Hong Kong exchange excludes unrealised agricultural gains/losses from IPO consideration

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18 Dec 2012

The Hong Kong Exchanges and Clearing Limited (HKEx) has released a guidance letter outlining how entities involved in agricultural activities are to treat fair value gains when seeking a listing on the exchange. The guidance letter notes that allowing "unrealised fair value gains on valuation of biological assets to fulfil the trading record requirements is contrary to the principles of the Listing Rules", and instead requires the "recorded sales of biological assets/ agricultural produce and profits (excluding unrealised fair value gains on biological assets)" in fulfilling the requirements.

The HKEx listing rules require an applicant for listing on the exchange to have a trading record with certain levels of profitability in the preceding three years.  This trading record is required to exclude any income or loss generated by activities outside the ordinary and usual course of its business.

The guidance letter notes the following concerns of the HKEx:

We consider that the sales of biological assets/ agricultural produce are the principal activities in the ordinary and usual course of business of an applicant which engages in agricultural activities. In addition, biological assets are subject to inherent risks and their valuation is usually subject to higher uncertainty due to complex and not easily verifiable assumptions adopted.

Hong Kong Accounting Standard HKAS 41 Agriculture (equivalent to IAS 41 Agriculture) generally requires a biological asset to be measured at fair value less cost to sell.  For the purposes of seeking a listing, entities will not be able to rely on unrealised agricultural gains recognised in applying HKAS 41 in meeting the trading record requirements.

The measurement of agricultural assets based on their fair values is a controversial topic in Asia, and efforts by various standard setters, such as the Malaysian Accounting Standards Board (MASB), led to the IASB taking on a narrow scope project on the treatment of 'bearer biological assets' such as fruit trees and vineyards under IAS 41.  An exposure draft is expected from the IASB during 2013.

Due to their nature, increases in the fair value of bearer biological assets would only be realised on sale of the operation (as for instance a fruit tree produces fruit each year which can be sold, but any underlying value in the tree itself is unrealised).  Changes in value of the bearer biological assets would be excluded from the trading record test under the HKEx guidance and may be have a large impact on affected entities, particularly if the entity's bearer biological assets are mature and the amount of produce remains relatively constant in both volume and realised price.

Click for access to the HKEx guidance note (link to HKEx website).

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