The future of fashion - Hong Kong Institute of Certified Public ...

ISSUE 1 VOLUME 9 JANUARY 2013
PLUS
• Dos and don’ts of M&A due diligence
• Entrepreneur CPAs follow their dreams
• What’s keeping us awake in 2013
The
future of
HK$70.00
fashion
UCCAL CFO Aaron Au
caters to trendier
Mainland shoppers

“ It is with great
honour and humility
that I assume
the position of
president of our
Institute.”
President’s message
Focusing on
members
Dear members,
I
t is with great honour and humility that
I assume the position of president of our
Institute.
Being the first female president, I am
grateful for the trust placed in me by the Council,
and their vision of embracing diversity given
that our women members account for 65 percent
of all new members joining the profession. I vow
to treasure this opportunity to work with my fellow
Council members, the chief executive and the
management – as well as all of you – to take the
Institute to the next level amid growing economic
and geopolitical uncertainties.
In my term, I will work on the following four areas
of focus – all of which are of equal importance.
Sixth long-range plan
We aim to finalize and implement the Institute’s
sixth long-range plan, which focuses on the long
term positioning of the Institute in China and
internationally. The plan covers seven core areas:
constitution and governance; qualification
and education; standards, ethics and regulation;
member support and development; Mainland
and international; communication and branding;
and making a difference to society and thought
leadership. As the long-range plan aims to build
a sustainable future for our profession, it is crucial
to engage members in the process, obtaining
input and maintaining two-way communication.
More open dialogue and exchange of views with
members will be achieved through forums, sur-
veys and social media. This will ensure our policies
are consistent with your needs.
Audit profession reform
Looking to the immediate year ahead, we will
be commencing regulatory and liability reform.
The end game is to obtain global recognition for
the regulatory framework in Hong Kong, but with
minimum impact on the profession and at the
same time preventing auditor liability from escalating.
I commit to working closely with my two
vice presidents, the Council and the chief executive
on the reform, to sufficiently address the issues
and concerns of the profession, while meeting
public expectation and serving the public
interest. We shall strive to reach consensus with
the Financial Reporting Council on the implementation
details and will do everything we can
to consult with Institute members and the public.
Professional development and membership
engagement
Ultimately the Institute is a membership body. As
our membership grows and becomes more diverse,
member engagement is an important focus
in the coming 12 months, to cultivate a sustainable
sense of belonging and to improve communication
with our members. This involves examining
critically the value proposition of our Institute’s
membership fees and services provided to our
members throughout their careers as CPAs, ranging
from technical to sport and recreation.
January 2013 1

President’s message
“ I look forward
to meeting and
working with you
all in the coming
year, to make our
profession better,
stronger and truly
a global leader.”
2 January 2013
With increasing demands placed on training
and education, we will examine our CPD programmes
to ensure value for money in terms
of content, delivery and relevance to members.
Technical training and support to SMPs should
also be enhanced, and more in-depth business
training should be given to members in business,
given that more than 60 percent of our members
are PAIBs.
More than 45 percent of our members are under
the age of 40. Assisting young members to
progress in their careers, with specific training to
develop their skill sets, and helping them during
transition from PAIPs to PAIBs are important areas
close to my heart. The 25.35 leadership panel is a
great platform for young members to share views,
network and organize training and events relevant
to them. This should be continued and embrace
an ever larger section of young members.
Meanwhile, we have done a lot of work fighting
against companies that purport to provide
statutory auditing services but are not qualified
to do so. This fight must go on in order to uphold
the integrity and high standing of our CPA brand.
Consolidate and re-examine our strategies in
Mainland China
After investing in the QP in the Mainland for a
number of years, it is time to consolidate our
efforts and re-examine where we can focus our
resources most effectively. After signing up 13 accredited
universities in China, and with a couple
more accreditation processes awaiting comple-
tion, we will now focus on expanding student
numbers in these universities. We need to position
the QP properly, both as a brand and by
opening up international career opportunities
to the Mainland via our mutual recognition with
other accounting bodies around the world.
A strong team
It is a long to-do list, which can only be achieved
through teamwork. I am fortunate and glad to
have a strong team at the Institute. I have to give
special thanks to our immediate past president,
Keith Pogson, for giving me a lot of support and
guidance in the past year. He has laid a solid foundation
for us to move forward, and I have learned
a lot from his able leadership. I am thankful to
have two strong vice presidents, Clement Chan
and Mabel Chan, to work closely with; they will
provide sound advice and support to me, especially
on the practising side. And I am grateful
to have a capable chief executive, Raphael Ding,
who keeps the Institute in strong management.
Together with my fellow Council members – each
of whom has his or her unique strengths – we’ll
combine our skills and make a difference.
The Institute is marking its 40th anniversary
this year. Let’s celebrate all the past and present
efforts of our members, past presidents and
registrars who set the foundation and helped get
the Institute to where it is today. I look forward to
meeting and working with you all in the coming
year, to make our profession better, stronger and
truly a global leader.
Susanna Chiu
President

ISSUE 01 VOLUME 09 JANUARY 2013
REGULARS
01 President’s message
06 Institute news
08 International news
12 Greater China news
FEATURES
16 Know your target
In light of the HP-Autonomy debacle, George W. Russell asks
the experts how M&A due diligence should be done
24 Taking the lead
Jemelyn Yadao profiles Institute members who have become
entrepreneurs to blaze their own independent business trails
32 Success ingredient
Aaron Au, CFO of UCCAL, tells Emily Ford about the challenges
and opportunities in the Mainland for fashion brands
38 The year ahead
Accountants and other experts in Hong Kong, China and around
the world tell A Plus what will keep them awake in 2013
SOURCE
44 Joint arrangements
Lee Yin-toa and Laurence Carabin of Ernst & Young explain the
impact of HKFRSs 10 and 11 on joint arrangements in China
46 TechWatch 122
The latest standards and technical developments
48 Tech Q&A
Your questions about standards answered
54 People on the move
The latest professional appointments from around the region
55 Events
A guide to forthcoming courses, workshops and member activities
LIFESTYLE
56 Business travel
Honnus Cheung finds some surprising charm in Seoul
58 After hours
George W. Russell on wine; Wendy Hu on watches
60 Let’s get fiscal
Nury Vittachi says tax dependant claims are going to the dogs
4 January 2013
CONTENTS

