news 08 Business news FEATURES 10 A high value career A special report on the work and skills of specialists working in valuations 20 Second opinions What should the top priority be for accountants in 2021? 22 Leadership: Barry Dempsey The Chief Executive of Chartered Accountants Ireland on his key focus areas for CAI’s future growth 29 Thought leadership: Eugene Yeung The Convenor of the Institute’s Budget Proposals 2021/22 Sub-committee and Partner of KPMG, on this year’s Budget 30 Accountant Plus: Eugene Liu The Managing Partner and Head of Consulting at RSM Hong Kong on the need to stay relevant and flexible amid rapid changes within the profession 37 How to Ken Chan, Director of Page Personnel Hong Kong, on the most effective way to remotely manage a team 39 Meet the speakers What to expect from an e-Series on Base Erosion and Profit Shifting 2.0 SOURCE 40 Institute’s response to the IAASB discussion paper on fraud and going concern A look at the Institute’s feedback and recommendations on an International Auditing and Assurance Standards Board discussion paper on fraud and going concern 42 Technical news 22 10Special report: A high value career Developing future leaders Barry Dempsey, Chief Executive of Chartered Accountants Ireland, on his plans to grow the organization and keep it relevant with its new strategic plan
DRIVING BUSINESS SUCCESS About our name A Plus stands for Accounting Plus. It represents a profession that is rich in career options, stays relevant amid rapid changes, and adds value to business. This magazine strives to present the global mindset and varied expertise of Institute members – Accountants Plus. Editor Gerry Ho Email: gerry.ho@mandl.asia Copy Editor Jemelyn Yadao Junior Copy Editor Jeremy Chan Contributors Nicky Burridge, Erin Hale Art Director Ann Lee Registered Office 2/FWang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong Advertising enquiries Advertising Director Derek Tsang Email: derektsang@mandl.asia ISSN 1815-3380 President Raymond Cheng Vice Presidents Rosalind Lee Ken Li Chief Executive and Registrar Margaret W. S. Chan Director of Corporate Communications Dr Wendy Lam Head of Corporate Communications and Member Services Rachel So Editorial Manager Paul Smith Editorial Coordinator Maggie Tam Office Address 37/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Tel: (852) 2287-7228 Fax: (852) 2865-6603 Member and Student Services Counter 27/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong Website: www.hkicpa.org.hk Email: hkicpa@hkicpa.org.hk A Plus is the official magazine of the Hong Kong Institute of Certified Public Accountants. The Institute retains copyright in all material published in the magazine. No part of this magazine may be reproduced without the permission of the Institute. The views expressed in the magazine are not necessarily shared by the Institute or the publisher. The Institute, the publisher and authors accept no responsibilities for loss resulting from any person acting, or refraining from acting, because of views expressed or advertisements appearing in the magazine. ©Hong Kong Institute of Certified Public Accountants February 2021. Print run: 7,290 copies The digital version is distributed to all 46,511 members, 18,445 students of the Institute and 2,358 business stakeholders every month. WORK-LIFE BALANCE 46 Following the recipe CPA bakers share their passion for baking and secrets to making consistently delicious treats and pastries 52 Young member of the month Sean Cheng, Senior Manager of Group Audit and Management Services at a high-end lifestyle brand operator 54 Leisure Plus Spotlight on the best restaurants to get takeaway from; what members are currently reading and listening to 56 Let’s get fiscal Take a deep breath and say “om” every now and then – especially before an audit, says Nury Vittachi 54 46 Following the recipe Leisure Plus 30 Creating lifelong value Eugene Liu, Managing Partner and Head of Consulting at RSM Hong Kong, on how he helped with the diversification of the firm’s service offerings
NEWS The 2021-2022 Budget includes 10 suggestions made by the Institute in its budget submission. The Institute considers that the government is right to be prudent on budget measures amid global economic uncertainties. However, the Institute recommends the government to continue to explore broadening the tax base. Although the Institute appreciates the distribution of consumption vouchers, the administrative procedures should be simple to accommodate the needs of different citizens. Read the Institute’s press releases and budget proposals on the Institute’s website and our response to the budget on p. 29. Task Force on the Financial Reporting Council Assessment on HKICPA The Institute has set up the Task Force on the Financial Reporting Council Assessment on HKICPA to review and address the findings of the Financial Reporting Council from their oversight review of the Institute’s performance in specific functions. Learn more about the task force on the Institute’s website. Submission to HKEX on increasing the Main Board profit requirement The Institute issued a submission to Hong Kong Exchanges and Clearing Limited in response to the Consultation Paper The Main Board Profit Requirement. Sharing of BCGA winners Representatives of some awardees of the Institute’s Best Corporate Governance Awards have recorded brief videos sharing the value of the Institute’s awards to their organizations, and how they are developing and enhancing their corporate governance and sustainability practices. View the video on the Institute’s website. Recently qualified members may join the ICAEW at a special rate Members who qualified through the Qualification Programme in or after 2012 can apply to join the Institute of Chartered Accountants in England and Wales (ICAEW) at a special rate. Find out more about the scheme on the Institute’s website. Teen Money Management Survey 2020 In celebration of the 15th anniversary of its flagship community project, “Rich Kid, Poor Kid,” the Institute conducted the “Teen Money Management Survey 2020” of primary and secondary students between September and November 2020. Based on the survey results, the Institute has developed a set of teen money management indicators. For details, read the press release and the report on the Institute’s website. Subscription to China Taxation Yearbook 2020 The China Taxation Yearbook 2020 is now available for subscription until 17 March. Institute news Business news Institute’s response to 2021-22 Budget 4 February 2021
