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Quick Understanding on the Impact under the New Standard
HKFRS 16 Lease

January 2018

HKFRS 16 Lease becomes effective for annual periods beginning on or after 1st January 2019. It requires lessee to recognize 'right-of-use' assets with the corresponding lease liabilities for most of the property leases. This requirement does not apply to leases with lease term within 12 months or for which the underlying asset is of low value. Apart from this, companies which rent offices or lease machineries may be affected by this new financial reporting standard.

Basically, this new requirement puts the 'off-balance sheet' accounting items on the balance sheet of lessee. In financial term, key measures and ratios are affected, such as EBITDA and debt-to-equity ratio, and as a result companies, especially SMEs, may expose to higher financial risk such as breaching financial covenants. An example for fixed payment is illustrated below:

Lease term 10-year lease with an option to extend for 5 years
Lease payment $30,000 per year for the 10-year lease and $35,000 per year during the optional period
Lessee's incremental borrowing rate 5% per annum

Cash outflow for lease Year 1 Year 2 Year 3 Year 4 Year 5
Cash payment for lease $30,000 $30,000 $30,000 $30,000 $30,000
Discount factor at 5% p.a. 1.0000 0.9524 0.9070 0.8638 0.8227
PV of payment for lease $30,000 $28,572 $27,210 $25,914 $24,681
           
  Year 6 Year 7 Year 8 Year 9 Year 10
Cash payment for lease $30,000 $30,000 $30,000 $30,000 $30,000
Discount factor at 5% p.a. 0.7835 0.7462 0.7107 0.6768 0.6446
PV of payment for lease $23,505 $22,386 $21,321 $20,304 $19,338
           
Sum of present value of lease payment $243,231        

In the above example, lessee has cash payment for Year 1 at $30,000 on the contract commencement date (for simple illustration, ignore other related costs) and further recognizes the lease liability at $213,231 and 'right-of-use' asset at $243,231 for the subsequent term. Also, depreciation and lease interest will be charged at $24,323 (straight line depreciation over 10 years lease term) and $10,662 (5% p.a. interest charge for lease liability) respectively at the end of first year.

In addition, in order to lessen the burden of the balance sheet, the tenant may intend to negotiate for a shorter lease term or a higher portion of variable lease payment based on turnover rent before entering into new lease contract. This results in a change of behavior of leasing activities towards the tenants in the commercial market. Entities should start the planning for timely assessment to address the potential challenges for the new standard and seek for professional advice on a variety of leasing structures in favour to the companies.

Issued by: Professional Development and Standards Team

 
The Exchange Strives to Develop Hong Kong as Aircraft Leasing and Financial Hub
December 2017

The Stock Exchange of Hong Kong Limited ("the Exchange") has issued the consultation paper in November 2017 by understanding the practical difficulties to comply with the disclosure requirement under Chapter 14 in respect of the aircraft leasing activities.

To enhance the positioning on aircraft leasing hub in Hong Kong amongst other competitors such as Ireland and Singapore, the Exchange has addressed the exemption for listed companies in complying with the notifiable transaction rules for aircraft leasing activities. The proposed exemption is intended to apply to acquisition, disposals and finance leases of aircraft by listed issuers. Alternative disclosure of the transactions by the way of announcements and in their interim/annual report is allowed.

Greater China Appraisal Limited which is one of the RICS Regulated Firms fully supports the Exchange's action to update the requirements from time to time to meet the market development.

The proposed exemption will encourage the increase of momentum in the aircraft commercial activities in Hong Kong. GCA Professional Services Group's expertise is ready to provide assistance and counsel to different areas.

Detailed information of our aircraft and aviation related services is available at below: http://gca-valuation.com/Publication/gca_service_brochure_Airplane_Valuation.pdf

Detailed information of the consultation paper is available at below: https://www.hkex.com.hk/News/Market-Consultations/2016-to-Present/November-2017-Exemption-for-Aircraft-Leasing-Activities?sc_lang=en

Issued by: Professional Development and Standards Team

 
The New CEIV Credential - A milestone for Valuation Professional
November 2017

The New Certified in Entity and Intangibles Valuation ("CEIV") credential was introduced by three valuation professional organizations i.e. The Royal Institution of Chartered Surveyors ("RICS"), American Society of Appraisers ("ASA") and The American Institute of Certified Public Accountants ("AICPA") in 2017.

It enhances the transparency, quality and consistency of valuation for fair value measurement and helps to unify the valuation profession in the market.

Greater China Appraisal Limited, as one of the RICS Regulated Firms, has always provided a consistent framework for how to perform a professional valuation work and how to document the work done in estimating fair value. We welcome and fully support the Credential which is benefited to the public and is in time with our company's objective to ensure the best quality of valuation.

 
SFC has launched guidance note on valuation in corporate transaction
May 2017

The Securities and Futures Commission ("SFC") has increasingly concerned the responsibility and liability to all directors of listed companies, financial advisors and valuers in ensuring the terms of corporate transactions, including the consideration and the use of valuation, are fair and reasonable.

Greater China Appraisal Limited ("GCA") as one of the major valuation consulting firms in the market, we are delighted to see the launch of guidance note and related documents by the SFC on 15 May 2017. It is no doubt that valuation used in corporate transactions shall protect the interests of the company and its shareholders as a whole.

Our competent professional valuation teams offer recognised quality service by exercising a high level of skill and reasonable care to conduct valuation engagements. GCA being a Corporate Member of International Valuation Standards Council ("IVSC") and as a Regulated Firm by Royal Institution of Chartered Surveyors ("RICS"), we fully support SFC's action to raise valuation practice standards for the benefit of Hong Kong capital market.

Detailed information is available on the SFC website below:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR68

 
Launch of International Valuation Standards (IVS) 2017
January 2017

Greater China Appraisal Limited as one of the major valuation consulting firm in the market, we are delighted to see the launch of International Valuation Standards (IVS) 2017.

Being a Corporate Member of International Valuation Standards Council (IVSC), we fully support IVSC's mission to raise valuation practice standards for the benefit of the global financial market. Our corporate clients share with us the latest version ofs the IVS which brings a greater depth to the standards and provides a greater efficiency to the business environment.

Detailed information is available on the IVSC website below:
https://www.ivsc.org/news/article/ivsc-launches-new-global-standards-for-valuation-profession

Contact us:
Ms. Tracy Tam
E: commun@gca-group.com
T: +852 3582 3149

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