COVID-19 – Valuation and Market Update (30 June)

COVID-19 – Valuation and Market Update (30 June)

Kenneth Ma

The first half of 2020 has been full of unexpected events.  COVID-19 has already infected more than 13 million people worldwide, and social distance measures have brought global economic activities to a halt. Other events, such as the oil price crash and the new wave of secondary listing in Hong Kong, further made the market to be extremely volatile.

Given the fluid nature of the pandemic, different stakeholders and practitioners in the business world are facing unprecedented challenges. Various regulators and industry organisations, including SFC, HKEX and IFRS Foundation hence published an amount of new guidance and technical notes, aiming to expand the regulatory focus amid economic uncertainties and market volatilities.

On 30 January 2020, the Securities and Futures Commission (SFC) and the Stock Exchange of Hong Kong Limited (HKEX) released a joint statement1 to remind all Hong Kong-listed companies to inform the HKEx, and to discuss with their auditors the impact of the coronavirus on their businesses.

The Exchange also suggested that listed entities to publish its preliminary results, even if it fails to obtain agreement from its auditors but is otherwise in all respects in full compliance with other reporting requirements of the Listing Rules. Hence, the disruptions to trading can be minimised by ensuring investors are able to receive sufficient and accurate information to make investment decisions.

In view of the increased use of remote office arrangements, SFC issued a circular2 on 29 April 2020 to admonish relevant parties to implement measures to mitigate the cybersecurity risks associated with remote working tools like Virtual Private Network (VPN) software and videoconferencing platforms. For instance, SFC suggested their licensed corporations (LCs) to implement security patches and hotfixes from the VPN software providers. Moreover, the LCs should adopt a surveillance mechanism to identify unauthorised access to internal systems.

On the other hand, various guidances have been developed by various industry organisations to assist industry practitioners, especially the accounting industry. For example, on 3 June 2020, the International Federation of Accountants (IFAC) issued a summary of audit considerations amid COVID-193. It highlighted the importance of continually reviewing and updating the assessments related to areas such as going-concern, accounting estimates (e.g. impairment, fair value) and other areas involving significant judgments. When necessary, management may need to make disclosures about COVID-19 in accordance with IAS 10 - Events After the Reporting Period.

Some industry organisations also provided further guidance related to specific accounting standards. For instance, on 27 March 2020 and 10 April 2020, IFRS issued two technical notes4,5 and pinpointed the areas that require special attention during the pandemic for IFRS 9 Financial Instruments and IFRS 16 Leases, respectively.

As required by IFRS 9, estimates have to be developed based on the best available information about past, current and forecasted economic conditions. In the abovementioned technical note, IFRS reminded that the effects of COVID-19 have to be taken into account in assessing forecast conditions.

As a result of COVID-19, changes in lease payments are expected to occur, such as payment holidays and deferral. In the technical note, IFRS restated that any changes in payments have to fulfil the definition of lease modification in IFRS 16 before performing related accounting treatments by the entities.

Third-party experts, such as valuers and consultants, would then become more important in financial reporting or audit process in the current extreme conditions. For more details about the valuation considerations amid COVID-19, including those for financial reporting purposes (IFRS 9, IFRS 16 and IAS 36, etc.), please refer to our article, “Valuation considerations amid the COVID-19 crisis 6.

Listing in Hong Kong
Amid the escalated US-China tension, Chinese companies are lining up for secondary listings in Hong Kong to hedge against uncertainties. On the other hand, since Chapter 18A of the Main Board Rules which enabled the listing of pre-revenue Biotech Companies became effective in 2018, more than 15 of these biotech companies listings were completed.

On 29 April 2020, HKEX published a new guidance letter7 to provide further instruction on prospectus disclosures for listing applicants under Chapter 18A. In summary, the guidance letter recommended listing applicants to (1) make disclosures on scientific descriptions more readable by using plain language without compromising scientific accuracy; (2) make a comprehensive description about the industry landscape; and (3) make a comprehensive disclosure about product development and commercialisation, in their prospectuses.

As the listing requirements are constantly changing, many of the listing applicants often obtain opinions from external independent valuers in determining or justifying the price of their initial public offering. An objective and accurate business valuation can ensure applicants a smoother IPO process, especially in times of turbulence.

Crude oil futures
In April, crude oil future prices slid into negative territory for the first time in its trading history. Many disputes related to the crude oil futures trading product, such as the crude oil “bao” by Bank of China, are going to be resolved through litigation.

Because of it, SFC issued two circulars8,9 on 24 April 2020 to remind involved parties about the potential risks in trading crude oil futures contracts. The circulars cautioned brokers not to open new positions for clients who do not understand the complexity of these future contracts. SFC also warned investors to be aware of the possibility of margin calls if they engage in leveraged trading of crude oil futures and options.

As many companies, especially those in the aviation industry, hold crude oil ETF, futures or options for hedging purposes, third party valuers have to be extremely careful when conducting related business valuations in these companies during market turmoil.

The economic outlook for 2020 is still full of challenges. It would be beneficial to seek advice from financial experts to help you fulfil your goal.  At Moore Transaction Services Limited, we have a team of financial analysts and accountants who are experienced in performing valuations for purposes such as M&A, financial reporting, listing and litigation purposes.

For more details about how we could assist you in the relevant assessments, please contact our director Kenneth Ma at

1. Securities and Futures Commission and the Stock Exchange of Hong Kong Limited, “Joint statement in relation to results announcements in light of travel restrictions related to the severe respiratory disease associated with a novel infectious agent”      
2. Securities and Futures Commission and the Stock Exchange of Hong Kong Limited, “Circular to licensed corporations Management of cybersecurity risks associated with remote office arrangements”
3. International Federation of Accountants, “Summary of Covid-19 Audit Considerations”                                                                                 
4. IFRS Foundation, “IFRS 16 and covid-19 - Accounting for covid-19-related rent concessions applying IFRS 16 Leases”                                                            
5. IFRS Foundation, “IFRS 9 and covid-19 - Accounting for expected credit losses applying IFRS 9 Financial Instruments in the light of current uncertainty resulting from the covid-19 pandemic.”                                         
6. Moore Hong Kong, “Valuation Considerations Amid The COVID-19 Crisis”  
7. Hong Kong Exchanges and Clearing Limited, “HKEX Guidance Letter - HKEX-GL107-20 (April 2020)”
8. Securities and Futures Commission, “Circular to commodity futures brokers Managing financial and operational risks under extreme market conditions”
9. Securities and Futures Commission, “Circular to management companies of SFC-authorized exchange traded funds and to intermediaries - Futures-based ETFs”