APLUS Settlement Hong Kong Institute of Certified Public Accountants settles regulatory proceedings involving a corporate practice and two certified public accountants (practising) The Hong Kong Institute of Certified Public Accountants has settled regulatory proceedings concerning alleged non-compliance of its professional standards involving Elite Partners CPA Limited and two certified public accountants (practising), namely Chan Wai Nam, William and Edmund Siu. The complaint concerns Elite’s audit of the consolidated financial statements of a Hong Kong listed entity, China Household Holdings Limited, and its subsidiaries (group) for the year ended 31 December 2013, on which Elite issued an unmodified opinion. Chan was the engagement director and Siu was the engagement quality control reviewer. The Financial Reporting Council (FRC) had referred its findings on the audit to the Institute. The group’s financial statements included a material amount of exploration and evaluation assets, which were a new line of business for the group. Those assets represented a mineral mining operation in China, for which the group had only obtained exploration right for the mine but the official approvals for exploitation were pending. Elite failed to obtain sufficient evidence and prepare adequate documentation in assessing management’s valuation of the assets, including their assumptions and methodology used in the relevant profit forecasts, notwithstanding that the project had been delayed for many years and there was an indication of a declining market for the minerals to be mined. In 2013, the listed entity acquired a group of companies that provided virtual design and online trading services. As consideration for the acquisition, the listed entity issued convertible bonds which would be adjusted in each of the next three years with regard to a profit guarantee. Elite adopted inappropriate or inconsistent approaches in assessing management’s valuation of the convertible bonds and profit guarantee which adopted a different measurement date for the bonds and was materially different from an earlier independent valuation obtained by management. Elite also failed to adequately document audit procedures carried out on an intangible asset, being an online trading platform, which was acquired in the acquisition. As a result of the above: (a) Elite and Chan failed or neglected to observe, maintain or otherwise apply the following professional standards: • Hong Kong Standard on Auditing (HKSA) 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Hong Kong Standards on Auditing; • HKSA 230 Audit Documentation; • HKSA 500 Audit Evidence; and • HKSA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures (b) Siu failed or neglected to observe, maintain or otherwise apply HKSA 220 Quality Control for an Audit of Financial Statements. (c) Chan and Siu failed or neglected to observe, maintain or otherwise apply the fundamental principle of Professional Competence and Due Care in sections 100.5(c) and 130.1 of the Code of Ethics for Professional Accountants (Code of Ethics). Settlement agreement: The Council of the Institute has agreed with Elite, Chan and Siu that: 1. Elite, Chan and Siu acknowledge the facts of the case and areas of non-compliance with professional standards; 2. The Institute will cease regulatory proceedings against Elite, Chan and Siu; 3. Elite, Chan and Siu be reprimanded; and 4. Elite, Chan and Siu jointly pay a financial penalty to the Institute of HK$250,000 and make a contribution to the costs of the Institute and the FRC in the amount of HK$314,493.98. The Council considers that dealing with the matter by way of this settlement will achieve an appropriate resolution without incurring additional expenses and tying up resources in disciplinary proceedings. The Disciplinary Committee, to which the complaint had been referred, was advised of the terms of the settlement agreement and agreed to the complaint being withdrawn. February 2021 5
APLUS Disciplinary findings Zenith CPA Limited, Cheng Po Yuen, CPA (practising) and Keung Yee Man, CPA Complaint: Failure or neglect by Zenith to observe, maintain or otherwise apply HKSA 230 Audit Documentation, HKSA 500 Audit Evidence, HKSA 510 Initial Audit EngagementsOpening Balances, HKSA 570 Going Concern and HKSA 710 Comparative Information-Corresponding Figures and Comparative Financial Statements. Failure or neglect by Cheng to observe, maintain or otherwise apply the fundamental principle of professional competence and due care in sections 100.5(c) and 130.1 of the Code of Ethics in conducting his duties as engagement director. Failure by Keung to carry out an adequate engagement quality control review in accordance with HKSA 220 Quality Control for an Audit of Financial Statements, and as a result she neglected to observe, maintain or otherwise apply the fundamental principle of professional competence and due care in sections 100.5(c) and 130.1 of the Code of Ethics. Zenith expressed an unmodified auditor’s opinion on the consolidated financial statements of China Healthcare Holdings Limited (now known as China Health Group Limited), a Hong Kong listed company, and its subsidiaries (collectively, group) for the year ended 31 March 2011. Cheng was the engagement director and Keung was the engagement quality control reviewer. The Institute received referrals from the FRC about