NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2022 NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2022 4 PROPERTY, PLANT AND EQUIPMENT (CONT’D) The key assumptions used in estimating the recoverable amounts are set out below: US Europe Asia New Zealand Occupancy rate 2022 65.0% to 95.0% 70.0% to 76.0% N/A 62.6% to 69.1% 2021 45.0% to 95.0% 54.0% to 84.0% 36.4% to 73.0% N/A Average room rate growth 2022 2.0% to 10.0% 1.1% to 9.1% N/A 2.0% to 3.0% 2021 1.4% to 56.4% 1.1% to 12.2% 2.0% to 8.2% N/A Discount rate 2022 8.3% to 10.5% 7.3% to 11.3% N/A 10.3% 2021 7.5% to 11.8% 6.6% to 8.3% 11.8% to 12.0% N/A Terminal rates 2022 6.0% to 8.5% 4.0% to 7.8% N/A 9.5% 2021 5.5% to 9.8% 4.0% to 6.3% 9.0% to 10.0% N/A Capitalisation rates 2021 N/A N/A 8.8% N/A The cash flow forecasts under the discounted cash flow method cover a five to ten years period, and cash flows beyond this period are extrapolated using a growth rate ranging between 2.2% and 3.4% (2021: 1.5% and 3.1%), which is based upon the expected trading growth for each hotel and inflation in the country in which the hotel is located. Sensitivity analysis The Group’s impairment review is sensitive to changes in the key assumptions used. An increase in occupancy rate and/or average room rate growth in isolation would result in a higher recoverable amount. An increase in discount rate, terminal rate or capitalisation rate in isolation would result in a lower recoverable amount. 4 PROPERTY, PLANT AND EQUIPMENT (CONT’D) (d) The Group undertook its annual review of the carrying amounts of hotels and property assets for indicators of impairment. Where indicators of impairment were identified, the recoverable amounts were estimated based on internal or external valuations undertaken by the Group. The cash generating units (CGU) are individual hotels. The recoverable amounts of the individual hotels, being the higher of the fair value less costs to sell and the value-in-use, were predominantly determined using the fair value less costs to sell approach and were estimated using the discounted cashflow method (2021: discounted cash flow and income capitalisation methods). Under these methodologies, the fair value measurement reflects current market expectations about an efficient third party operator’s future cash flows. The discounted cash flows method involves estimating each hotel’s future cash flows and discounting the cash flows with an internal rate of return to arrive at the market value, taking into consideration the assumptions in respect of revenue growth (principally factoring in room rate and occupancy growth) and major expense items for each hotel. The future cash flows are based on assumptions about competitive growth rates for hotels in that area, as well as the internal business plan for the hotel in the relevant market. These plans and forecasts include management’s most recent view of trading prospects for the hotel in the relevant market. The income capitalisation method capitalises an income stream into a present value using revenue multipliers or single-year capitalisation rates. Where appropriate, the Group sought guidance on the fair values of the hotels from independent external valuers with appropriate professional qualifications and recent experience in the location and category of the properties being valued. In relying on the valuation reports, the Group has exercised its judgement and is satisfied that the valuation method and estimates are reflective of current market conditions. Certain valuation reports obtained from the external valuers have highlighted that a combination of global inflationary pressures, recent geopolitical events, and remaining effects of Covid-19 pandemic in some markets, has heightened the potential for greater volatility in property markets over the short to medium term. The importance of the valuation date must be stressed as property values may change over a relatively short period of time. The fair value measurement was categorised as a Level 3 fair value based on the inputs to the valuation technique used. In 2022, the Group recognised a net reversal of impairment loss of $28,113,000 on certain hotel properties, comprising reversal of impairment losses of $33,778,000 on four hotels in United States of America (US) and three hotels in Europe, net of impairment losses made of $5,665,000 in respect of one hotel in New Zealand and a club in Asia. The impairment losses reversed during the year mainly arose from the improved trading performances of certain hotel properties, following the progressive recovery of the hospitality sector in the countries in which these hotels are located. The impairment loss recognised on the club in Asia was a result of its weak financial performance. The estimated total recoverable amounts of the properties on which impairment losses were reversed or impaired during the year were $615,980,000 as at 31 December 2022. In 2021, the Group recognised a net reversal of impairment loss of $95,375,000 on its hotel properties, comprising reversal of impairment losses of $96,317,000 on five hotels in United States of America (US), two hotels in Europe, and four hotels in Asia, net of impairment losses made of $942,000 in respect of a club and a restaurant in Asia. The impairment losses reversed during the year mainly arose from the improved trading performances of certain hotel properties, following the progressive recovery of the hospitality sector in the countries in which these hotels are located. The estimated total recoverable amounts of the properties on which impairment losses were reversed or impaired during the year were $743,871,000 as at 31 December 2021. The fair value measurement was categorised as a Level 3 fair value based on the inputs to the valuation technique used. Impairment losses recognised or reversed were included in “other operating expenses” in the consolidated statement of profit or loss and the hotel operations segment. CITY DEVELOPMENTS LIMITED ANNUAL REPORT 2022 FINANCIALS 158 159
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