Chapter 24

Due Diligence Guidelines –

Biological Assets

3. Experience of Valuer, Scope of Work and Bases and Assumptions

3.1 Standard

3.1.1 At the time of issue of a listing document, a sponsor as a non-expert, after performing the due diligence set out in paragraph 17.7, should have no reasonable grounds to believe and should not believe that the information in the expert reports is untrue, misleading or contains any material omissions. [Paragraph 17.5(c) of the Code of Conduct].

3.1.2 For the purposes of paragraph 17.5(c), the sponsor should:

(a) satisfy itself that:

(i) the expert is appropriately qualified, experienced and competent to give the opinion;

(ii) the expert is sufficiently resourced; and

(iii) the expert is independent from the listing applicant and its directors and controlling shareholder(s);

(b) assess whether the scope of the expert’s work:

(i) is appropriate to the opinion given by the expert; and

(ii) adequately covers the reliability of information provided to the expert, if not, the sponsor should:

(A) request that the scope of the expert’s work be expanded;

(B) seek the assistance of a third party; or

(C) extend its due diligence having regard to the procedures set out in paragraph 17.6,

to cover the information provided to the expert;

(c) assess whether material bases and assumptions (in the case of financial information, critical accounting policies and estimates) on which the expert report is founded are fair, reasonable and complete; and

(d) as regards the expert’s opinion and the rest of the information contained in the report, the sponsor should:

(i) critically review the expert’s opinion and the rest of the information in the report against the totality of all other information known to the sponsor about the listing applicant (including the business model, track record, operations, forecasts, sector performance and any relevant information publicly available) through due diligence and the sponsor’s knowledge and experience of the listing applicant, the market in which the listing applicant operates and of comparable companies;

(ii) corroborate the information in the expert report with the information disclosed in non-expert sections and the sponsor’s knowledge and experience of the listing applicant to ascertain whether the information throughout is consistent and coherent; and

(iii) conduct follow up work to resolve any material discrepancies, irregularities or inconsistencies.

(e) The performance of each of the procedures in paragraph 17.7(a) to (d) above should be to the standard expected of a sponsor which is not itself expert in the matters dealt with in the relevant expert report. [Paragraph 17.7 of the Code of Conduct]

3.1.3 The sponsor should be satisfied that (i) the independent valuer has appropriate and adequate experience in valuation of the type of biological asset; (ii) the independent valuer’s scope of work is appropriate to the opinion; and (iii) the bases and assumptions adopted by the independent valuer are fair and reasonable. [Paragraph 4.8(b) of Exchange Guidance Letter GL46-12]

3.2 Guidance

The sponsor should follow the guidance set out in Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties including Expert Advisers”.

3.3 Recommended Steps

3.3.1 The sponsor should interview the valuer to satisfy itself of the qualifications and experience of the team working on the assignment. The team should have knowledge of the requirements of HKAS 41 and any guidance issued by the International Valuation Standards Council, and have sufficient knowledge of the relevant industry and its economics.

3.3.2 The sponsor should discuss with the valuer its scope of work and compare this to other similar precedents, where available. As a preliminary matter, the sponsor should agree with the valuer the interests to be valued and the assets or activities within that interest that are to be included in the valuation.5 The species and varieties of the biological assets should be precisely identified.

3.3.3 The sponsor should also discuss with the valuer and management to understand all the factors that would typically be considered in the preparation of the valuation. These may include factors affecting the growth cycle of the biological assets, such as weather, natural effect of growth, liveability, disease, management of the assets and environmental conditions. The sponsor should also consider factors specific to the type of biological assets. For example, for valuation of forest assets, factors that may be considered other than the site, size and location, may include details and history of standing timber, potential silviculture strategies and projected growth rates, production risks, rotation length, supply and demand for products and other uses of the land.

3.3.4 Where collating or reviewing data in relation to market prices, the sponsor should consider price differences which may occur between different market locations, for example, due to disparate market environments and conditions, which may result from regulatory, transportation or seasonal differences.

3.3.5 The sponsor should also discuss with the valuer and management the valuation method chosen to understand the basis or reasons for using such valuation method over other valuation methods.

3.3.6 Where market prices are used as a basis for determining fair value, the sponsor should consider with the valuer and management the historical market prices and circumstances. For example, the sponsor should consider whether the listing applicant and valuer should observe and analyse a pattern of historical prices (and other factors such as exchange rates) for a period that is at least equal to the life cycle of the biological assets. The sponsor should also consider the maturity of the biological assets.

3.3.7 The sponsor should also refer to any industry guidance available in Hong Kong and in other applicable jurisdictions to determine if alternative valuation methods are appropriate or if the bases and assumptions relied on are reasonable.

3.3.8 The sponsor should examine the key bases and assumptions and discuss these with the valuer. The sponsor should review and perform due diligence on both the bases and assumptions and the reasons for making those bases and assumptions. The sponsor should also consider the disclosure on bases and assumptions in the valuer’s report, and whether this is adequate.

3.3.9 If an external valuer is appointed, but its report is not included in the listing document, the sponsor should follow the guidance set out in Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties including Expert Advisers” applicable to non-expert third parties and their work with respect to the valuation and the persons preparing or responsible for the valuation.


5. Paragraph 6, International Valuation Standards Council, The Valuation of Forests (Exposure Draft)


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.

Biological Assets

Independent Valuer Report in Listing Document

Experience of Valuer, Scope of Work and Bases and Assumptions

Factors Affecting Growth Cycle Of Biological Assets, Such As Weather, Natural Effect Of Growth, Liveability, Disease, Management Of The Assets And Environmental Conditions

Paragraph 17.5(c) of the Code of Conduct

Exchange Guidance Letter GL46-12

International Valuation Standards Council

Factors Considered in Preparation of Valuation for Listing Document

Valuation Method for Biological Assets

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