deficiencies in the audit. The audit team failed to perform sufficient audit procedures and prepare adequate documentation in relation to the classification, recognition and measurement of certain convertible bonds and notes, convertible cumulative preference shares and share options. There were also deficiencies in audit procedures and documentation regarding the accounting treatment of a subsidiary in which the company’s equity interest was below 50 percent, the preferred shares issued by the subsidiary and the related cumulative dividends. In addition, the audit procedures and documentation on assessing the group’s ability to continue as a going concern were inadequate. Decisions and reasons: Zenith and Cheng were reprimanded. In addition, Zenith, Cheng and Keung were ordered to pay a penalty of HK$150,000, HK$150,000 and HK$10,000, respectively, and to pay costs of the Institute and the FRC totalling HK$225,000 to be shared equally among them. When making its decision, the Disciplinary Committee took into consideration the particulars of the breaches committed in this case, the regulatory records of Zenith and Cheng and the respondents’ personal circumstances. Yu Ching Hoi, CPA (practising) Complaint: Failure or neglect to observe, maintain or otherwise apply (i) the fundamental principle of integrity in sections 100.5(a), 110.1 and 110.2 of the Code of Ethics; (ii) the fundamental principle of professional competence and due care in sections 100.5(c) and 130.1 of the Code of Ethics; and (iii) Hong Kong Standard on Quality Control 1 Quality Control for Firms that PerformAudits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements, and being guilty of professional misconduct. Yu is the sole proprietor of Yu Ching Hoi & Company (practice). He is responsible for the practice’s quality control system and the quality of its audit engagements. In 2015, the practice was subject to an initial practice review which identified deficiencies in its quality control system and an audit engagement selected for review. A follow-up practice review carried out in 2017 found a number of deficiencies, some of which were the same as or similar to those found at the initial review. The deficiencies concerned audit procedures performed on turnover, expenses and accounts receivable, and Yu’s failure to evaluate the impact of a repeated audit scope limitation on the practice’s acceptance of reappointment as auditor. In addition, Yu failed to establish and maintain an adequate system of quality control to address effective monitoring, independence threats arising from the practice’s provision of accounting services to audit clients, client acceptance and continuance, and engagement performance. Further, in the self-assessment questionnaire that Yu submitted for the practice review, he provided false or misleading answers on the quality control policies and procedures of the practice. Decisions and reasons: The Disciplinary Committee reprimanded Yu and ordered cancellation of Yu's practising certificate with no issuance of a practising certificate to him for 20 months with effect from 8 February 2021. In addition, Yu was ordered to pay a penalty of HK$50,000 and costs of disciplinary proceedings of HK$164,448. When making its decision, the committee took into consideration the particulars of the breaches committed in this case and the parties’ submissions and Yu’s conduct throughout the proceedings. Details of the settlement and disciplinary findings are available at the Institute’s website. February 2021 7
NEWS Bill Michael, KPMG’s Chairman in the United Kingdom has resigned after sparking outrage for telling employees to stop complaining about the work conditions brought about by the COVID-19 pandemic. Michael, who has headed the firm since 2017, was speaking with members of the firm’s financial services consulting team at a virtual town hall meeting on 8 February when he made the comments. The 52-year-old Australian announced that he would leave the firm at the end of the month, admitting that his position had become “untenable.” Michael said in an emailed statement: “I love the firm and I am truly sorry that my words have caused hurt among my colleagues and for the impact the events of this week have had on them.” Business HONG KONG TO TIGHTEN MONEY LAUNDERINGRULES The Hong Kong government has proposed changes that would require financial institutions and advisors to conduct more stringent checks on the bank accounts and transactions of officials fromMainland China. The move, which will impose harsher sanctions on individuals found to be laundering money in the city, came as the Hong Kong Joint Financial Intelligence Unit suggested broadening the current regulatory regime to also apply to those outside of the territory. The plans will bring Hong Kong in line with recommendations made by the Financial Action Task Force. The Hong Kong Institute of CPAs responded to the consultation in January. KPMG U.K. HEAD STEPS DOWN FOLLOWING COMMENTS MADE DURING VIRTUAL MEETING Hong Kong Exchanges and Clearing Limited (HKEX) has named Nicolas Aguzin as its new incoming chief executive. Aguzin, who will succeed current CEO Charles Li, takes on the role on 24 May for a period of three years pending approval from the Securities and Futures Commission. Aguzin, an Argentinian and permanent resident of Hong Kong, is currently CEO of JP Morgan’s International Private Bank, and will be the first non-ethnic Chinese person to lead HKEX. HKEX NAMES NEW CEO U.K. DIRECTORS FACE HARSHER PENALTIES AND BANS UNDER AUDIT REFORM PROPOSALS Company directors in the United Kingdom could be held personally accountable for the accuracy of their company’s financial statements under proposals to tighten corporate governance and audit oversight. The proposals, which are similar to Sarbanes-Oxley rules in the United States, include punishments such as fines and bans for company directors, and are currently being put through a consultation process. The