38
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reference to our top-notch accountant members who
are success ingredients in business and in society. It
is also the quality that we strive for in this magazine —
going an extra mile to reach beyond grade A.
President: Susanna Chiu
Email: president@hkicpa.org.hk
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NEWS
INTERNATIONAL
Abe to focus on ailing economy
after resounding election victory
Incoming prime minister seeks to reshape central bank’s role
Newly elected Japanese Prime
Minister Shinzo Abe said he
would rejuvenate Japan’s sluggish
economy during his term.
Abe’s Liberal Democratic Party
returned to power in a landslide
election victory last month.
Upon declaring victory, he
vowed to pass a large stimulus
spending bill as well as battle
deflation and a strong yen.
According to the Financial
Times, just days after his victory,
Abe asked Bank of Japan Governor
Masaaki Shirakawa to set an
inflation target of 2 percent.
Abe also stated he would
not only push for more easing
policies but amend the Bank of
Japan Act if necessary to reduce
the central bank’s autonomy
over currency and monetary
control.
Abe’s other moves include
restarting the Council on Economic
and Fiscal Policy, a policy-
Swiss bank UBS was hit last
month with a record US$1.5
billion fine over allegations that
it manipulated a key international
bank interest rate. The
fine is more than double the
US$450 million settlement that
Barclays paid over the same
issue in June.
The fine was announced
just as The New York Times
reported that two senior UBS
traders based in Tokyo had
8 January 2013
Shinzo Abe
setting body led by the prime
minister which has laid dormant
under previous administrations.
The incoming prime minister
said his administration would
issue bonds to help finance a ¥10
trillion supplementary budget
that focuses on reconstruction
and disaster prevention.
However, Shirakawa warned
that aggressive bond buying by
been charged by officials in the
United States with conspiracy,
price fixing and wire fraud in
relation to manipulation of the
London interbank offered rate.
According to Reuters, a
worldwide probe into Libor
rigging found that 36 UBS
employees around the world
manipulated Libor between
2005 and 2010. Traders were
accused of falsely inflating or
deflating the borrowing rates
a central bank without fiscal
discipline would cause a loss of
market trust.
The bank is expected to yield
to Abe’s demands, according
to some observers. “I think the
Bank of Japan will deliver with
increased purchases of government
debt,” Norio Miyagawa,
senior economist at Mizuho Securities
Research and Consulting
in Tokyo, told Reuters.
However, the bank is still
nominally independent, which
may make it difficult for it to
adopt all the actions outlined
by Abe for fear of appearing to
bow to government demands,
Hiromichi Shirakawa, chief
economist at Credit Suisse in
Tokyo, told the FT.
Abe served briefly as prime
minister in 2006-2007 before
stepping down due to low approval
ratings and stress-related
health issues.
used to calculate Libor in order
to make a profit.
Libor is a benchmark interest
rate upon which the rates of
many consumer financial products
such as credit cards, loans
and mortgages are based.
The fine widens UBS’ fourthquarter
net loss, which the bank
already flagged in October.
Taking into account the fine,
the bank said it expected to
make a fourth quarter net loss
“Fiscal cliff”
vote averts
U.S. slowdown
The United States took a step
back from the so-called “fiscal
cliff” when the Republican
Party-controlled House of
Representatives voted to back
a legislative package to avert
US$600 billion in spending cuts
and tax increases that could
have tipped the country back
into recession. The lower house
passed the Tax Relief Extension
Act in a 257-167 vote late on 1
January. The Senate had earlier
passed it, 89 votes to 8.
The legislation raises income
tax rates on wealthier Americans
but retains tax reductions for
individuals making less than
US$400,000. The act also delays
government spending cuts for
two months.
Some conservative legislators
had criticized the bill, arguing
that it consisted almost entirely
of tax increases and contained
barely any spending cuts.
UBS pays record US$1.5 billion fine over Libor manipulation
AFP
AFP
of between 2 billion to 2.5 billion
Swiss francs.
It is the latest in a series of
missteps for UBS, including the
jailing of rogue trader Kweku
Adoboli in November and a
US$377 million loss from the
Facebook initial public offering
in May.
However, even after paying
the fine, UBS said it “remains
one of the best capitalized banks
in the world.”

EU places ECB in supervisory role
as precursor to banking authority
Finance ministers to decide which institutions to be overseen
Finance ministers in the European
Union reached a landmark
agreement last month to appoint
the European Central Bank as
the “single supervisory mechanism”
for an EU-wide banking
authority, the first step of a plan
aimed at containing the euro
zone debt crisis.
After 12 hours of negotiations
in mid-December, the
ministers mapped out a timeline
that aims to have the new supervisor
fully functional by March
2014 or 12 months after the EU
publishes the regulations to set it
up, whichever comes first.
“The ECB will be in a position
to detect risks to the viability of
banks and require banks to take
the necessary actions,” Michel
Barnier, the EU commissioner
for the internal market, said
after the accord was reached. “It
will be competent to grant and
revoke licences for credit institu-
Fed ties interest rate to unemployment figures
The Federal Reserve Board, the
central bank of the United States,
has decided to keep the interest
rate at about zero until the
unemployment rate falls below
6.5 percent.
The move was decided after
the rate-setting Federal Open
Market Committee voted 11 to
one in favour. Unemployment in
the U.S. stood at 7.7 percent in
December.
The chairman of the Fed, Ben
Michel Barnier
Bernanke, said the decision was
in line with previous plans to
keep interest rates unchanged
until at least mid-2015.
According to the Financial
Times, the move is risky because
if inflation rises before unemployment
falls to the target level,
the Fed will be forced to either
backtrack or allow further price
rises.
Inflation has averaged near
the Fed’s 2 percent goal for the
AFP
tions and it will ensure compliance
with capital requirements.”
According to the Financial
Times, the next phase of the
agreement will be to align the
individual national rules –
covering everything from bank
capital requirements to the
emergency powers national governments
have – within the next
six months in order to create a
single rule book.
Ministers also have to
decide on which banks the new
mechanism will oversee, how to
accommodate the needs of large
and small eurozone
countries, as well
as how to accommodate
lenders in
non-euro nations.
Current proposals
will see the supervisory
body directly
responsible for 200
of the biggest banks
within the eurozone.
Although it was a widely
welcomed deal, Anders Borg,
the Swedish finance minister,
told Bloomberg that the ECB’s
common supervision would
leave Europe “more divided” by
creating a greater gap between
countries inside and outside of
the banking union.
Hours after the deal was
reached, finance ministers
agreed to release a delayed
€34.4 billion bailout instalment
to Greece, with another €15 billion
to come later.
AFP
past 20 years and analysts say it
should remain around there, if
not lower, in the next year.
The Fed also lowered its economic
growth forecasts for 2012
and 2013. It expects growth to
be between 1.7 to 1.8 percent last
year, down from its September
projection of 1.7 to 2 percent. It
predicts growth this year to be
between 2.3 to 3 percent instead
of the 2.5 to 3 percent forecast in
September.
Deutsche Bank
ends 2012 on
a messy note
Deutsche Bank announced its
fourth quarter profits would be
dented by a string of legal tussles
as well as restructuring.
German police and finance
investigators raided the bank’s
headquarters on 12 December as
part of a probe into alleged tax
evasion, money laundering and
obstruction of justice involving
carbon trading.
Jürgen Fitschen, the bank’s
co-chief executive, and Stefan
Krause, its chief financial officer,
have been put under investigation
because they signed the
bank’s 2009 value-added tax
statement. Arrest warrants were
issued for five employees, while
three offices were searched.
These allegations are the
most recent revelations in a longrunning
probe into tax fraud over
trading carbon emission permits
at the bank since last year, which
led to six employees being jailed.
Recent reports in the Financial
Times have alleged that the
bank hid paper losses in the way
it accounted for complex derivative
trading. The bank says the
allegations are unfounded.
Additionally, Deutsche Bank
is being investigated over allegations
that it manipulated the
Libor benchmark interest rate.
Meanwhile, the bank has put
€122 billion of assets into a noncore
operations unit in a bid to
get out of risky assets. “This is not
a bad bank but... comprises businesses
that are no longer core to
the bank’s strategy,” Krause said.
January 2013 9

ICAEW urges IFRS option
for all listed companies
A report by the Institute of Chartered Accountants
in England and Wales released last month
urged the International Accounting Standards
Board to give all listed companies around the
world the option of applying International Financial
Reporting Standards. “All listed companies
in major countries currently not part of
the IFRS family should be given the option of
reporting under IFRS, including [those in] the
United States,” said Nigel Sleigh-Johnson, head
of ICAEW’s financial reporting faculty.
KPMG profits rise amid
cooling in Asia Pacific
KPMG International saw revenues grow to
US$23 billion for the year ending 30 September
2012, which is a 4.4 percent increase on the
previous year. Advisory revenue grew by 8.3
percent, tax revenues by 6.3 percent and audit
revenues by 0.9 percent. The strongest region
for the firm was the Americas, with 7 percent
revenue growth. Asia Pacific, by contrast, grew
just 1.1 percent.
Big Four firms bank on
Myanmar’s potential
PricewaterhouseCoopers and KPMG have
opened their first offices in Myanmar as the
Southeast Asian country liberalizes its economy.
The firms will provide assurance, tax and
advisory services to support large local businesses
and foreign corporations’ investments
in Myanmar.
Revenue accountants
see high demand in U.K.
Revenue accountant was Britain’s most indemand
finance job during 2012, according to a
survey by a recruiter. Demand for this position
increased by 55 percent over the previous year,
the highest increase of any job. It was followed
by commercial finance analyst, the 2013 Michael
Page salary survey found. “Revenue accountants
play a key role in advising a business of the risks
and opportunities associated with deals,” said
Gareth Davage, managing director of Michael
Page Finance. Demand for reporting analysts fell
by 256 percent in 2012, according to the survey.
10 January 2013
NEWS
INTERNATIONAL
SEC approves new standard
on audit panel communication
PCAOB official says rule will improve quality
The Securities and Exchange Commission in the United States has approved a
new standard that requires greater transparency and communication between
auditors and audit committees.
The rule, Communications With Audit Committees, was submitted by the
Public Company Accounting Oversight Board and will come into effect for
audits of fiscal years that ended on or after 15 December.
The new standard requires auditors and the audit committee to establish
an understanding of the terms of the audit engagement in order to enable an
exchange of information between the two parties.
Under the new rule, auditors are also required to provide audit committees
with their own evaluation of the company’s financial reporting and issues
surrounding the company’s accounting practices, policies and estimates. It
will also oblige auditors to provide any information about significant unusual
transactions, the rationale behind those transactions and any other issues that
arise during the audit.
Martin Baumann, the PCAOB’s chief auditor and director of professional
standards, said that the standard would improve audit quality. “It emphasizes
effective two-way communication on matters of great importance to the
audit and financial statements, such as significant risks, critical accounting
estimates, difficult or contentious matters, significant unusual transactions
and going concerns.”
The board initially proposed the standard in March 2010 and re-proposed
it in December 2011 with revisions based on comments at a roundtable in
September 2010.
IFIAR survey findings reveal common
problems surrounding inspections
The International Forum of International Audit Regulators released the findings
of a global survey of audit inspections, identifying the most common problems
affecting audit firms around the world.
The forum asked members to report findings from their inspections of audit
engagements and areas where they had noted deficiencies.
The survey results identified common findings in a number of areas. It showed
that the largest number of inspection findings in audits of public companies
occurred in fair value measurements, internal control testing and engagement
quality control reviews.
In audits of financial institutions, it was revealed that the largest number of
inspection findings occurred in internal control testing, valuation of investments
and securities and audit of allowance for loan losses and impairments.
“The survey results suggest that audit firms need to do more to improve
the consistency of performance on individual audit engagements,” the report
concluded.

