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Following is a question by the Hon Tam Heung-man and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (February 8):
Question:
Under the new accounting standards, government and non-profit-making bodies registered as body corporates or limited companies, such as hospitals, the Vocational Training Council, universities, school sponsoring bodies and social service agencies should, like other companies, engage valuers to make valuations every year on the property they hold, and the price changes should be included in their profits. In this connection, will the Government inform this Council:
(a) as the engagement of valuers will exert financial pressure on non-profit-making bodies, whether the authorities will discuss with the Hong Kong Institute of Certified Public Accountants with a view to exempting non-profit-making bodies from valuating their property, so as to alleviate their financial burdens; if they will, of the details; and
(b) if the authorities will not conduct the discussion, the reasons for that and whether they will consider subsidising the engagement of valuers by non-profit-making bodies; if not, the reasons for that and whether the authorities will assist non-profit-making bodies in avoiding the situation in which, because their shareholders or members do not make valuations in accordance with the new accounting standards due to the excessively high valuation costs, the auditors of their accounts express reservations in their reports; if not, the reasons for that?
Reply:
Madam President,
Under the Professional Accountants Ordinance (Chapter 50), the Council of the Hong Kong Institute of Certified Public Accountants (HKICPA) is empowered to issue accounting standards which are required to be observed, maintained or otherwise applied by any certified public accountant. The Administration has thus consulted the HKICPA in the formulation of this reply.
According to the HKICPA, Hong Kong Financial Reporting Standards (HKFRS) include all Hong Kong Accounting Standards (HKAS) and are designed to apply to the general purpose financial statements of profit-oriented entities, although not-for-profit entities may also apply these standards, apart from any reporting requirements prescribed in their enabling legislation, as appropriate.
Hong Kong Accounting Standard 16 "Property, Plant and Equipment" (HKAS 16) applies to properties for use in the supply of goods or services or for administrative purposes. HKAS 16 provides an entity with an option to choose either the cost model or the revaluation model for measurement of a property after initial recognition. In other words, under HKAS 16, whether an entity will revalue its property depends on its own choice of an accounting policy. Revaluation increases are generally taken to a reserve within equity and not through the income and expenditure account. It should be noted that not-for-profit entities usually prepare "income and expenditure account" rather than "profit and loss account" to emphasise the different objectives vis-ⷳ-vis profit-oriented entities.
Hong Kong Accounting Standard 40 "Investment Property" (HKAS 40) applies to properties held to earn rentals or for capital appreciation and not occupied by the owner. Under HKAS 40, an entity may choose either the cost model or the fair value model to measure the value of an investment property for reporting in the balance sheet. If an entity uses the cost model, it should still determine the fair value of an investment property and disclose it in the notes to the financial statements.
Neither HKAS 16 nor HKAS 40 mandates the use of professional valuers. Both standards note that an entity is encouraged, but not required, to determine the fair value of a property on the basis of a valuation by professionally qualified valuers. In Hong Kong (unlike many other jurisdictions), information about property values is more readily available and an entity can decide whether to use this information or whether to seek the services of a professional valuer. Given the amount of publicly available data, valuers are often able to provide relatively low-cost desktop valuations if an entity requests it.
Furthermore, the HKICPA has advised that two recently issued standards have eased the reporting burden for not-for-profit entities -
(a) The HKICPA has issued in November 2005 an amendment to HKAS 16 permitting charitable, government subvented and not-for-profit entities to recognise their properties at carrying amounts on transition to HKFRS and then to make the election between the cost model and the fair value model; and
(b) The HKICPA has issued in August 2005 the Small and Medium-sized Entities Financial Reporting Framework and Financial Reporting Standard to reduce the reporting burden on those smaller entities eligible to apply it. This Framework and Standard allow the cost model to be used for all property measurement.
Given the above, the HKICPA is of the view that the question of subsidising these entities for the engagement of professionally qualified valuers does not arise.
Ends/Wednesday, February 8, 2006
Issued at HKT 12:38
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