reforms follow high profile corporate collapses including construction company Carillion in 2018 and café chain Patisserie Valerie in 2019. New rules to report environmental and social obligations such as climate risk are also expected to be introduced as part of the legislation, said sources familiar with the plans. Hong Kong’s unemployment rate hit 7 percent in January, reaching the highest level seen in more than 16 years as the impact of the COVID-19 pandemic continues to batter the economy. The rate topped 6.6 percent, the previous record high recorded during the November-to-January period in 2004, according to a government report. Unemployment in the food and beverage sector also surged to 14.7 percent amid dining restrictions put in place due to a spike in COVID-19 infections beginning in November last year. The government, however, announced new relief measures during its 2021-2022 Budget on 24 February. Read about Institute’s response to the budget on p. 29. HONG KONG UNEMPLOYMENT RATE REACHES RECORD HIGH 7% PwC in the United States has partnered with Northeastern University in Massachusetts to create a master of accounting programme offered to black and latino accountants, in a move to drive better diversity and inclusion. The programme, which will be offered to 40 black and latino accountants from across the U.S. starting July, hopes to close the diversity gap in the accounting profession. Of the almost two million accountants in the country, less than 9 percent of them are black, according to the U.S. Bureau of Labour Statistics. “Our goal is to expand this programme so we can continue to open up opportunities in the accounting industry,” said Leah Houde, Chief Learning Officer at PwC. PWC U.S. TO OFFER FREE MASTERS DEGREE TO BLACK AND LATINO ACCOUNTANTS Photo credit: HKEX 8 February 2021
APLUS Deloitte in the United Kingdom has announced plans to divest its restructuring services business to Teneo, a global CEO consulting and advisory company. The transaction, which is subject to regulatory approval, comes ahead of imminent legislation in the U.K. to force the Big Four to split off their audit arms to ensure independence. Deloitte U.K.’s restructuring service business is made up of more than 250 employees including 24 partners. “We are very excited to join Teneo and believe that this is the perfect home for our partners and people,” said Daniel Butters, Head of Deloitte U.K.’s restructuring business, who will soon become head of restructuring for Teneo. “We have growth plans to scale our existing market leading business, clear support from our clients for our strategy and we believe that Teneo gives us the right platform to deliver this vision.” DELOITTE U.K. TO SELL RESTRUCTURING UNIT EY AUDITORS TOLD TO TESTIFY OVER WIRECARD FAILINGS CITIBANK ACCIDENTALLY WIRES NEARLY US$900 MILLION IN LANDMARK BLUNDER A German court has ordered two EY auditors to testify before a parliamentary committee about their accounting work for now-insolvent payment processor Wirecard AG. EY were Wirecard’s auditors when the company collapsed last year with US$2.3 billion missing from its accounts. In a statement released by EY on 11 February, the ruling gives the firm more guidance about how much information it is allowed to disclose under professional rules. Previously, citing professional confidentiality rules, current and former EY partners involved in work for Wirecard had declined to fully answer questions regarding the matter. “We have always stressed that we’re contributing to clear up the Wirecard case, but that we need a legally valid lifting of confidentiality rules,” EY said in the statement. Citibank in the United States will not be able to recover almost US$900 million it sent to financial companies by mistake, a U.S. District Court judge has ruled. In August last year, the bank, which was acting as a loan agent for makeup brand Revlon, meant to send about US$7.8 million in interest payments to the cosmetic company’s lenders. Instead, Citibank accidentally wired almost 100 times that amount. Despite the court ruling the incident as “one of the biggest blunders in banking history,” the judge ruled that the lenders will be able to keep the money because they could in good faith and with ample justification have understood the payment to be a full repayment on principal loan amounts. “We strongly disagree with this decision and intend to appeal. We believe we are entitled to the funds and will continue to pursue a complete recovery of them,” Citibank said in a statement. Shares of dating app Bumble began trading on the Nasdaq, following its initial public offering on 11 February, which saw the company trading up 77 percent at US$76 a share under the ticker “BMBL.” It priced its shares at US$43 apiece, above its target range of US$37 to US$39, and sold 50 million shares, raising US$2.15 billion. The company, which now has a market value of over US$13 billion, was founded by Chief Executive Officer Whitney Wolfe Herd, who previously co-founded the dating app Tinder. At age 31, Wolfe Herd is the youngest woman to take a large company public in the United States. SHARES START TRADING ON NASDAQ Cathay Pacific has cautioned of “extremely challenging” months ahead as newly-proposed quarantine measures in Hong Kong hamper hopes of a recovery in the near future. The city’s flagship carrier, which carried 981 passengers a day on average last month, revealed in its monthly business report that it started the year with the lowest rate of January passengers on record. The airline has been forced to eliminate 11 routes to Europe, North America and Asia. The quarantine measures, which came into effect on 20 February, could increase the carrier’s monthly losses by HK$400 million. CATHAY PACIFIC FLIGHT OPERATIONS DOWN 90 PERCENT FROM PRE-PANDEMIC LEVELS February 2021 9
SPECIALISMS Valuations SPECIAL REPORT: A HIGH VALUE CAREER 10 February 2021
