PRC Asset Appraisal Requirements and Considerations

PRC Asset Appraisal Requirements and Considerations

Lin Mei, Kenneth Ma

Like Hong Kong, asset appraisal regulations in the PRC have become more stringent in recent years in response to the ever-changing market conditions. Compared with the valuation standards adopted by other countries, taken account of the domestic market needs, the PRC’s asset appraisal standards are tailor-made to incorporate distinct "Chinese characteristics".

According to an unofficial statistics from the Baidu Encyclopedia, there are currently more than 130,000 certified appraisers, 600,000 industry practitioners and 14,000 appraisal firms in the PRC appraisal industry. This article offers guidance to Hong Kong’s investors, accounting and valuation practitioners in understanding the appraisal requirements and considerations in the PRC, with the purpose of promoting further businesses between the two places.

Development history of asset appraisal in the PRC
Asset appraisal activities in the PRC commenced around the late 1980s and early 1990s. During the period, co-operation and partnerships among state-owned enterprises and foreign companies increased substantially. To protect the state-owned assets not being undervalued at unreasonable transaction prices, asset appraisal had grown out of the official practice needs.

In 1989, under the impetus from the Government, the former State-owned Assets Supervision and Administration Bureau (国家国有资产管理局) began to regulate the appraisals of state-owned assets, and issued the “Provisional Regulations on Asset Appraisal when the Property Rights of State-owned Assets Change" (关于国有资产产权变化时必须进行资产评估的若干暂行规定). In the same year, the first PRC asset appraisal firm was established in Shenzhen.

In 1991, the State Council (国务院) issued the "Measures for the Administration of State-owned Assets Evaluation" (Order No. 91) (国有资产评估管理办法(91号令)). Being the first national administrative regulation on asset appraisals, the order formulated a fundamental framework for the appraisal procedures in the PRC.

In December 1993, China Appraisal Society was established under the Law, marking the beginning of the PRC appraisal industry’s transition from a direct-government-managed body to a community-managed body. Since then, the association has become an indispensable intermediary between the Government and appraisal firms.

In 1999, the PRC formally became a permanent member of the International Valuation Standards Council (“IVSC”). Subsequently, the China Appraisal Society continued to cooperate with international organisations such as the IVSC and the American Society of Appraisers (“ASA”) to promote the internationalisation of the PRC asset appraisal industry. From time to time, PRC appraisal firms also hold seminars in Hong Kong, Macau, and Taiwan to facilitate the key collaboration matters within the industry.

Asset appraisal standard
The earliest asset appraisal standard was introduced in 1996 when the China Appraisal Society drafted the "Opinions on the Operating Procedure for Asset Appraisal (for Trial Implementation)" (资产评估操作规范意见(试行)). Later in February 2004, the Ministry of Finance issued the "Basic Rules for Asset Appraisal" (资产评估准则—基本准则) and "Basic Rules for Asset Appraisal - Professional Ethics" (资产评估职业道德—基本准则).

The “Basic Rules for Asset Appraisal" consists of six chapters: General Rules, Basic Compliance, Asset Appraisal Procedures, Asset Appraisal Reports, Asset Appraisal Files and Supplementary Rules. The standard lists out the requirements in appraisal procedures, appraisal report content and disclosure, and handling of working papers. The standard also specifies the respective application requirements in applying the Cost Approach, the Market Approach and the Income Approach. While the "Basic Rules for Asset Appraisal - Professional Ethics" stipulated the ethical benchmark for the asset appraisers in the PRC.

In 2016, for the purpose to uphold the sustainable reputation of the PRC appraisal industry and unify appraisers’ understanding in appraisal procedures, the Standing Committee of the National People’s Congress (全国人民代表大会常务委员会) resolved the "Asset Appraisal Law of the People's Republic of China" (中华人民共和国资产评估法) which emphasised the supervision and management of appraisal practitioners, institutions and industry societies.

State-owned assets appraisals and SASAC
State-owned assets, as the name implies, is an umbrella term for assets that belong to the PRC Government. In light of their importance to the government, the regulations of state-owned assets appraisals become a key part in the PRC appraisal standard.

The State-owned Assets Supervision and Administration Commission ("SASAC") (国有资产监督管理委员会) was established in April 2003. It is a special institution directly under the State Council.

According to the "Interim Measures for the Management of State-owned Assets Evaluation of Enterprises" (企业国有资产评估管理暂行办法) issued by the SASAC in 2005, the SASAC is wholly responsible for the supervision of all state-owned assets appraisals. It also stipulates that all enterprises must submit their state-owned assets appraisal reports to the SASAC for approval, which requires the appraiser to use two or more approaches in such appraisals.