NEWS
GREATER CHINA
Economic policies to focus on
stability, tax cuts during 2013
Annual conference acknowledges continuing challenges
The Chinese government plans
to continue with its existing economic
policies this year, leaving
room for manoeuvres in the face
of global economic difficulties,
according to an official statement
released after an annual
policy-setting conference last
month.
The two-day Central
Economic Work Conference,
chaired by new Communist
Party chief Xi Jinping, sets
the tone for economic policymaking.
It confirmed tax cuts, continued
curbs on real estate speculation
and a broader effort to
increase domestic consumption.
China will “properly expand
the amount of social financing
to maintain a moderate increase
in loan issuances” and keep the
yuan’s exchange rate “basically
China’s foreign exchange regulator
has removed a US$1 billion
limit on investments from international
sovereign wealth funds,
central banks and monetary
authorities.
The new regulations,
published on the website of the
State Administration of Foreign
Exchange, are expected to start
immediately but the administration
did not specify whether
there was a new limit.
The move underlines efforts
to boost investor confidence and
12 January 2013
Xi Jinping
stable” in 2013, according to the
statement.
The nation will also continue
to implement its pro-active fiscal
policy, which China has kept
since 2008, and its monetary
policy, prudent since 2010.
“The proactive fiscal policy will
be combined with tax reforms
and structural tax cuts and the
prudent monetary policy will
pay attention to dynamism and
enhance operational flexibility,”
the statement said.
China’s economy still faces
increase foreign investment in
Chinese assets, which has declined
by more than 60 percent
since November 2007.
Bloomberg reported that
foreign direct investment in the
Mainland had declined for the
12th time in 13 months.
Investment dropped 5.4
percent in November from a
year earlier to US$8.29 billion,
the Ministry of Commerce said.
Also, FDI inflows in the first
11 months of last year fell 3.6
percent on a year-on-year basis
global uncertainties
as well as rising trade
protectionism, the conference
concluded. “We
must soberly recognize
that there are still many
risks and challenges
confronting our national
development,” the statement
added. “Problems with
imbalances, ill-coordination
and lack of sustainability remain
pronounced.”
China’s annual economic
growth dipped to 7.4 percent
in the third quarter of 2012,
marking the seventh successive
quarter of slowing.
To spur growth, China’s central
bank has cut benchmark interest
rates twice since June and commercial
banks’ reserve requirement
ratios three times in the past
few months.
to US$100 billion.
According to the Financial
Times, the new policy is aimed at
sovereign wealth funds such as
the Qatar Investment Authority
and central banks such as the
Hong Kong Monetary Authority,
both of which have been
approved to invest up to US$1
billion.
Foreign investment inflows
are likely to be stable this year
and will not drop significantly,
Shen Danyang, a ministry
spokesman, said at a press brief-
World Bank
forecasts
growth spurt
The World Bank raised its 2013
economic growth forecasts for
China last month, citing stimulus
measures and approved infrastructure
projects as helping
to boost the economy.
This year, growth in the
world’s second largest economy
is expected to grow by 8.4
percent, slightly better than an
earlier projection of 8.1 percent,
the bank said in its East Asia and
Pacific Economic Update.
“The impact of easing credit
conditions and public investment
in infrastructure is beginning,”
the World Bank said in
the report. “Weak exports and
the government’s efforts to cool
down the overheating housing
sector slowed down China’s
economy in 2012, but recovery
has set in the final months of the
year.”
Foreign exchange regulator raises US$1 billion investment limit
AFP
ing last month.
Through the Qualified Institutional
Investor Programme,
government-approved foreign
investors can trade Chinese
class-A shares and bonds listed
on the Shanghai or Shenzhen
stock exchanges. Since 2002,
China has expanded the programme
to attract more investors
such as pension funds.
Total Qualified Institutional
Investor Programme quotas rose
to US$80 billion in 2012 from
US$30 billion in 2007.

Advertising company agrees
to US$3.7 billion buyout offer
Private equity firms among consortium members
Chinese advertising company
Focus Media approved a US$3.7
billion buyout offer last month
from a group of private equity
funds.
The deal to take the company
private, said to be one of the
biggest leveraged buyouts of a
Chinese company, should be
completed early in the second
quarter of this year, Focus Media
said in a statement.
The buyers will pay US$27.5
per share, valuing the company,
listed in the United States, at
US$3.7 billion. The takeover
group behind the offer includes
Carlyle, Fountainvest, China
Everbright and Citic Capital, as
well as Focus Media’s chairman
and major shareholder, Jason
Jiang.
The firm, which operates advertising
screens in offices and
commercial spaces in China,
says it has about 170,000 flatpanel
displays in about 90 cities
in the Mainland.
In 2011 Focus Media was accused
of overstating the value of
its assets by short-seller Carson
Block of Muddy Waters Research.
Focus Media denied the
accusations, which prompted
the share price to plunge by 40
percent on the day the allegations
were made.
Although the share price has
since recovered to about US$25,
it is still trading well below its
peak of about US$66 per share
in 2007.
In response to the deal, Muddy
Waters told the BBC that “investors
are clearly better off with
Focus Media no longer participating
in U.S. capital markets.”
Bank of America, Citigroup,
Credit Suisse, UBS and Deutsche
Bank have agreed to join Chinese
banks in providing US$1.53 billion
in debt for the transaction.
PetroChina strikes deal with Canada’s Encana
PetroChina, one of the world’s
biggest oil and gas producers,
will pay US$2.2 billion to buy
into a natural gas project with
Encana, a Canadian energy
company – underlining the
Chinese company’s growing
appetite for investment in gas
developments around the world.
Under the deal, Phoenix
Duvernay Gas, a wholly owned
subsidiary of PetroChina,
will jointly develop Encana’s
Duvernay natural gas and
liquids play in Alberta, giving
PetroChina a 49.9 percent stake
in the asset.
Jason Jiang
AFP
Calgary-based Encana
said the venture, with a
non-controlling interest for
PetroChina, allows the partners
to avoid stringent reviews under
the Canadian government’s new
restrictions on foreign stateowned
firms seeking to invest in
Canada’s oil sands.
The deal, which was
announced on 13 December,
was the second overseas deal
reached by PetroChina in a
week, after the oil giant agreed
to pay US$1.63 billion to BHP
Billiton, the Anglo-Australian
miner, for a 10 percent stake in
its Browse liquefied natural gas
project, which consists of three
fields off the northwest coast of
Western Australia.
Both ventures are part of
PetroChina’s broader goal
of having half its production
outside of China by 2015.
Last year, a previous joint
venture between Encana and
PetroChina – a 50 percent
stake for the Chinese company
in a large shale-gas project in
western Canada worth more
than US$5.5 billion – failed to go
ahead after the two sides could
not agree on final terms.
Lenovo takes
No. 3 spot in
devices market
Technology group Lenovo
has seized a 7 percent share
of the world market for smart
connected devices after a surge
of Mainland sales, putting
the Chinese company behind
technology leaders Apple and
Samsung.
This market represents total
global shipments of personal
computers, smartphones and
tablets.
According to market
research firm IDC, global
shipments in connected
devices rose 27.1 percent (or
303.6 million units) in the last
quarter, a record high valued at
US$140.4 billion.
Samsung posted a 21.8
percent market share, while
Apple cornered 15.1 percent.
Lenovo, which recently
overtook market leader
Hewlett-Packard to become the
world’s largest supplier of PCs, is
expected to narrow the gap with
Apple.
“That should not come as
a surprise because Lenovo
has sharpened its focus on the
smartphone and media tablet
market segments, which helped
it become one of the top brands
for those devices in Mainland
China,” Kitty Fok, general
manager of IDC China, was
quoted as saying by the South
China Morning Post.
The figures are in line
with the November forecast
of Lenovo chairman Yang
Yuanqing.
January 2013 13