APLUS Valuations are playing an increasing role in business. Though the fundamental process – determining the current or projectedworth of an asset of company – remains the same, new regulations have cast a spotlight on the specialism and the valuers working in the field. Nicky Burridge speaks to Institutemembers and valuation professionals about how the industry has evolved over the years, whether the new International Valuation Standards will have an impact on the profession, the skills and knowledge required to become an expert practitioner, and the pressing challenges that still lie ahead Illustrations by Gianfranco Bonadies C hanges are taking place in the business valuations industry. A new framework has been developed by the Hong Kong Business Valuation Quality Initiative Task Force, of which the Hong Kong Institute of CPAs is a member, and aims to improve the competency and professionalism of valuers. At the same time, the International Valuation Standards Council (IVSC) has introduced a new set of standards in a bid to harmonize valuation practices worldwide. Professionals who specialize in either the provision of valuations or the assurance of valuations play an important role in maintaining the quality of Hong Kong’s capital market. Spencer Tse, Valuation and Advisory Service Partner at PwC Hong Kong, points out that different capital market activities, such as initial public offerings (IPOs), fundraising and venture capital or private equity investments, all involve companies being valued. “The role of a valuer is not just to give a stamp, but to provide the capital market with an objective point of view,” says Tse, who is a member of the Institute’s Financial Reporting Valuation Advisory Panel. Institute member Wiley Pun, Director at Savills Business and Financial Instrument Valuation, agrees: “Valuation practitioners help maintain the quality of Hong Kong’s capital market by being credible and reliable, much like auditors and many other professionals.” Eugene Liu, Managing Partner and Head of Consulting, RSMHong Kong, adds that independent professional third-party valuation reports also play a key role in giving market confidence that a transaction is fair, particularly if it involves non-cash considerations, or has a complicated target, such as a technology company, or involves patents or mining rights. “Valuation makes an observable contribution to the fairness and efficiency of the capital market,” says Liu, who is an Institute member (read more about Eugene Liu in Accountant Plus on p. 30). Rita Lau, Associate Director of Business Valuation, Valuation and Advisory Services at Colliers and an Institute member, concurs, noting that valuers also play an important role when there is a discrepancy in the expectations of price between the seller and the buyer, providing an objective valuation that serves as the guiding light for them and can help to narrow the gap. February 2021 11
SPECIALISMS Valuations Valuers play an important role in everything from mergers and acquisitions (M&A), to financial reporting, to capital raising, to restructuring and liquidations, to tax planning. “Valuation analysts perform valuations for numerous purposes, such as for financial reporting to fulfil the fair value measurement, asset impairment, and expected credit loss required by accounting standards like the International Financial Reporting Standards,” Liu notes. “Listing rules require valuation reports or valuations to be provided or performed for IPOs, notifiable transactions, employee share options, convertible bond issuances, and transaction pricing for disclosures and regulatory approval.” He adds that tax authorities often require valuations for transfer pricing, gifts tax and estate tax purposes, while courts require valuations for a number of purposes, such as shareholder disputes, matrimonial disputes and estate disputes. “Sometimes, company management requires business valuations or project valuations for performance reviews or post-M&A management,” he says. Lau adds: “Management may also engage professional valuers to provide advisory work on their assets and business using financial modelling to understand how to maximize the potential of or get the best from their assets for their strategy, planning and corporate decision-making.” Tse points out that while some valuations are carried out for internal reference, such as to be used as the basis for negotiations for potential transactions, others are for external use and the report will be seen by other parties, such as in court cases, statutory valuations for Chinese state-owned enterprises, or disclosures for public circulars and prospectuses. He adds that for external use, valuers need to be careful to state the scope of work, as while clients may understand the limitations of conducting a valuation, external parties, including the general public, may not. Pun explains that while business valuation work may be carried out for numerous purposes, the objective is often to meet compliance and governance requirements, such as financial reporting, listing rules, internal control, or court requirements. He adds that there is a misconception that valuation is only needed for big corporations or listing rules, when it actually can be required for companies of various sizes. The professional valuations industry is currently enjoying a boom in Hong Kong. Liu explains that a combination of increasing fair value requirements in financial reporting standards, regulatory tightening and concerns about the fairness of transactions, as well as growing capital market awareness of the important role of valuations, have all driven an increase in demand for the services of professional valuers. “Many audit firms have set up an internal division for valuation audit and consulting, and many independent valuation firms have also been established in recent years to bridge the gap between booming market demand and limited supply in Hong Kong,” he says. Lau adds that the rise in corporate transactions, such as M&As