Chapter 24

Due Diligence Guidelines –

Biological Assets

2. Independent Valuation Of Biological Assets

2.1 Standard

An independent qualified valuer should be appointed to value the biological assets unless cogent reasons are provided. [Paragraph 4.8(a) of Exchange Guidance Letter GL46-12]

2.2 Guidance

2.2.1 The sponsor is not an expert in regard to biological assets and accordingly the listing applicant should expect to appoint a valuer which is acceptable to the sponsor to perform a valuation of the listing applicant’s biological assets (see section 3 “Experience of Valuer, Scope of Works and Bases and Assumptions” below). Only in exceptional circumstances or where it is not normal practice to include a valuation report in a listing document of an applicant engaged in the same activity as the listing applicant, and there is no doubt in relation to any aspect about how the value of the biological assets is determined, should a valuer not be appointed. If it is normal practice for a listing document of an applicant engaged in the same activity as the listing applicant to include a valuation report, a valuation report should ordinarily be included and if it is not, the sponsor will need to document the reasons why it is not appropriate for the listing document to contain a valuation report. The sponsor should also consult experienced biological assets valuers for their opinion on whether the use of independent valuations is common for the type of activity in which the listing applicant is involved.

2.2.2 The following factors should be considered if it is proposed that a valuer not be appointed:

(a) are external independent valuations commonly used for the type of activity carried out by the listing applicant, in particular practice on other IPO transactions of the type of activity that the listing applicant is involved in, where available;

(b) whether an external independent valuation of the listing applicant’s biological assets would be required in order to provide investors with sufficient information to make an informed assessment of those biological assets;3

(c) whether there is an established and active market for identical or largely similar biological assets and if the physical and biological attributes are easily understood; and

(d) why the listing applicant believes that the fair value of the biological assets can be determined without an independent qualified valuer.4

2.2.3 If a valuer’s report is included in the listing document, it (and any valuations extracted from it that are contained elsewhere in the listing document) will be an expert report for the purposes of the Code of Conduct and Listing Rules and accordingly subject to a different standard of liability and responsibility vis a vis the sponsor, among other things, on the basis that the sponsor is not itself an expert. If no valuer’s report is included, the sponsor’s liability and responsibility for any valuation will be the same as for the remainder of the listing document (other than any expertised sections such as the accountants’ report).

2.2.4 Even if an external valuer is not to be appointed, the sponsor should follow the guidance set out in Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties including Expert Advisers” with respect to non-expert third parties and their work in assessing the valuation and the parties preparing the valuation.

2.3 Recommended Steps

If an external valuer is not to be appointed, the sponsor should consider the reliability of the valuation method used to value the biological assets. For example, where the present value of expected net cash flows is used to determine fair value and the special physical and biological attributes of the assets are complex such that a thorough understanding is difficult, or where many assumptions are required, which are inherently uncertain, the sponsor will need to satisfy itself as to the basis of valuation and the bases and assumptions used, which may require it to obtain expert guidance on such matters. Where there is an established and active market for identical or largely similar biological assets and the physical and biological attributes are easily understood, this should be the most reliable measure of the value of the biological assets. In such case, the sponsor should nevertheless satisfy itself that market prices are reliable as these may vary between different market locations.

Endnotes

3. HKAS 41 does not require an external independent valuation and the IASC Board rejected the proposal for requiring an external independent valuation if the present value of expected net cash flows is used to determine the fair value of biological assets. The IASC Board believes that external independent valuations are not commonly used for certain agricultural activity and it would be burdensome to require an external independent valuation. [HKAS 41 Basis for IASC’s Conclusions on IAS 41 Agriculture, B33].

4. The IASC Board believes that it is for entities to decide how to determine fair value reliably, including the extent to which independent valuers need to be involved. [HKAS 41 Basis for IASC’s Conclusions on IAS 41 Agriculture, B33].