Mainland may adopt IFRS
de facto control standard
China may decide to adopt the international accounting
standard covering de facto control. Under
revised rules, an investor would be judged
to have de facto control of a company if it can exert
influence on its activities or coordinate with
other shareholders to control the firm with less
than 50 percent of the voting rights. The Ministry
of Finance is seeking public feedback on a proposed
draft of the revisions. The new rule is in
accordance with IFRS 10, issued by the International
Accounting Standards Board in May 2011,
which takes effect this month.
E&Y to pay out claims
over Sino-Forest audits
Ernst & Young agreed to pay HK$912 million
to settle shareholder claims over its audits of
Sino-Forest, the China-focused forestry company
that collapsed in 2011. The class-action
settlement is one of the biggest in the world,
said Siskinds and Koskie Minsky, the Canadian
law firms representing shareholders. Earlier
last month, the Ontario Securities Commission
said E&Y was facing allegations that it conducted
improper audits of Sino-Forest.
BOC Taipei branch named
clearing bank for yuan
Bank of China’s Taipei branch has been appointed
the clearing bank for yuan transactions
in Taiwan, paving the way for the use of China’s
currency there. “This is a breakthrough for the
establishment of a cross-strait currency clearing
mechanism and important progress for Bank of
China to accelerate its business in cross-border
yuan clearing and settlement,” the bank said in
a statement posted on its website.
All Taiwan companies
to adopt IFRS this year
All publicly traded domestic companies in Taiwan
will be required to adopt International Financial
Reporting Standards this year. Foreign
companies listed in Taiwan will be required
to adopt IFRS, American GAAP or Taiwanese
accounting standards at their discretion, the
Financial Supervisory Commission stated, according
to the China Post.
14 January 2013
NEWS
GREATER CHINA
U.S. regulator cracks down
on firms over China audits
Five affiliates charged with securities violations
The Securities and Exchange Commission in the United States last month
charged the Chinese arms of five large accounting firms with violating securities
laws by refusing to hand over audit papers on China-based companies.
The Chinese affiliates of PricewaterhouseCoopers, Deloitte, KPMG, Ernst
& Young and BDO are under investigation by the SEC for “potential accounting
fraud against U.S. investors.”
The firms are charged with violating the Securities Exchange Act and the Sarbanes-Oxley
Act, which requires non-U.S. accounting firms to provide the SEC
with audit working papers involving companies listed in the U.S. upon request.
“Only with access to work papers of foreign public accounting firms can
the SEC test the quality of the underlying audits and protect investors from the
dangers of accounting fraud,” said Robert Khuzami, director of the commission’s
enforcement division.
The audit firms said they are prevented from doing so, citing China’s state
secrecy laws. “Accounting firms in China are not permitted to produce documents,
including audit work papers, directly to any foreign regulator without Chinese government
approval, so all firms in China have been unable to produce documents
requested by the SEC,” Deloitte spokeswoman Lauren Mistretta told U.S. media.
The decision to file charges against the five audit firms in China appears to signal
an end to the SEC’s patience, analysts say. “The Chinese, it has concluded, are
simply stonewalling,” said Patrick Chovanec, a professor at Tsinghua University’s
School of Economics and Management in Beijing.
The SEC, which is investigating possible wrongdoing at nine China-based
companies, said a judge would schedule a hearing to determine potential sanctions
against the accounting firms.
Macau sees slight reduction in
dependence on gambling taxes
Gambling taxes will account for about 78 percent of total Macau government
revenue this year, a reduction from 84.3 percent last year. Macau expects casinos
and other gambling taxes to total about 100 billion patacas (HK$97.6 billion),
according to the budget for 2013, an increase from the previous year.
“In 2012, gaming revenue reached 92 billion patacas,” Macau Legislative
Assembly’s second standing committee chairman Chan Chak Mo told Macau
Business Daily.
Legislators have criticized the government’s heavy dependence on revenue
from gambling. But Francis Tam, Macau’s secretary for the economy and finance,
said the reliance “would remain for some years to come.”
The government plans to spend 82.5 billion patacas this year, 6.7 percent more
than last year. Chan said some of the biggest spending increases would be on transport,
education, consumer protection and prisons, as well as the civil service.

M&A due diligence
Allegations of
wrongdoing
over deals
made by
technology
giant Hewlett-
Packard and
commodities
trader Olam
have put
mergers and
acquisitions
under the
spotlight.
16 January 2013
KN
YO
TAR

OW
UR
GET
George W.
Russell finds
out how
accountants
can ensure
transactions
don’t sour
January 2013 17

M&A due diligence
The purchase by Hewlett-
Packard in August 2011
of British software maker
Autonomy was heavy
with meaning. It was,
at more than US$10 billion,
one of the largest deals of the year and
was intended to transform HP, a well-respected,
if slightly out-of-touch, technology giant,
under then CEO Léo Apotheker.
In addition, it was hailed as part of a resurgence
of British innovation – Autonomy
is based in Cambridge – and underscored
the importance of processing “unstructured
data” such as that generated from social media,
which is Autonomy’s forté.
Though criticized at the time – Oracle
CEO Larry Ellison thought HP was overpaying
wildly – few expected the deal would
turn into such a disaster. In November 2012,
HP announced it had taken a US$8.8 billion
write-down on the Autonomy takeover.
Moreover, accusations of fraud and mismanagement
were made against the companies
involved, a forensic audit revealed
“accounting improprieties and disclosure
failures” and lawsuits were initiated
against audit firms KPMG and Deloitte.
The HP-Autonomy deal is not the only
merger and acquisition transaction to come
under scrutiny. Short-seller Muddy Waters
took commodities trader Olam to task over
its 2010 purchase of Crown Flour Mills in
Nigeria for US$107.6 million. Muddy Waters
noted that Olam replaced almost all of
Crown Flour Mills’ equipment and is building
a new facility, suggesting Olam paid too
much and did not book an impairment loss
against the assets.
Such high-profile cases illustrate the
minefield that M&A can become and the
importance of thorough due diligence. According
to Kenneth Yeo, a director of BDO
and a Hong Kong Institute of CPAs member,
M&A risks include misreporting of revenue
and profit, non-compliance with accounting
standards or financial reporting procedures
and transparency issues such as opaque
group structures.
Sometimes, says Yeo, it can be a challenge
even gathering accurate data and basic financial
analysis such as sales or gross profit
margins needed to carry out the necessary
due diligence work. “The quality of information
you receive can make the process challenging
and you will need to both expect
that and be prepared to deal with that.”
View the big picture
Much M&A due diligence work is simply
the analysis of fundamentals, yet it can be
overlooked in the euphoria of a seemingly
attractive deal. “A buyer needs to
understand what is driving
the revenue and
the profitability of
the target business,”
says David
Brown, who
leads the M&A
transaction services
business in
Hong Kong and the
Mainland for PricewaterhouseCoopers.
Purchasers should be sure that the sales
are real, the cash is there, the margins are
understood and the properly stated working
capital is accessible, Brown says, adding
that simple questions must be asked:
“If [the target] is a business that has higher
profit margins than its peers, why should
that be?”
Brown says auditors must suspend belief
when doing due diligence on a target company.
“You must ask yourself, ‘If I’m prepared
to believe it, do I understand why?’ ”
In addition, Brown adds, it helps to
imagine a scenario in which the numbers
are fraudulent. “If there was a fraud being
perpetuated, what would it look like? Do it
on a whiteboard. You’re entirely speculating,
but assume the worst outcome.”
Stephen Law, an Institute Council member
who worked on many M&A transactions
when he was a managing director of private
equity group TPG, says there are many indirect
approaches to verify company statements
about production and revenue, from
counting delivery trucks to obtaining a copy
Auditors must suspend belief when doing
due diligence on a target company. “You
must ask yourself, ‘If I’m prepared to
believe it, do I understand why?’ ”
18 January 2013