and divestments, as well as the growing importance of intellectual property to businesses, especially new economy companies, and adoption of fair value measurement in the financial reporting framework are driving demand. “The negative effects of COVID-19 on business activities and economies may result in indicators of impairment for many entities and may cause more entities to perform valuations relating to impairment testing for non-financial assets for financial reporting purposes.” But the industry is not without its issues, and Liu points out that there are no regulatory requirements for setting up a valuation firm in Hong Kong, meaning the barrier to entry is not comparable to licensed corporations, despite the important role valuation plays in the capital markets. Pun adds: “It does not have a central regulator, and quality diverges. There are also limited avenues for complaints due to the lack of a central regulator. There is no entry barrier for anyone to claim they are a ‘qualified’ valuer.” He points out that other parties that use valuations, such as directors, auditors and financial advisors, are all subject to regulation by their respective bodies, but business valuers are largely unregulated. Tse describes the industry as being highly fragmented. He highlights the fact that in other THE NEED FOR VALUATIONS ABOOMINGBUT FRAGMENTED INDUSTRY 12 February 2021
APLUS “ The role of a valuer is not just to give a stamp, but to provide the capital market with an objective point of view.” In a bid to address some of these issues, the Hong Kong Business Valuation Quality Initiative Task Force was set up, led by the IVSC, and including a number of industry bodies, such as the Institute, the Royal Institution of Chartered Surveyors, the Hong Kong Institute of Surveyors and the Chamber of Hong Kong Listed Companies. In July 2019, it published a consultation paper on a proposed framework to improve standards and professionalism in the industry, covering ethics, competency and continuing professional development, as well as setting out technical standards and a performance framework. Tse welcomes the initiative as a “good first step,” but says: “We would like the regulators, such as the Securities and Futures Commission and Hong Kong Exchanges and Clearing, to be more active and to play a key role to push the industry to follow guidelines and be responsible for the work it does.” Although he adds that the valuations industry is relatively new in Hong Kong, compared with other developed markets, and it will take time for it to become a more regulated environment. Felix Wong, Principal at Ascent Partners and an Institute member, agrees that the work of the task force is helpful, but adds that there is still more to do. “Just setting up a task force is too simple. It is the next step in how the framework is launched and monitored that is important. Frequent communication with the market, and listening to and addressing the market’s needs should be considered,” he says. He suggests the task force should consider its next step, for example providing guidance on new issues such as how to value cryptocurrencies and other digital assets. A COMPETENT FRAMEWORK markets, such as the United States, companies have to follow strict guidelines in the way valuations are carried out. The situation means these companies are prepared to spend more when hiring valuers to do work for them, compared with Hong Kong, where companies may be more price sensitive. “The quality of the valuation depends on how much work the valuer does, and how many questions they ask the client about the information they need. Many firms try to do valuations in the most cost-efficient way, which makes it challenging for firms that are self-disciplined and impose a lot of policies and guidance to train people,” he explains. Tse adds that at PwC all valuations have to be approved by a senior partner before they are released to the client, while more partners are involved if the valuation is for a public disclosure for a listed company. But he points out that not all firms have the resources to conduct this type of quality control. February 2021 13
SPECIALISMS Valuations While there is no single valuation methodology, generally accepted methodologies include an income approach, market approach and cost approach. Liu at RSM explains: “An income approach involves discounting streams of future economic benefits and costs to arrive at the present value of an asset or liability. The key factors are the reliability of the amount and timing of the economic benefits and costs, and the appropriate estimation of the discount rate. “A market approach involves benchmarking against comparable transactions or comparable companies and is based on valuation multiples, such as price-to-sales, price-to-earning, and price-to-books ratios for valuing the subject item.” He points out that when using this method, the screening and selection of comparable transactions is crucial, while a detailed understanding of the subject and comparable companies is also important. “A cost approach is based on the concept that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction, unless undue time, inconvenience, risk or other factors are involved. It provides an indication of value by calculating the current replacement or reproduction cost of an asset and making deductions for physical deterioration and all other forms of obsolescence,” he explains. Pun at Savills adds that within these approaches, there are a range of other sub-methods that are used. “These are mainly the discounted cash flow method, guideline public company method, guideline transaction method and summation method,” he says. Wong points out that different methodologies will be appropriate in different circumstances to establish the fair value of an asset. But he adds that traditional methodologies are often difficult to apply to new economy companies that may not be generating a revenue yet. “In