CITY DEVELOPMENTS LIMITED ANNUAL REPORT 2021 FINANCIALS 168 169 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2021 YEAR ENDED 31 DECEMBER 2021 9 INVESTMENTS IN AND BALANCES WITH JOINT VENTURES (CONT’D) (i) Accounting for acquisition of HCP Group (cont’d) Measurement of fair values (cont’d) In relying on the valuation reports for the property, plant and equipment, investment properties and development properties, the Group had exercised its judgement and was satisfied that the valuation methods and estimates were reflective of current market conditions. The valuation reports obtained from external valuer of the properties had highlighted that as a result of the COVID-19 pandemic, giving rise to an unprecedented set of circumstances on which to base a judgement, less certainty and a higher degree of caution, should be attached to the valuations than would normally be the case. Due to the uncertainties that the pandemic may have on the real estate market, the external valuer had recommended to keep the valuations of these properties under frequent review. The fair value measurements were categorised as Level 3 in the fair value hierarchy based on the inputs in the valuation techniques used. The PPA exercise indicated that the Group’s cost of investment in HCP of $0.9 billion represented goodwill. Impairment of the Group’s investment in HCP in 2020 is set out in note (ii) below. (ii) Impairment of the equity investment in HCP Group 2021 The impairment loss previously recognised was fully utilised in 2021, following the Group’s disposal of its interest in HCP. 2020 In 2020, subsequent to the Group’s acquisition of the equity investment in HCP Group, the Group identified indicators of impairment on the investment arising from the challenging macro-economic environment posed by the COVID-19 pandemic, the credit tightening measures imposed on China’s real estate sector and the liquidity challenges faced by Sincere Property Group. The Group assessed the recoverable amount of the investment using the fair value less costs to sell approach which was based on the financial position of the HCP Group, which took into consideration the fair values of the joint venture’s underlying assets and liabilities. Based on the assessment undertaken, the recoverable amount was estimated to be nil. After equity accounting for the Group’s share of HCP Group’s share of loss of $75.8 million, an impairment loss of $806.4 million was recognised. The impairment loss was included as part of “Share of after-tax profit/(loss) of joint ventures” in the consolidated statement of profit or loss, and in the property development ($435.4 million), hotel operations ($48.4 million) and investment properties ($322.6 million) segments. As the Group’s cost of investment in HCP Cayman had been reduced to nil, the Group had discontinued equity accounting for further losses of HCP Group as the Group had no obligation to fund HCP Group’s operations or make payments on behalf of HCP Group (other than the financial guarantee that the Group had issued in relation to a loan undertaken by HCP Group for which a provision had been made for the full guarantee amount (refer to “Financial guarantee issued” below)). 9 INVESTMENTS IN AND BALANCES WITH JOINT VENTURES (CONT’D) (ii) Impairment of the equity investment in HCP Group (cont’d) The fair value measurement was categorised as Level 3 in the fair value hierarchy based on the inputs in the valuation technique used. Valuation technique Significant unobservable inputs Inter-relationship between key unobservable inputs and fair value measurement The fair value is calculated using the net asset value (NAV) of the investee entity adjusted for the fair value of the underlying properties, where applicable. NAV The estimated fair value would increase/(decrease) if the NAV was higher/(lower). (iii) Impairment of amounts owing by HCP Group 2021 During 2021, as part of the Group’s disposal of its interest in HCP, the Group had entered into various agreements with the HCP Group whereby it was agreed that (i) an amount owing by the Group to HCP Group of $263.7 million would be set off against the amounts owing by HCP Group; and (ii) the collateral held by the Group in respect of the amounts owing by HCP Group, which relate to shares in an investment holding company that holds an equity interest in a property-owning entity which had been pledged by HCP Group to the Group, in respect of the amounts owing by HCP Group, would be transferred to the Group, as settlement of $54.1 million (RMB260.0 million) of the amounts owing by HCP Group. The above arrangements resulted in a utilisation of $8.2 million (RMB39.2 million) impairment loss previously recognised in the current year (note 9(d)). As at 31 December 2021, after the offset arrangements, the Group had gross amounts owing by HCP Group of $395.1 million (classified under other receivables in note 15) and amounts owing to HCP Group of $50.3 miliion (note 30). In October 2021, the Chongqing No. 5 Intermediate People’s Court accepted the bankruptcy reorganisation application by a creditor against Sincere Property and a bankruptcy administrator was subsequently appointed. In addition, a local credit rating agency downgraded Sincere Property’s credit rating and its existing domestic corporate bonds as Sincere Property was unable to redeem its corporate bonds that matured in 2021. As at 31 December 2021, the Group assessed that the amounts owing by HCP Group continue to be credit-impaired. The Group assessed the lifetime ECL to be recognised, taking into account the latest developments of Sincere Property Group based on publicly available information as described above, prevailing market conditions and price trends of corporate bonds issued by other China real estate developers with credit ratings similar to that of Sincere Property Group and face similar debt and liquidity challenges as those faced by Sincere Property Group, following regulatory tightening and systematic changes on financing imposed on China’s real estate sector. The key parameter applied in estimating the ECL to be recognised include assuming a loss given default (“LGD”) of up to 95% which was estimated based on the range of decline in trading prices of bonds issued by other China real estate developers with credit ratings similar to that of Sincere Property Group and face similar debt and liquidity challenges as those faced by Sincere Property Group. Based on the assessment undertaken, the Group estimated that no additional impairment is required on the amounts owing by HCP Group, other than an impairment loss of $6.1 million on the interest income recognised on the amounts owing by HCP Group during the year. At 31 December 2021, the carrying value of the amount owing by HCP Group was $63.9 million (net of impairment loss of $331.2 million), which is classified as other receivables (note 15).
RkJQdWJsaXNoZXIy ODIwNTc=