The International Accounting Standards Board (“IASB”) has published the Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment in March 2020 (the “Discussion Paper”). The Discussion Paper considers four major topics, including (1) improving disclosures about acquisitions, (2) improving effectiveness of impairment test, (3) simplifying the impairment test, and (4) changing the range of recognisable intangible assets. As an experienced valuation and financial advisory firm, AVISTA has outlined the key points in the Discussion Paper and potential impacts to valuation and corporate transactions.
 
Improving disclosures about acquisitions
 
In response to some investors’ concern on not having sufficient information for understanding the subsequent performance of an acquisition and achievement of the management’s objectives for the acquisition, the IASB believes that companies should disclose the strategic rationale and management’s objective for undertaking an acquisition, and the metrics for monitoring achievement of objectives at acquisition date. Subsequent to the acquisition date, disclosure regarding the information and metrics used by the management to monitor and measure the progress of objectives achievement should be required. The metrics to be disclosed could be financial (e.g. profitability) and/or non-financial (e.g. product launches).
 
Another suggested additional disclosure is the factors making up goodwill, such as nature, amount, and timing of, and related costs required for the synergies expected to be realised. The company is required to provide qualitative description of factors that make up the goodwill recognised and to quantify an estimate of expected synergies in determining and agreeing the acquisition price.
 
Improving effectiveness of impairment test
 
Under the current IAS 36 — Impairment of Assets requirement, companies have to test cash-generating units containing goodwill for impairment at least annually. The Discussion Paper has examined (1) ways to improve the effectiveness of impairment test at a reasonable cost; and (2) whether to reintroduce amortisation of goodwill.
 
Regarding the improvement on the effectiveness of impairment test at a reasonable cost, the Discussion Paper has preliminary concluded that it is not feasible to design a significantly more effective impairment test than the currently adopted one as required in IAS 36 — Impairment of Assets.
 
In the context of reintroducing amortisation of goodwill, the views among IASB members are controversial, with majority of them voting in favour of retaining the impairment-only model and not reintroducing amortisation of goodwill, as the determination of useful life of goodwill would be arbitrary and amortisation of goodwill could not be an effective measure of management’s accountability for acquisition decisions.
 
Simplifying the impairment test 
 
There are three reliefs proposed by the IASB to simplify the impairment test, including (1) removing the requirements for a company to perform annual impairment assessment for cash-generating units containing goodwill if there is no impairment indication, intangible assets with indefinite useful lives and intangible assets not yet available for use; (2) removing the restriction on including uncommitted restructuring and asset enhancement cash flows; and (3) removing the requirement to use pre-tax cash flows and pre-tax discount rates in estimating value in use.
 
The IASB is in the preliminary view that these measures could reduce the cost and complexity for performing impairment test.
 
Changing the range of recognisable intangible assets
 
The Discussion Paper has examined whether some intangible assets could be included in goodwill to reduce costs and complexity for companies in identifying and valuing particular intangible assets. Having considered varying views from stakeholders on this topic, the IASB concluded that there is no compelling evidence suggesting that a change in the range of recognisable intangible assets is favourable.
 
To read the full Discussion Paper released by IASB, please click <a href="https://cdn.ifrs.org/-/media/project/goodwill-and-impairment/goodwill-and-impairment-dp-march-2020.pdf">here</a>.
 
 
AVISTA’s Professional Services for Valuation and Corporate Transactions
 
AVISTA provides one-stop valuation and financial advisory services that help clients achieve additional growth and ensure their compliance with regulators’ stringent rules and disclosure requirements when implementing business decisions and strategies. 
 
<ul>
<li>Valuation Services for Transactions</li>
<li>Valuation Services for Financial Reporting</li>
</ul>
 
We are closely following up on the latest development of this accounting standard update. For further information or enquiry regarding the potential valuation impact of the Discussion Paper to you, please feel free to contact us.

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IASB Discussion Paper on  Business Combinations — Disclosures, Goodwill and Impairment

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Newly-Released ESG Guide Consultation Conclusions and ESG Disclosure Review by HKEX

The Hong Kong SAR government has recently released a new round of economic data, predicting that Hong Kong's Gross Domestic Product (GDP) will contract by 3% in the Q4 of 2019 and contract by 1.3% for the whole year, and lowering Hong Kong's GDP growth forecast for 2020 to 0.7%.
 
It can be seen that there is an uncertainty in Hong Kong's economic prospects and hence some investors have stepped up their efforts to transfer funds to other countries and regions, including Southeast Asian countries. These countries are the members of the Belt and Road Initiative (BRI) that China has been actively promoting since 2013. With the continuous implementation of the BRI, China and Southeast Asian countries have developed much closer business relationships and trade ties.
 
In view of that, AVISTA has selected a number of the Belt and Road countries, mainly those in Southeast Asia, and conducted a comprehensive analysis of their real estate market.
 
The first country that we are looking at would be … Malaysia.
 
Please <a href="../../../../../uploads/Malaysia_belt_and_road_initiative_aba68f497d.pdf" target="_blank" rel="noopener">click here</a> to read the full report (available in Chinese version only).
 