these cases, we discount by the risk associated with the company and reference other deals in the market. Valuers need a lot of market knowledge and access to services such as Bloomberg and listed company announcements. They need to be very commercialized to know what has happened out there,” he says. Lau at Colliers points out that as no one method is suitable in all circumstances, valuers need to consider the terms and purpose of the valuation, the strengths and weaknesses of the different approaches, their appropriateness in terms of the nature of the asset, and the availability of reliable information that is needed to apply the various methods when deciding which one to use. While there is no single set of valuation standards that is recognized worldwide, the latest edition of the International Valuation Standards (IVS) marks an important step towards harmonizing valuation practice worldwide. The set of standards includes five general standards, which apply to all valuations, and six asset-specific standards covering areas such as intangible assets, businesses and business interests, plant and equipment, and financial instruments. Lau considers it to be a significant milestone. “IVS are universally accepted standards for the valuation of assets, including NO SINGLE APPROACH 14 February 2021
APLUS Valuation professionals have busy but varied days. Unsurprisingly, the typical day of a valuer differs significantly according to their role. Spencer Tse, Valuation and Advisory Service Partner at PwC Hong Kong, points out that an analyst will typically spend their day doing research, financial analysis and financial modelling, while a manager will be engaged with project planning, meeting and calling clients, reviewing work done by analysts and writing reports. Directors and partners are more involved in business development, as well as coaching their team and reviewing the work done by subordinates. Tse says: “I do a lot of marketing and meeting with clients, particularly those in acquisition mode. The role of a valuer is now transforming from being a pure valuer to a deal advisor.” Like auditors, the work of valuation professionals has a peak season, typically from January to March, and from July to August. Rita Lau, Associate Director of Business Valuation, Valuation and Advisory Services at Colliers, says: “The schedule is packed every working day during the peak seasons when the team is working hard to meet the agreed deadline for business valuations used for listed companies’ financial reporting purposes.” Lau typically begins her day by reviewing her emails and checking her meeting schedule. Next, she has discussions with her team about the status of their various engagements, as well as any market updates or valuation issues, before preparing material for meetings with different clients. Most of her day is taken up with meetings. At the end of the day, she holds another discussion with her team to review their work. She pays particular attention to their replies to questions raised by second valuers, who are engaged by clients’ audit teams for financial reporting purposes. “If the business valuation is used for a public transaction, there are frequent conference calls with other professional parties, including auditors, lawyers, financial advisors, and the management team, so that we can work closely to meet the tight schedule,” she says. Wiley Pun, Director at Savills Business and Financial Instrument Valuation, also starts his day by checking to see if there are any updates from clients and colleagues on existing projects and ensuring that engagements are progressing well. He then typically reviews the work and reports of his colleagues, and holds discussions with clients, auditors and their specialist review teams for more complicated projects. “As valuation is a highly judgemental subject, we keep the dialogue open to exchange our views to ensure consistent understanding between all three parties,” he says. When a new project comes in, he reviews the valuation subject and identifies the key areas of risk, as well as commenting on the scope of the engagement and the fee. Pun also makes time to read business news, as well as various valuation and accounting newsletters he subscribes to, ensuring he remains up to date with market developments. “Since we cover a wide spectrum of industries and given the interconnectedness of the economy nowadays, we need to read broadly to ensure our valuation opinion remains relevant in today’s fast changing world, and to spot business opportunities,” he says. “ The latest edition brings greater depth to the IVS, as recommended by member organizations, including the major accounting firms and valuation professional organizations.” business and intangible assets, across the world in the public interest. The latest edition brings greater depth to the IVS, as recommended by member organizations, including the major accounting firms and valuation professional organizations. It will serve as the key guide for valuation professionals globally,” she says. Tse at PwC adds: “The efforts of the board of IVSC have been well recognized and now more and more countries recognize the IVS. The adoption of IVS is still uncommon in Hong Kong, but I do see some valuers refer to the basis of value per IVS for particular engagements. It is a step in the right direction, but it will take time before it is comparable to accounting standards and there is a globally accepted standard worldwide.” A DAY IN THE LIFE OF A VALUATION PROFESSIONAL February 2021 15