Mainland M&A
M&A concerns are magnified when it comes to doing
deals in China, where there is less familiarity with due
diligence. “You have to be more careful when internal
controls are not as good, corporate governance is not
as well developed and there is a longer time to discover
data,” warns Stephen Law, an Institute Council member
who worked on many M&A transactions when he was a
managing director of private equity group TPG.
There were about 3,000 reported M&A transactions
in China during 2011, of which 80 percent were domestic
transactions. The remainder were inbound deals from
overseas, which have slowed in the wake of downturns
in the European Union and United States.
However, outbound deals by Chinese companies
are proceeding apace. In October, China saw its biggest
foreign acquisition when the state-controlled oil
company CNOOC struck a US$15.1 billion blockbuster
deal to acquire the Canadian energy
producer Nexus. “It is a particularly
strong market at the moment,”
says David Brown, who leads
PricewaterhouseCoopers'
M&A transaction services
business in the Mainland and
Hong Kong.
After a spate of high-
profile scandals, M&A
due diligence in China
in recent years is much
more focused on looking
out for fraud, Brown says.
“There are more forensic
due-diligence procedures in
place,” he says.
There are also lessons
for Hong Kong businesses
involved in M&A deals
with Chinese companies.
It was the HK$418 million
acquisition of Hong Konglisted
Omnicorp in 2010 that
put Sino-Forest Corporation
in the spotlight when it
was found that some of
Omnicorp’s logging licences
had expired. Sino-Forest
filed for bankruptcy in 2012.
There can be many
hidden
obstacles
when conducting M&A due diligence in China, or on
Mainland-invested entities, experts warn. These include:
Complex corporate structures Acquiring a minority
interest in a business or entering into a joint venture
are common ways to invest in Chinese companies, as
is the use of cross holdings, offshore entities and shell
and holding companies, but some set-ups may not be
entirely legal under Chinese law. “Make sure you are in
fact buying one company and not 30 companies,” adds
Velisarios Kattoulas, chief executive of Poseidon Research,
a consultancy that advises on M&A.
Multiple sets of books It is common for Chinese private
companies to have multiple sets of books and it is essential
to understand why this is and the differences between
books. “Frequently the ‘tax books’ will understate income
in order to reduce the tax liability,” says Barry Tong,
transaction advisory services partner at Grant Thornton in
Hong Kong and an Institute member. “[This] may result in
a potentially large contingent liability for a buyer.”
Revenue recognition and cash reconciliations
Experts recommend reconciling cash deposits from bank
statements to revenue. “There is often an early recognition
of revenues and inclusion of one-off gains as recurring
revenue,” observes Jack Clipsham, a partner and head of
Asia Pacific corporate finance at Mazars and an Institute
member.
Owners’ compensation and personal expenses
These are among the most common causes of
adjustments to earnings. “Look for signs of inappropriate
expenses,” advises Law at TPG.
Related-party transactions Relatives of the owners or
managers may be on the company’s payroll, customers
may include related or affiliated companies and key
suppliers may be related or affiliated by common
ownership. “The due diligence process needs to
determine if there is contractual employment, sales or
purchase agreements that will survive [the] closing [of the
deal],” Tong says.
Last but not least, make sure all parties understand
the documentation, especially if it requires a translation.
“Language itself can also be a challenge – both oral
and written,” Clipsham warns. “The Chinese language
does come from one of the world’s oldest cultures and
possesses an eloquent tradition rich in ambiguities.”
A PLUS
January 2013 19

of the target’s electricity bill. “Find out the
bank balance – that’s harder to falsify than
bank statements,” he advises.
However, a new stumbling block that
many carrying out due diligence are increasingly
facing is sellers that give critical
information only to certain suitors. “It is becoming
very difficult to get the more valuable
commercial information before entering
an exclusivity phase when a preferred
buyer gets access to management,” says
Jack Clipsham, a partner and head of Asia
Pacific corporate finance at Mazars and an
Institute member.
Such a preferred-party system might
require a phased approach to the due
diligence, Clipsham adds. Initial due diligence
might ensure key concerns and potential
risk areas are covered, but full due
diligence wouldn’t be engaged unless the
parties were seriously involved, enabling
potential acquirers to control associated
costs.
Teamwork is the key
While accountants are essential to an M&A
due diligence exercise, other input is necessary.
“Accountants tend to look at what information
they have. You need other people
to look at what information you don’t have,”
says Law. That, he adds, means hiring lawyers,
business consultants and, if necessary,
private investigation companies.
Lawyers are there to examine documents,
company structures and other legal and regulatory
aspects of the target company. “You
will need to develop a sense for what aspects
of non-compliance or non-conformity are
deal breakers and which can be fixed,” says
The good and bad of M&A
Ten notable global transactions of the past 15 years for
the right – and wrong – reasons.
Despite the occasional stinker of a mega-deal, the
Americans are generally very good at mergers and
acquisitions. Large markets, technological knowhow
and effective due diligence have made them the
masters of the art. It’s no surprise that some of the
most successful multi-billion dollar
partnerships involve both acquirers
and targets from the United States.
Exxon Corporation (U.S.) and
Mobil Corporation (U.S.), 1999,
US$82 billion
This merger formed the largest
company in the world and reunited John
D. Rockefeller’s Standard Oil Company of
New Jersey (Exxon) and Standard Oil Company
of New York (Mobil), which had been merged in
1870 and broken up by the U.S. Supreme Court in 1911.
“You have to ask: ‘Can I trust these
people, and do they have the
wherewithal to execute... their business
plan?’ ”
SWEET
DEALS
Chase Manhattan Corporation (U.S.) and J. P.
Morgan & Co. (U.S.), 2000, US$28.6 billion
The ultimate evocation of the idea that “big is beautiful,”
the deal that resulted in JPMorganChase maximized the
synergies of consumer banking (Chase) and investment
banking (Morgan) through a largely seamless transaction.
A PLUS
Mark Schaub, a partner with the King & Wood
Mallesons international law firm in Shanghai.
One common hiccup is focusing on the
commercial matters at stake without thinking
of the wider regulatory environment that
could affect a deal. “Due diligence should
also examine the increasingly complicated
approval road map, including anti-monopoly
and national security clearances being required
in some cases,” Schaub says.
That is even more important when one or
both of the companies concerned is in China,
he says, adding that the Chinese regulatory
environment has many grey areas.
Working together, everybody needs to
Broken Hill Proprietary Company (Australia) and
Billiton (U.K.-Netherlands), 2001, US$57 billion
The biggest mining industry deal to date was agreed to
not by market dictates but by the personal desires of
then-CEOs Paul Anderson of BHP and Brian Gilbertson
of Billiton. The resulting BHP Billiton is a
behemoth in an industry where size
matters.
DBS Group Holdings (Singapore) and
Dao Heng Bank Group (Hong Kong),
2001, US$10 billion
DBS was criticized for overpaying Guoco for
Dao Heng, but a decade later the acquisition
looks smart. No longer dependent on Singapore
for the bulk of its revenues, the deal catapulted DBS
into the major regional leagues.
The Walt Disney Company (U.S.) and Pixar
Animation Studios (U.S.), 2006, US$7.4 billion
Widely hailed as one of the shrewdest Hollywood
deals in memory, this merger brought together the
resources, access and history of Disney and the cuttingedge
innovation and risk-taking of one of the greatest
animation and special effects studios.
January 2013 21