<a href="../../../../../uploads/Malaysia_belt_and_road_initiative_aba68f497d.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/thumbnail_9d5a6ef6e3.png" alt="" width="630" height="888" /></a>

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AVISTA Insight – Belt and Road Series: Malaysia

The Hong Kong Stock Exchange (the “HKEx”) has issued a consultation paper on “Review of the Environmental, Social and Governance (“ESG”) Reporting Guide (the “Guide”) and Related Listing Rules” (“Listing Rules”) (“the consultation paper"). This is the second consultation on the revision of the Guide conducted by the HKEx since the launch of the Guide in 2013. The HKEx has proposed to implement the revised “Listing Rules” and the “Guide” for the fiscal year beginning on or after January 1, 2020. In other words, issuers are required to publish ESG Reports according to the revised Guide starting from 2021.
 
Based on our extensive experience ESG advisory, AVISTA Risk Advisory has summarized the major revisions in this consultation with comparisons of previous guides.
 
Please <a href="../../../../../uploads/ESG_Guidance_Update_98ad3951d1.pdf" target="_blank" rel="noopener">click here</a> to read the full summary.
 
<a href="../../../../../uploads/ESG_Guidance_Update_98ad3951d1.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/aaa_440b6aaf32.png" alt="" width="632" height="894" /></a>

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Update of the Newly-Released Consultation Paper on ESG Report by HKEX

The Securities and Futures Commission (“SFC”) of Hong Kong has issued a statement on 4 July 2019 (the “Statement”) in which the directors’ duties when considering corporate acquisitions or disposals have been further stressed. The Statement listed out several key types of misconduct and deficiencies of the directors commonly seen in transactions, in particular, lack of independent valuation, lack of due diligence on target entity’s financial position, inappropriate valuation procedures, etc.  Further to the “Guidance note on directors’ duties in the context of valuations in corporate transactions” issued on 15 May 2017, the SFC once again reminds directors that they are liable for ensuring the information in relation to a planned corporate transaction should be compiled with due care. Apart from the financial forecast or profit guarantees, the historical financial position of the target entity also requires a thorough analysis in the process of a proper due diligence.  As an experienced independent valuation and advisory firm, AVISTA has outlined following common queries that corporates might raise when aligning directors’ duties with the SFC’s updated requirements in corporate transactions.
 
What are the appropriate procedures in considering any planned corporate transaction?
 
Although it is not expressly required by statutory law or under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”), engaging an independent professional valuer, as well as a financial advisor, are recommended for directors in contemplating potential transactions.
 
A professional independent valuer is able to aid the directors in assessing the business performance and prospects of the target entity, so as to protect the interests of the company and its stakeholders.
 
In addition, in case of a connected transaction, an independent financial advisor (“IFA”) is required to be appointed under Chapter 14A of the Listing Rules. IFA will assist the directors in reviewing the overall reasonableness of the transaction, including but not limited to the terms of the potential transaction, the basis of determining the consideration and the valuation report.
 
Independent professional valuation has been obtained. Would that sufficiently fulfill the SFC’s requirements on directors’ duties?
 
Apart from conducting independent valuation, the SFC has also shown increasing concerns about the reliability of the target entity’s financial information.
 
As a matter of fact, financial and legal due diligence is becoming more commonly performed as a part of pre-deal due diligence. In particular, financial due diligence (“FDD”) is an extensive process for a thorough and complete assessment of the target entity's business, assets, capabilities and financial performance.
 
FDD enables the directors to scrutinize the quality of earnings and the financial position of the target entity, which is considered to be a prerequisite for any potential transactions. Such due diligence work allows the directors to identify any potential risk in early stage of the potential transaction, which could possibly enhance directors’ duty to exercise due and responsible care, skill and diligence in the discharge of their duties.
 
Why are the regulators still showing concerns even market approach has been adopted in the valuation? 
 
There has been an upward trend in the applications of market approach. However, the SFC has noted certain cases in which the valuation parameters have been “cherry-picked”.
 
In order to conform with the regulators’ standards, the valuation has to be carried out under a fair and reasonable basis. In adopting market approach, a systematic way of selection of comparable companies constitutes one of the essential parts of the valuation. Factors such as business nature, development stage, geographical location, etc. of the target entity should be considered such that an exhaustive list of comparable companies could be obtained.
 
To read the full statement released by the SFC, please click <a href="https://www.sfc.hk/web/EN/news-and-announcements/policy-statements-and-announcements/statement-on-the-conduct-and-duties-of-directors.html" target="_blank" rel="noopener">here</a>.
 
 
AVISTA’s Professional Services for Corporate Transactions
 
AVISTA provides one-stop financial advisory services that help clients achieve additional growth and ensure their compliance with regulators’ stringent rules and disclosure requirements when implementing business decisions and strategies. 
 
<ul style="text-align: left;">
<li>Valuation Services for Transactions</li>
<li>Financial Due Diligence Service </li>
<li>Risk Advisory Review on Target</li>
</ul>

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Avoiding Major Misconduct in Corporate Transactions: Q&A on HK SFC’s Latest Statements on Directors’ Duties

Previously, we are honored to be engaged by COSCO SHIPPING Holdings Co., Ltd. (1919.HK) in providing PPA valuation services for their Acquisition of Orient Overseas (Int’l) Ltd. (316.HK). This was the largest M&amp;A transaction in the global shipping industry in terms of deal price.
 
Please <a href="../../../../../uploads/CaseHighlight_COSCO_20190503_87da489474.pdf" target="_blank" rel="noopener">click here</a> to know more about the acquisition and its transaction synergy and our engagement. 
 
<img src="../../../../../uploads/a_a82449e3a4.png" alt="" width="700" height="495" /><a href="../../../../../uploads/CaseHighlight_COSCO_20190503_87da489474.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/a_e1c764fdde.png" alt="" width="700" height="493" /></a>

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