SPECIALISMS Valuations This year, the Institute is offering a brand new course on valuations, the Business Valuation Programme, in collaboration with Savills Valuation and Professional Services (S) Pte Ltd., a global real estate services provider actively involved in setting valuation standards. The programme will guide participants through performing valuations, including the relevant International Valuation Standards and their interactions with financial reporting standards. The programme includes a mix of live and e-learning sessions. There are 11 compulsory modules covering the fundamentals of valuations, valuing transactions, financial reporting valuations, and the application of valuations. There are also four elective modules covering valuing financial instruments, property, plant and equipment, and biological assets. Participants are required to take two elective modules as part of the programme. The pilot intake of the programme will be held in April to June 2021, and will then be run twice-yearly. For the pilot, all live modules will be conducted via Zoom. Look out for more details on the programme on the Institute’s website and CPD Highlights weekly email. INSTITUTE OFFERS NEW COURSE ON VALUATIONS 16 February 2021
APLUS Professional valuers face a number of challenges in their day-to-day work, ranging from keeping up to date with best practices to the increasing need to value new economy companies. Liu points out that as a lot of fair value measurements evolved from financial reporting standards, and as a result, in addition to their day jobs, valuers also need to attend seminars, workshops and forums after office hours to keep up to date with those standards, as well as of what is happening in the wider market. Valuation professionals also need to make assumptions behind the figures they use in calculations. “We need to make sure they are reasonable so as to make the output reasonable, meaningful and useful. For us to be able to assess the reasonableness of the assumptions and inputs, we are required to be familiar with not only the relevant accounting and financial knowledge, but also some industry knowledge, such as the value of a patent, or a new drug,” Liu explains. Another challenge is the need to value intangible assets and new economy companies. Wong thinks the main challenge in valuing intangible assets relates to the transparency of the data and information that is available on them. He adds that valuing new economy companies, such as biotech firms or other technology companies that are pre-revenue generating can also be difficult, as valuers have to look at company’s technology and how much revenue it could generate in future, as well as referencing market transactions of similar companies. “A lot of start-ups can be overpriced and investors still need a guideline,” he says. Tse says one of the biggest challenges involved in valuing new economy companies is understanding their business model and how they will make money in the future. He explains that valuers have to consider factors such as the company’s potential future market share and the competition it will face, as this will affect the sustainability of its growth and profitability. “We don’t have a historical track record as these may be start-ups, so deciding whether their performance can be sustained in the longer term is a challenge,” he says. Tse adds that in order to overcome these issues, valuers tend not to rely on just one valuation method, but rather use different methods and different scenarios to test which factors are most important in terms of their impact on the company. He points out that while for traditional companies, practitioners will normally come up with a valuation range of 10 percent to 30 percent, while for new economy ones, the range is typically wider at 40 percent to 50 percent. For Pun, the biggest challenge business valuers face is uncertainty. “Business valuations often make use of financial projections, especially those using an income approach and sometimes a market approach. How to factor in the uncertainty embedded in these financial projections is the most difficult part of our work,” he says. He adds that another significant challenge is benchmarking when using the market approach. Pun explains: “Even if good, comparable public companies exist, they often have some differences from the subject company being valued. Assessing and explaining the differences in valuation levels among the companies requires lots of analysis and judgement.” Wong agrees, pointing out that each transaction is different. “For certain types of assets, such as bonds or listed stocks or instruments issued by banks, valuations can be done in a straightforward way using a standardized methodology, but valuations can be complicated for other assets. The valuation of a bank will be very different to the valuation of a pharmaceutical company, for example,” he says. “With a bank you would look at cash flow, financial information, whereas with a pharmaceutical company you would look at the potential drugs or other research and development in the pipeline with respect to the forecasted timeline to launch. You cannot just use a straightforward international standard; you need to go into the details of each company, such as its management, its revenue stream, how diversified it is, whether it is the market leader, and the downside risks it faces.” He adds that while the IVS guidelines issued by the IVSC give valuers rules to consider in general, they cannot always be adopted, and some judgement is still necessary. Wong points out that the COVID-19 pandemic had also affected the approach professionals need to take when valuing certain businesses. He gives the example of the impact successfully developing an effective COVID-19 vaccine can have on the valuation of a pharmaceutical company. Lau agrees that the pandemic has created new challenges. “During COVID-19, companies in the same industries may be impacted differently because of decisions made by their management. When performing a business valuation, it is crucial for professional valuers to understand the management’s strategy and business plan, the industry development in which the subject company has business operations and the financial performance of comparable companies,” she says. A RANGE OF CHALLENGES February 2021 17
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