The method of valuation of investment properties is disclosed which justifies the increase of their net book value and crediting to income statement. However, there is no explicit terminology (e.g. sum-of-years, double-declining balance) to described the depreciation method being applied as well the asset’s useful lives and depreciation rates. Computations on carrying amount and accumulated depreciation are shown with current and previous year comparisons. Carrying amounts at the beginning through the end of the period are adjusted by considering additions, disposals, and exchange differences among others.
Bearing in mind that PPE of HSBC are land and buildings, other disclosure involves their nature as finance lease contracts, expenditure and commitments but there are no third party compensation clause. In the revaluation of its investment properties, HSBC disclosed the effective date of revaluation (e.g. every 31 December), involvement of independent professional valuers (e.g. DTZ Debenham Ltd), use of open market basis and recognition of contractual obligations on investment properties. However, there is no presentation on alternative cost model. There are no disposed non-current assets that HSBC has executed. As there is no specific depreciation method used, it is undeterminable to comment about its semblance with pattern of asset’s economic benefits and consumption.
In valuing intangible assets, HSBC seemingly is not within the scope of IAS 38 because it included goodwill arising from issuance contracts which is beyond the scope of the standard. However, the analysis will be focused on certain contents which coincide with the provisions of IAS 38. For example, HSBC created a classification of intangible assets under “other” account which make it impossible to assess its ground for recognition. There are also figures concerning present value of in-force long-term insurance benefits. Further, adjustments for PPE and intangible assets have the same accounts (e.g. additions, exchange differences, etc.). However, the lack of text explanations for the notes to goodwill and intangible asset presentations inflicted the validity of internally-generated software which accounts for the biggest intangible property.
The strength of HSBC especially pertaining to current assets is that it revalues its non-assets regularly to avoid huge discrepancy of the previous period to the succeeding ones. This is aided by presenting comparative revaluation results year-on-year. As investment properties are only the ones that are revalued, HSBC also rescinded in revaluing non-current assets under finance lease contracts (FLCs). This move is according to IAS guide on revaluation model. In addition, investment properties are also imputed with the same adjustments and comparative presentations like non-current assets under FLCs. As both accounting year 2006 and 2005 have revaluation surplus, it should be recorded in equity but HSBC opted to reflect it on notes under “non cash items included in profit and tax” and ultimately in income statement (IS).
One advantage of HSBC’s approach to non-current assets is that it applies a comprehensive valuation of PPEs even though the company does not gain most of its income from non-current assets such land and building. This reflects managerial evaluation due to inability of available depreciation methods to suffice representation needs. However, this strategy can also minimize the “true and fair” impression on its BS because of excessive non-objective application of valuation techniques. In contrast, HSBC is able to redeem some spots of unbiased stance by regularly evaluating its techniques, inclusion of outside valuer and stating non-current asset restrictions. However, the inability to reflect the revaluation surplus in equity account rather on IS makes the increase less useful to shareholders.
For the low-educated type of people, the BS of the company will be appreciated because it maximized managerial evaluation in determining the “true and fair” value of non-current assets for the purpose of information. However, on the part of credit rating agencies (e.g. Standard & Poor), the opposite impression will result. The same adjustment elements for non-current assets that are evaluated are also helpful in establishing ease of analysis from low-educated people. In the contrary, agencies would prefer more complex numerical data to suffice the claim like the movement in PVIF shown in adjusting the values of intangible assets. For both users, HSBC could infuse more textual explanations to the arrived figures especially in valuating goodwill and intangible assets because fewer details could mean confusion and speculations.
Hang Seng Bank
Same as HSBC, Hang Seng use open market value, independent professional valuer and annual assessment method for its investment properties. However, unlike HSBC, Hang Seng classifies their investment properties as operating leases. The requirement disclosure of IAS 16 is not accounted as Hang Seng does not present a detailed surplus revaluation rather the note that supposedly explains the carrying amount and adjustments is inexistent. Although the basis for valuing PPE is stated, the depreciation method used or the same problem on HSBC is not explicitly disclosed. Useful lives of the PPEs are also not reflected. On the other hand, reconciliation of investment properties and PPEs are included while the restrictions on assets are stated when presenting investment properties.
Alternative presentation for the cost model is excluded like the HSBC and also changes in economic benefits and consumption pattern of PPEs and investment properties are not discussed. Possibly, this is the result when external valuers have found no significant valuation change for Hang Seng which is the present case. Provisions on disposals are eminent in both PPEs and investment properties which requires the abolition of such assets in the BS. In addition, a situation that Hang Seng would defer payment of certain properties to apply market interest is not determinable because there is no disclosure about purchase or lease transactions. But Hang Seng included direct operating expenses as expenditures for investment properties which contribute to the increase of revaluation of investment properties. In contrast, it is observable that no impairment looses that are recognized. Also, there are no recorded amortizations that concretized the fact that the Hang Seng fully-paid such assets.
Credit:ivythesis.typepad.com
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