e very rigorous. “You definitely need the
auditors to come in and kick the tyres very
hard,” says Velisarios Kattoulas, chief executive
of Singapore-based Poseidon Research,
which helps conduct M&A due diligence
investigations.
“You need the lawyers to do the same –
and beyond that you need somebody to come
in and give a candid assessment of the management
team,” he adds. “You have to ask:
‘Can I trust these people, and do they have the
wherewithal to execute either their business
plan or the business plan that we’re looking to
impose on them?’ ”
Striking a balance
While sometimes deals seem too good to be
true, experts advise treating M&A transactions
on a case-by-case basis. “While a
healthy dose of scepticism is important,
don’t go overboard,” says Nick Gronow, senior
managing director at FTI Consulting
and a member of the Institute. “It is unreasonable
to expect that everything in a target
company is perfect. In fact, if it is, that is
probably a warning sign.”
China has an undeveloped M&A market and, sadly, the
country is best known for the scandalous reverse mergers
in the U.S. and Canada such as Sino-Forest and AutoChina.
Hong Kong barely makes the global M&A radar, though
the British-owned city banking icon HSBC is notable for
its botched acquisition of U.S. sub-prime
lender Household.
Daimler-Benz (Germany) and
Chrysler Corporation (U.S.), 1998,
US$36 billion
Imposing German management
culture even on a weak and demoralized
American company was bound to fail — and
so it did. Sold first to a private equity group and
then to Fiat, Chrysler has fared better under Italian
control.
AOL Corporation (U.S.) and Time Warner (U.S.),
2000, US$164 billion
The New York Times described the marriage of a flashy
Internet company and a venerable publisher as a “trail
of despair.” It resulted in job losses in the thousands,
the decimation of pensions, legal investigations and
accounting frauds.
“While a healthy dose of scepticism is
important, don’t go overboard. It is
unreasonable to expect that everything
in a target company is perfect. In fact, if
it is, that is probably a warning sign.”
And if acquirers end up exaggerating
the potential missteps, they could miss out
on a lucrative deal. A Shanghai real estate
developer courted by a multinational was
rumoured to be mired in legal scandal. An
investigation by Poseidon Research revealed
that while two executives of the Shanghai
developer were the subjects of lawsuits, neither
the company nor any key personnel had
been involved in corruption or other criminal
acts. “Inflammatory assertions were unconfirmed,”
its report concluded.
On the other hand, CPAs should not be silent
if a deal might not be in the best interests
of the acquirer. “Raise the issues with the advisers
to the company on the deal,” Clipsham
at Mazars advises. “If concerns persist and
SOUR
no action has been taken, concerns should
be formally documented and circulated to
all board members.”
If you are that dissenting voice, make
sure your objections are noted, Yeo at BDO
emphasizes: “Your discussions with the
board should be documented and filed for
internal recording purposes.”
Don’t always expect your advice to be
heeded. It later emerged that Cathie Lesjak,
HP’s CFO, was opposed to the Autonomy
deal. “I can’t support it,” Fortune quoted an
unnamed HP executive as hearing her say
at a board meeting in 2011. She reportedly
advised: “I don’t think it’s a good idea.
I dont think we're ready. I think it’s too
expensive.”
HSBC (U.K.) and Household Finance Corporation
(U.S.), 2003, US$15 billion
Within four years HSBC had racked up write-downs
of more than the purchase price as poor Americans
defaulted on mortgages, credit cards, personal loans
and car finance. Knight Vinke, an activist
investor, is pressing HSBC to sell it off.
Alcatel (France) and Lucent
Technologies (U.S.), 2006,
US$13.4 billion
This technology tie-up has ended with
the combined entity on the verge of “penny
stock” status. Alcatel-Lucent has failed even to
capitalize on its massive Bell Laboratories patent
portfolio, considered one of the jewels in the crown.
DEALS
Bank of America Corporation (U.S.) and Merrill Lynch &
Co. (U.S.), 2008, US$81 billion
Bank of America recently paid out US$2.43 billion in a legal
settlement over accusations that it misled investors about
the acquisition of Merrill Lynch. The bank has also struggled
with losses on mortgage assets related to the purchase.
Sources: Accenture, Bloomberg, Economist Intelligence
Unit, company and stock exchange reports
A PLUS
January 2013 23

Entrepreneur CPAs
Instead of working
in practice or in
business, some
Institute members
choose to be their
own bosses. Jemelyn
Yadao finds out about
the career versatility
open to CPAs
Photography by Samantha Sin
and Sunny Yu
24 January 2013
Brian Tang
TAKING

THE LEAD
PHOTO: SAMANTHA SIN
January 2013 25

Entrepreneur CPAs
Benny Tong
Manager, audit
Jonathan Tsui
Brian Tang is used
to being the oldest
person in his
Hang Hau office.
And, unusually for
a Hong Kong Institute
of CPAs member,
his day job is spent among folks who can
barely add up.
Finger paintings scatter the walls,
splotches of primary colours conceal the
windows and clay ornaments dangle from
the ceiling. On one side of the room, a threeyear-old
applies generous amounts of paint
to a reindeer with 10 legs. On the other, a
little girl pounds her lump of clay into her
26 January 2013
unique interpretation of a bird.
“We are not like other galleries – we’re
more creative and let the students have the
freedom to draw. They can choose the shape
and the colour. Some galleries don’t even allow
students to talk, but we do,” says Tang,
founder of Little Masterhand, which runs
art programmes for children such as basic
painting and Chinese art.
This open-plan environment, or “gallery,”
which allows children to be miniature artists
– and as messy as they want – is exactly what
Tang had in mind when he decided to blaze
his own trail.
He is one of the Institute members who
have eschewed the traditional career stops
such as accounting firms or businesses to
start their own exciting business ventures,
using the all-round skills they have developed
as CPAs.
Since 2010, Tang has been running the
business with his wife, an art professional
with experience in children’s education.
“Art is a really good pastime for children.
They can relax here, learn to be creative and
learn to concentrate,” Tang explains as his
reason for starting Little Masterhand.
One of the initial challenges he faced was
attracting customers and retaining them – it
was important that Little Masterhand demonstrated
to parents that it could provide
quality art lessons. After about six months,

PHOTO: SAMANTHA SIN
the hard work paid off, and Tang saw a
growth in the number of students he had in
both his gallery in Hang Hau and the other
one he opened in Causeway Bay.
It was all thanks to referrals from satisfied
customers – both young and old. “That
is very encouraging because we feel that our
environment is appreciated by our existing
parent clients, and they are proud to refer us
to others.”
Tang’s gallery in Hang Hau now has about
150 students attending every week, while his
Causeway Bay branch teaches about 120.
It hasn’t all been plain sailing. Tang recalls
one unexpected turn of events that
threatened his business. Two teachers who
A PLUS
“The goal was not to make a profit but to
make the customer happy because I live
in this district. Everyone is part of my
neighbourhood.”
taught at his galleries left and set up a gallery
of their own, poaching some of Tang’s
original students. Rather than taking legal
action, Tang focused on turning a negative
into a positive by introducing student evaluation
forms to help both students and their
parents get more from the learning process
and see increased value in staying at Little
Masterhand.
Tang now also has employees sign what
he was very familiar with when he worked as
a financial controller at a commercial firm.
“I ask new staff members to sign a non-competition
agreement... I didn’t think it was
necessary [before],” says Tang, who laughs
about the incident now.
Setting up shop
For an accountant, Jonathan Tsui has an unusual
portfolio of businesses. The Institute
member owns two pharmacies and a property
agency in Tin Hau.
He first decided to enter the pharmacy
business in 2008, just as he was in line to be
promoted to senior manager at Deloitte. He
liked the idea of working with his wife and
running a thriving business.
“When we walked around, we saw that
pharmacies had many people [in them],
but I didn’t have any idea whether it was
profitable or not,” recalls Tsui. The couple
consulted with a friend of a friend who had
experience in the sector. “Otherwise I could
not have started my own pharmacy. This industry
is quite closed... You really need that
inside knowledge.”
Even after doing his homework, Tsui was
surprised at what he found after biting the
bullet and setting up shop. “The profit mar-
gin is unbelievably low,” he says. “I only knew
the truth when I entered this industry.”
Nevertheless, Tsui has managed to stabilize
his business by building a loyal customer
base, which, he says, is vital in the sector. To
achieve this, he follows a philosophy of putting
money last. “The goal was not to make
a profit but to make the customer happy because
I live in this district. Everyone is part of
my neighbourhood.”
Tsui’s entrepreneurship didn’t stop there.
In 2009, Tsui and his wife, who both already
had an interest in investing in property,
started their own property agency, called
Yan Tak Property.
“Many years ago I had the idea of having
a property agency, even at Deloitte, because
I love investing in properties,” he recalls.
At first, the couple ran the agency with a
friend, who later left the company over professional
differences.
The business-minded Tsui takes this experience
as a valuable lesson. “Partners need
to [think] in line with you, otherwise you
may argue,” reflects Tsui, who remains good
friends with his former partner.
Tsui is sometimes dejected by Hong
Kong’s notoriously expensive property prices.
“Sometimes I think it’s seriously time to
change [the agency] or even close it down,”
he mulls.
Ever the entrepreneur, Tsui is constantly
on the lookout for new business opportunities.
He recently started a company in the
Mainland that provides management services
to petrol stations. And back in Hong Kong,
a restaurant and a health clinic are just two
of many other businesses Tsui is thinking of
setting up.
January 2013 27

