New World Development Company Limited
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Financial Section
5 Critical Accounting Estimates and Judgements
(continued)
(b) Valuation of investment properties
The fair value of each completed investment property is individually determined at the end of each reporting period
by independent valuers or by management based on a market value assessment. The valuers have relied on the
capitalisation of income approach as their primary methods, supported by the direct comparison method.
Management also determines fair value based on active market prices and adjusted if necessary for any difference in
nature, location or conditions of the specific asset, and uses alternative valuation methods such as recent prices on
less active markets. These methodologies are based upon estimates of future results and a set of assumptions
specific to each property to reflect its tenancy and cashflow profile. The fair value of each investment property
reflects, among other things, rental income from current leases and assumptions about rental income from future
leases in light of current market conditions. The fair value also reflects, on a similar basis, any cash outflows that
could be expected in respect of the property.
The fair value of investment properties under development is determined by reference to independent valuation. For
the Group’s majority of investment properties under development, their fair value reflects the expectations of market
participants of the value of the properties when they are completed, less deductions for the costs required to
complete the projects and appropriate adjustments for profit and risk. The valuation and all key assumptions used in
the valuation should reflect market conditions at the end of each reporting period. The key assumptions include value
of completed properties, period of development, outstanding construction costs, finance costs, other professional
costs, risk associated with completing the projects and generating income after completion and investors’ return as a
percentage of value or cost.
At 30 June 2016, if the market value of investment properties had been 5% (2015: 5%) higher/lower with all other
variables held constant, the carrying value of the Group’s investment properties would have been HK$4,329.9 million
(2015: HK$4,581.3 million) higher/lower.
(c) Estimated useful lives and impairment of property, plant and equipment
Property, plant and equipment are long-lived but may be subject to technical obsolescence. The annual depreciation
charges are affected by the estimated useful lives that the Group allocates to each type of property, plant and
equipment. Management performs annual reviews to assess the appropriateness of the estimated useful lives. Such
reviews take into account the technological changes, prospective economic utilisation and physical condition of the
assets concerned.
Management also regularly reviews whether there are any indications of impairment and will recognise an impairment
loss if the carrying amount of an asset is higher than its recoverable amount which is the greater of its net selling
price or its value in use. In determining the value in use, management assesses the present value of the estimated
future cash flows expected to arise from the continuing use of the asset and from its disposal at the end of its useful
life. Estimates and judgements are applied in determining these future cash flows and the discount rate. Management
estimates the future cash flows based on certain assumptions, such as market competition and development and the
expected growth in business.
(d) Impairment of assets
The Group tests annually whether goodwill has suffered any impairment according to their recoverable amounts
determined by the cash-generating units based on value in use calculations. These calculations require the use of
estimates which are subject to change of economic environment in future. Details are set out in note 20.
The Group determines whether an available-for-sale financial asset is impaired by evaluating whether there is
significant or prolonged decline in the fair value below its cost.
The Group assesses whether there is objective evidence as stated in note 3(j) that deposits, loans and receivables are
impaired. It recognises impairment based on estimates of the extent and timing of future cash flows using applicable
discount rates. The final outcome of the recoverability and cash flows of these receivables will impact the amount of
impairment required.
