Chapter 24

Due Diligence Guidelines –

Biological Assets

Key Stock Exchange Guidance Letters

Exchange Guidance Letter GL46-12

Other Key Reference Documents

Hong Kong Accounting Standard 41 – Agriculture

Hong Kong Financial Reporting Standard 13 – Fair Value Measurement

1. Introduction

1.1 Background

1.1.1 There is no specific reference to biological assets in the SFC consultation conclusions or the Code of Conduct. However, the Stock Exchange released Exchange Guidance Letter GL46-12 in December 2012 (which was updated in October 2015) which provides guidance on (i) how applicants engaged in agricultural activities are to treat unrealised fair value gains on the valuation of biological assets for the purposes of the trading record and profit requirements under the Listing Rules; (ii) the disclosure requirements for such applicants seeking an initial public offering; and (iii) the due diligence work on biological assets expected to be performed by sponsors and other professional advisers. The Stock Exchange has stated that the treatment of biological assets is unique in view of the nature and inherent risks relating to biological assets and their valuation and that it considers the risks in biological assets to be higher as such assets are perishable and their valuation is usually subject to higher uncertainty due to the complex and not easily verifiable assumptions adopted in determining their value.

1.1.2 The purpose of this due diligence guideline is to provide guidance on the due diligence work expected to be performed on biological assets and supplements Practice Note 21 to the Listing Rules and Paragraph 17.6(e)(ii) of the Code of Conduct in relation to inspection of physical assets.

1.1.3 This due diligence guidance does not cover the accounting treatment of biological assets which is dealt with in Hong Kong Accounting Standard 41 – Agriculture (“HKAS 41”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). For completeness, HKAS 41 requires a biological asset to be measured at fair value less cost to sell, other than when its fair value cannot be measured reliably. The fair value of biological assets can be determined based on the market approach, the income approach (i.e. discounted cash flow method) or the cost approach.

1.1.4 This due diligence guidance also does not cover how fair value is measured which is dealt with in Hong Kong Financial Reporting Standard 13 (“HKFRS 13) issued by the HKICPA. For completeness, HKFRS 13 requires an entity to use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. HKFRS 13 also establishes a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to Level 1 inputs (i.e. unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date) and the lowest priority to Level 3 inputs (i.e. unobservable inputs for the asset or liability).

1.1.5 Appendix I sets out a list of initial public offerings in Hong Kong of businesses involved in agricultural activity or biological assets since 2008.

1.1.6 Appendix II sets out a non-exhaustive list of factors which a sponsor should consider when performing due diligence on biological assets.

1.1.7 Appendix III sets out some useful industry publications on biological assets.

1.1.8 Endnotes sets out various notes and source materials relating to comments below on biological assets.

1.2 Definitions

1.2.1 “Biological asset” means a living animal or plant.1 Examples of biological assets include sheep, trees in a plantation forest, plants, dairy cattle, pigs, bushes, vines and fruit trees.

1.2.2 “Agricultural activity” means the management by an entity of the biological transformation (i.e. growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset) and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets. Such activity covers a diverse range of activities, for example, raising livestock, forestry, annual or perennial cropping, cultivating orchards and plantations, floriculture and aqua culture (including fish farming).2


1. Paragraph 5, HKAS 41.

2. Paragraphs 5 and 6, HKAS 41.


HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.

Agricultural Activities

Listing Applicants Engaged in Agricultural Activities

Biological Assets Due Diligence

Exchange Guidance Letter GL46-12

Due Diligence Work on Biological Assets

Practice Note 21 to the Listing Rules in Relation to Inspection of Physical Assets

Paragraph 17.6(e)(ii) of the Code of Conduct

Hong Kong Accounting Standard 41 – Agriculture (HKAS 41)

Stock Exchange Treatment of Biological Assets

Table of contents