“People will
read up on your
background.
During my sales
presentations I will
say the company’s
management has
a very trustworthy
background and
includes a CPA.”
Outshining competitors
It wasn’t only the last sequential date of the
century. For Jane Wong, 12 December 2012
was even more momentous as her jewellery
company, Célébrité Fiesta, took part in a
mass wedding. Wong provided bridal jewellery
and styling to 10 anxious brides getting
married that day on a Star Cruise vessel sailing
out of Victoria Harbour.
“It was fantastic,” she says. “A tiring day,
though, which lasted from 7 a.m. until midnight...
One of the newlyweds loved me so
much that they paid a visit to my office [the
day after] and thanked me again,” recalls
Wong, also an Institute member.
Wong’s company sells jewellery handmade
by designers in Europe and America.
This, she says, is her unique selling point.
“My position is really clear: I need to differentiate
myself to play a role here. That’s
why I want to work with the European and
American designers and ensure that the production
itself is in their home countries so
I will be able to see the cultural differences,
their countries’ heritage and characteristics,”
says Wong, who recently introduced a
wedding planning service to her business.
Wong was previously director of finance
and administration at New World Telecom.
Despite not having a jewellery background,
PHOTO: SAMANTHA SIN
Wong’s more than 12 years of management
experience and globally recognized CPA
qualification have helped her build trust.
“People will read up on your background.
During my sales presentations I will say the
company’s management has a very trustworthy
background and includes a CPA.
That’s very helpful.”
Her qualification was put to the test as
the global financial crisis developed during
2008.
A PLUS
Jane Wong
“What I had to bear in mind then was
how long I could keep the relationship with
[international partners] going,” she recalls.
“I did not know whether they would survive
and [potentially] there would be a supply
problem.”
While risky, Wong decided to keep her international
orders flowing in. “I considered
this as a very good opportunity to support
other countries [and] assist them to grow
their brands in Hong Kong.”
January 2013 29

Entrepreneur CPAs
Peter Nixon
Filling the gap
For Peter Nixon, “talking the talk” is imperative.
Two decades ago, when the Canadian
was an auditor at Coopers & Lybrand (now
PricewaterhouseCoopers), he realized the
need for professionals such as accountants
to become better at communication, especially
during negotiations.
He turned down a partnership offer to
launch his own consultancy, Potential Dialogue,
which offers facilitation, negotiation
and business development services. “Financial
stability aside, I realized I was an entrepreneur
at heart,” he says.
30 January 2013
Nixon’s entrepreneurship has taken him
to more than 50 countries – but he credits
Hong Kong with giving him his global appeal.
“My clients in Hong Kong have taken
me to those countries,” he says. “There are so
many entrepreneurs here.”
Potential Dialogue’s niche is offering
face-to-face negotiating skills in an increasingly
digital age. Heavy reliance on communicating
digitally is causing a “dialogue gap,”
Nixon says. “This is diminishing the skills
of being able to converse at key times,” he
explains. “Problem solving, strategy, talent
PHOTO: SUNNY YU
“When you look
through the front
windshield, as an
entrepreneur, you
think you’re just
going to crash. But
when I look in the
rear view mirror
I think of all the
places I’ve gone,
all the things I’ve
done and all the
accomplishments.”
management and entrepreneurship all need
dialogue.”
He cites the essential skills he developed
as a CPA as what his clients look out for. “Our
ability to understand the numbers allows us
to have a full picture of the issues,” he says.
“If we can understand the strategic and human
capital side of the issues as well as the
financial, we’re way ahead.”
Accountants, he adds, are very capable
of running a business, as the hardest part is
the financial and bookkeeping side. “In the
early days I did it all myself; then I started to
outsource,” he says. “I know exactly what the
numbers are before they type them up and
give them to me.”
The best part of being his own boss, Nixon
says, are the things he never would have
achieved at a 9-to-5 job. “When you look
through the front windshield, as an entrepreneur,
you think you’re just going to crash. But
when I look in the rear view mirror I think
of all the places I’ve gone, all the things I’ve
done and all the accomplishments.”

Success ingredient
Aaron Au,
Chief financial officer, UCCAL
32 January 2013

Constant adaptation
in fashion-conscious
China is the latest
challenge for Aaron
Au, as Emily Ford in
Shanghai reports
Photography by Daniele Mattioli
Building
brands
No one could convince Aaron Au
that there is no glamour in being
an accountant. The chief financial
officer of UCCAL, the fashion brand distributor,
sees in his profession stories worthy of
fiction.
He has just returned from a creative writing
class and confesses that he nurtures a desire
to one day write literary thrillers, set in
the world of international accounting. “Better
to call it storytelling than an interview,”
he says with a smile.
Au talks rapidly, switching from English
to Cantonese to Mandarin with seamless fluency
whenever his phone rings, as it does,
frequently.
The Hong Kong Institute of CPAs member
has been in Shanghai since 2008, the latest
stop in a whirlwind career that has spanned
Asia and taken in markets from fast cars to
property to fashion.
A veteran Mainland businessman, Au
was in Beijing running the China property
division of the Lei Shing Hong conglomerate
in 2008 when a friend came with a
challenge. “He said: ‘I’m joining a company
called UCCAL as the chief executive and I
January 2013 33