The asset appraisal report and consulting report
The key difference between an asset appraisal report (资产评估报告) and a consulting report (咨询报告) is that the former is legally binding and can be used for company audit reports or initial public offerings while the latter is used for general business reference purposes only.

In 2017, the China Appraisal Society issued the "Asset Appraisal Standards-Appraisal Report" (new edition) (资产评估准则-评估报告(新版)), and states that the appraisal report must be signed by at least two appraisers who undertake the appraisal business and be stamped with the appraisal firms’ company seal; however, if the appraisal report is only used as a consultation report, there is no specific requirement for signature and seal.

Asset appraisal qualification
In the PRC, an appraisal firm should be established either in form of a partnership or corporation institute under the Law. According to the 2016 “Asset Appraisal Law” (资产评估法) and the 2017 Ministry of Finance Order No. 86 “Financial Supervision and Administration Measures for the Asset Appraisal Industry” (资产评估行业财政监督管理办法), an appraisal firm in form of a corporation should have eight or more registered appraisers, whereas an appraisal institution in form of a partnership form should have two or more registered appraisers.

At present, the National Appraiser Registration System requires all appraisers to be certified by the China Appraisal Society to be certified. It also specifies the academic qualifications and working experience that a registered asset appraiser must possess, which the required working experience may vary depends on the academic qualifications of the appraiser.

Asset appraisal fee structure
In terms of appraisal fees, unlike Hong Kong, asset appraisals in the PRC adopt tiered pricing basis over the value of the appraised asset. This usually refers to the "Asset Appraisal Fee Management Measures" (资产评估收费管理办法) promulgated by the National Development and Reform Commission and the Ministry of Finance, where the fees are charged based on the different fixed percentage brackets of the value of the appraised asset.

The fee brackets basis varies by province. Using the Shandong province as an example. For the portion of asset value below 1 million, fee at a rate of 7% will be charged; the portion of 1-10 million will be charged at a rate of 4%, and the portion of 10-50 million will be charged at a rate of 1.2%.

Stock exchange regulations in appraisals
In addition to the asset appraisal standards of the country, the stock exchanges also have their own guidelines for asset appraisals for listed companies. For example, according to the "Business Memorandum No. 6-Matters Related to Asset Appraisal" (业务备忘录第6号-资产评估相关事宜) published by the main board of the Shenzhen Stock Exchange in 2015, if the appraisal report shows that there is a huge discrepancy between the appraised value and the book value of an asset, listed companies should disclose the reasons behind the difference and the details of the appraisal.

The memorandum also specifies that if the Income Approach is adopted, listed companies should disclose key appraisal parameters, such as the financial forecast and the discount rate adopted; If the Market Approach is adopted, the listed company shall disclose the active market of the subject, the selection criteria of comparable companies, and the adjustments in economic conditions, geographic location, and market factors if applicable; If the Cost Approach is adopted, the listed company shall disclose the components in the replacement cost and the adjustments applied. The Shanghai Stock Exchange also has similar regulations.

Appraisal approaches
There are some distinct differences in the selection of the valuation approaches between the appraisers in the PRC and Hong Kong.

In Hong Kong, appraisers generally adopt only one approach among the Income Approach, the Market Approach, and the Cost Approach, based on the type of the appraisal subject, the completeness of information, and the applicability of each valuation approach.

However, PRC’s appraisers often apply two or three valuation approaches at the same time. After their further analysis, they would select the final result derived from the most appropriate appraisal approach. However, for the appraisals of land use rights, appraisers may simple average out or weighted multiple the results from different approaches.

With the increasing correlation of the investment processes, as well as the growingly frequent commercial interactions between Hong Kong and the PRC, we will closely follow the development of the PRC’s asset appraisal requirements and strive to provide our customers with the most comprehensive and high-quality transaction consulting services.

About us
This article is written collaboratively by Beijing Zhuoxindahua Appraisal Company Limited 北京卓信大华资产评估有限公司 and Moore Transaction Services Limited 大华国际交易咨询有限公司.

Beijing Zhuoxindahua Appraisal Company Limited is an asset appraisal institution approved by the Ministry of Finance and the China Securities Regulatory Commission to perform both state-owned and non-state-owned assets appraisals. Zhuoxindahua is also certified by the Ministry of Land and Resources to carry out appraisals in prospecting and mining rights.

Moore Transaction Services Limited has a strong team composed of financial analysts and experts with rich experience in areas such as mergers and acquisitions, financial reporting, listing and litigation.

For more information, please contact Ms. Lin Mei, Chairman of Beijing Zhuoxindahua Appraisal Company Limited and Mr. Kenneth Ma, Director of Moore Transaction Services Limited.

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