CITY DEVELOPMENTS LIMITED ANNUAL REPORT 2021 FINANCIALS 166 167 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) Material joint venture (cont’d) As at 31 December 2020, the Group had a call option to acquire an additional 11.25% equity interest in HCP, which was exercisable at the Group’s discretion within a 6-month period commencing on 1 July 2022 for a consideration of approximately $157.3 million (RMB774.1 million). As at 31 December 2020, the fair value of this call option was nil. As part of the Group’s disposal of its interest in HCP during 2021, the deed for the aforesaid call option was terminated. HCP was structured as a separate vehicle and the Group had residual interest in its net assets. In 2020, the Group had classified its interest in HCP as a joint venture, which was equity accounted. Following the Group’s disposal of its investment in HCP during 2021, the Group lost joint control over HCP and it ceased to be a joint venture of the Group. Investment in and balances with HCP Group (i) Accounting for acquisition of HCP Group In April 2020, the Group acquired an equity interest of 63.75% in HCP for an aggregate consideration of approximately $0.9 billion. The Group accounted for the acquisition of HCP as a business combination, which required the purchase price to be allocated to the fair value of the identifiable assets acquired and liabilities assumed, including any contingent liabilities (purchase price allocation or “PPA”). The fair values of assets and liabilities, which involved significant judgement and estimates, had been determined as follows: • The fair values of the underlying properties held by HCP Group were determined based on external independent valuations undertaken. A significant portion of the purchase price was allocated to HCP Group’s underlying property portfolio comprising development properties, property, plant and equipment and investment properties, based on the valuation amounts in the independent valuation reports. The valuation of development properties was critically dependent upon the estimated future selling prices. The valuation of property, plant and equipment and investment properties involved significant judgement in determining both the valuation methods to be used and the key assumptions to be applied. The valuations were sensitive to the key assumptions applied and a change in assumptions might have a significant impact on the valuations. • The fair values of the amounts due from related parties of HCP Group were estimated, taking into consideration the repayment patterns and the settlement arrangements agreed between the HCP Group and its related parties. • The fair values of contingent liabilities relating to financial guarantees issued by HCP Group for credit facilities granted to the related parties of HCP Group involved making estimates of the guarantees being invoked. • The fair value of a put option granted by HCP Group to a non-controlling shareholder of Sincere Property Group (the “Put Option”) for the latter to sell its 19.99% of shares in Sincere Property Group was estimated based on the present value of the exercise price of the put option. • The fair value of indemnities provided by the joint venture partner and its related parties in relation to the liabilities associated with the Put Option and contingent liabilities arising from the guarantees issued by Sincere Property Group to the joint venture partner and its related parties, was estimated to be nil, having considered the Group’s ability to recover these indemnity assets. 9 INVESTMENTS IN AND BALANCES WITH JOINT VENTURES (CONT’D) (i) Accounting for acquisition of HCP Group (cont’d) Measurement of fair values The valuation techniques used for measuring the fair values of the underlying significant assets and liabilities were as follows: Assets acquired and liabilities assumed Valuation technique Property, plant and equipment and investment properties Direct comparison, discounted cash flow, income capitalisation, cost and residual methods: The direct comparison method involved the analysis of comparable sales of similar assets and adjusting the sale prices to that reflective of the properties. The discounted cash flow method involved forecasting the properties’ income stream and discounting the income stream at the market rate of interest at the acquisition date. The income capitalisation method capitalised an income stream into a present value using revenue multipliers or single-year capitalisation rates. The cost method considered the current replacement cost of creating a comparable property. The residual method involved deducting the estimated cost to complete as of valuation date and other relevant costs from gross development value of the proposed development assuming satisfactory completion and accounting for developer profit. Development properties Direct comparison, income capitalisation, cost and residual methods: The direct comparison method involved the analysis of comparable sales of similar assets and adjusting the sale prices to that reflective of the properties. The income capitalisation method capitalised an income stream into a present value using revenue multipliers or single-year capitalisation rates. The cost method considered the current replacement cost of creating a comparable property. The residual method involved deducting the estimated cost to complete as of valuation date and other relevant costs from gross development value of the proposed development assuming satisfactory completion and accounting for developer profit. Amounts due from related parties Discounted cash flow method: The fair value was estimated as the present value of the expected future payments, discounted at the market rate of interest at the acquisition date. Interest-bearing borrowings Discounted cash flow method: The fair value was estimated as the present value of future principal and interest cash flows, discounted at the market rates of interest at the acquisition date. Contingent liabilities – financial guarantees issued Probability adjusted expected value method: The fair value was estimated based on the exposure amount that the HCP Group is obliged to pay in the event of a default by the entity for the financial guarantee was issued, adjusted for the probability of default. Put Option Discounted cash flow method: The fair value was estimated as the present value of the expected future payments, discounted at the market rate of interest at the acquisition date.
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