Success ingredient
34 January 2013

want a chief financial officer’,” Au recalls.
Intrigued, Au researched the company,
which has a portfolio spanning brands as
diverse as sportswear giant Nike and Italian
luxury label Roberto Cavalli, then flew to
Shanghai for talks. Au took the job and now
helps the company distribute some of the
world’s most popular fashion brands across
the Mainland.
Success requires mastering different
channels: department stores, discount outlets,
franchises, wholesale, online. “It is very
mathematical,” he explains. “You have to
understand your products, your channels,
your cash flow before you can make a decision
on where to put what. That’s the complication
of retailing,” he adds.
The biggest challenge, he says, is cash
flow. UCCAL buys inventory from fashion
brands, then sells it at its own discretion.
As CFO, Au is also heavily involved in strategy,
helping to decide when to “harvest” a
brand – to sell it at the right time.
Fashion is by nature a fickle beast, but the
speed at which consumer behaviour changes
in China means that UCCAL must constantly
adapt its brands – and sell off those that it believes
have reached their peak, Au says.
Nike, which he describes as his personal
favourite in the portfolio because he “loves
sport” – at the time of the interview he was
training to run a half marathon in Shanghai
in December – has moved to reposition
itself from being pure sportswear to more of
a lifestyle brand in China. However, he believes
that the future lies in luxury.
“When I first came to China in the 1980s
and 1990s, people would wear low-value
Well-worn path
China’s retail clothing market is now the world’s second largest–
at US$110 billion in 2011, it ranks behind only the United States
(US$232 billion) and recently surpassed that of Japan (US$100
billion), according to data from McKinsey & Co, the consulting
company, and PricewaterhouseCoopers.
China is also the most attractive emerging market for
apparel retailers, says a recent study by A.T. Kearney, another
consulting company. The market has grown at a rapid pace – at
a compound annual growth rate of more than 20 percent in the
past five years – and this is expected to continue for the next five
years, the study concluded.
Foreign apparel brands are aggressively entering the market.
As well as Roberto Cavalli’s deal with UCCAL in 2011 that will see
85 of the Italian luxury clothes-maker’s shops in the Mainland by
2016, American clothing retailer Gap opened stores in Beijing and
Shanghai in late 2010, PVH Apparel Group entered China in 2011
with its Izod brand, while Italian retailer RDM plans to set up five
formal shirts and suits. Five years ago people
started to dress more casually, in brands like
Nike and Giordano. In the coming years, we
are looking at luxury because there will be
more and more millionaires,” he says.
UCCAL has had particular success with
Italian designers such as Isaia and Amedeo
Testoni. “We have lots of Italian brands.
They all buy the concept, they all buy our
strategy,” he says.
As Chinese consumers travel more, a lot
of luxury consumption has been “lost” to foreign
markets, where duties on goods are substantially
lower. But Au sees a bright future
for retail in China with wealth continuing to
grow rapidly.
The government’s well-publicized policy
to boost domestic consumption to relieve dependence
on manufacturing will also help,
he adds. “What is local consumption? Retailing.
If you have more money in your pocket
then you can consume more,” he says.
In a coup for 13-year-old UCCAL, Au has
just brokered a deal to sell the company to a
privately owned Hong Kong blue chip. Some
might see it as an opportunity for an exit,
but he is determined to stay and build the
company.
Au says he relishes a challenge. “If you
look at my whole career, you can see that I
don’t have a comfort zone. If I get too comfortable,
I like to do something else,” he says.
Taking the driver’s seat
That attitude might have developed in contrast
to Au’s father. The young Au grew up in
Hong Kong as the son of a man who fled China
during the tumultuous years of civil war.
A PLUS
After the upheaval, his father became a
headmaster in a primary school and urged
his son to follow a secure career path, preferably
in public service. “The war destroyed
everything,” Au says. “My father didn’t have
the aggressiveness to go for his own career.
He just wanted a quiet life. He would say, ‘Go
to work for the government, be a civil servant’,”
he recalls.
Ambitious, commercially minded Au had
other ideas. As a child he attended Chinese
schools, where he learned Mandarin and
English and discovered he had a talent for
numbers. By 16, he had decided to become
an accountant. “I was thinking, how can I put
languages and maths together? Then I found
out there was something called accounting,”
he says.
He went on to study accounting at Hong
Kong Shue Yan College (now a university),
graduating four years later. In 1984, he began
his first job at Li, Tang, Chen & Co., a
family-owned audit firm in the city, where
he worked on the books of property developers,
retailers and manufacturers.
“As a learning base I think auditing was
good, but as a career it’s not my type of
work,” he says. “I wanted to add more value
to a business.”
Looking for his next move, Au received
two offers. The first was from the audit department
of the Hong Kong government – an
offer which, of course, thrilled his dad. The
second was as an accountant at Sime Darby,
a Malaysian conglomerate.
Au asked the government recruiters how
long he could expect to wait before being
promoted. “They said seven years. I said,
retail outlets in China this year.
While UCCAL and its competitors are seeing sales boom in the
branded stores they manage, other retailing models are emerging.
"Retail formats in China are diversifying beyond traditional
department stores,” says Hana Ben-Shabat, a partner with A.T.
Kearney in New York, who says Chinese consumers are beginning
to shop at hypermarkets, outlet stores, discount stores and online.
Meanwhile, Japan’s Uniqlo has more than 100 stores in the
Mainland, while Swedish retailer H&M has 89 stores in 36 cities
and Spain’s Zara has 66 stores in 31 cities. This reflects a desire by
retailers to expand in China beyond major metropolises such as
Beijing and Shanghai into second and third-tier cities. “The arrival
of such mass-market brands is particularly significant,” says Tom
Miller, a Beijing-based analyst with GK Dragonomics, a financial
research company. “It is recognition that millions of urban
residents in China’s less fashionable cities are becoming a viable
consumer market.”
January 2013 35

Success ingredient
‘Forget it.’ So I picked Sime Darby,” he says.
He joined the Malaysian group as an accountant
in Hong Kong, working across its
car dealerships business selling BMWs, Mitsubishis
and Fords. He rose quickly through
the ranks, becoming the group’s youngest
chief accountant at the age of 30.
It was a pivotal time for the company. After
years of political tension, relations had
thawed between Malaysia and China. The
bright young Hong Kong accountant with
the impressive language skills was handpicked
to be the group’s first China mergers
and acquisitions manager, with a mandate
to hunt out business opportunities on the
Mainland.
Au began travelling to China, brokering
deals to establish car dealerships there. “It
was very, very exciting. I can still remember
my first trip to Shenzhen – we started the
market there. Everything was so different at
that time. It was like Hong Kong in the 1960s.
36 January 2013
You couldn’t see tall buildings or cars.”
Au decided he needed to formalize his
skills and began studying for a master of
business administration degree at Hong
Kong University of Science and Technology.
“I was doing a lot of M&A work... I needed
more skills: commercial thinking, analytical
skills, logic, other disciplines such as marketing,
operations, logistics, IT.”
While he was studying, Sime Darby asked
him to move to Guangzhou to be the manager
of a joint venture with Mitsubishi. It
was a tough time, he recalls, straddling the
cultural differences with a Japanese partner
and managing the difficulties of the emerging
Mainland market.
Personal life began to intervene. Au
found it heartbreaking to leave his wife and
three young children behind in Hong Kong.
After two years he returned to his hometown,
first as the general manager of Sime
Darby’s Suzuki business, then starting Nis-
san dealerships on the Mainland.
After a few years the business landscape
shifted. China had joined the World Trade
Organization and was trying to boost its local
enterprises before the country’s entry on
to the international stage in 2005. Foreign
retailers such as Sime Darby suddenly found
themselves locked out.
Seeking a change, and with the lure of
unknown climes calling again, he joined
Lei Shing Hong, a rival conglomerate, as its
Indochina manager based in Vietnam. Au
was able to apply what he had learned from
China to the emerging Vietnamese market.
“Culturally they are both very Chinese, very
Confucian,” he says.
Au received a personal letter of appreciation
from George W. Bush for helping
to organize the then United States President’s
visit to Vietnam in 2006, a moment
which Au describes as the “high point” of
his career.

While Au did not follow his father’s career
path, one of his own sons followed his,
and is studying accounting at the University
of New South Wales. Au is pleased with his
son’s decision. “Having the CPA qualification
still helps me very much. It is a financedriven
world now,” he says.
For now, any dream of writing novels
must wait as the reality of the day job keeps
him far too busy, Au says. But he believes
there is a serious commercial niche for potboilers
that can bring to the accounting
world the kind of literary intrigue that John
Grisham, author of legal thrillers such as A
Time To Kill and The Firm, attached to the
law profession.
At the very least, it will be a chance to put
his life stories down on paper. “Biography is
lazy work – you just put your whole life in a
book,” he says. “If you are creative, you can
develop it into a longer, more interesting
story. That is for my retirement life.”
January 2013 37

The year ahead
KEEPING US
AWAKE IN
2013
A Plus asks Institute
members and other
professionals to identify
the big issues that will
dominate accounting,
business and the
economy in Hong Kong,
China and around the
world this year
Illustrations by Alan Ho
38 January 2013

hina’s economy avoided a major slowdown last
year, and the country’s new leader, Xi Jinping,
said last month that the economic goals for this
year would be to achieve sustainable development
and social stability.
“Such priorities bode well for consumption
and for a move to a more sustainable growth
driven by the services sector and domestic demand,”
says Dariusz Kowalczyk, senior economist
at Crédit Agricole Corporate and Investment Bank in
Hong Kong.
However, other analysts doubt such a rebalancing of
China’s economy is practicable in the near term. “There has
been a recalibration of China’s prospects,” says Ken DeWoskin,
the head of the China Research and Insight Centre, a Beijing
economic think tank, and a senior adviser to Deloitte. “You can’t
count on consumption as a major driver of growth anytime soon,”
says DeWoskin.
Economists cite a number of reasons why the Chinese population
is unlikely to spend more, including a historically high savings
rate, elevated levels of inflation, recent economic volatility
and persistently low consumer confidence. The recent government
leadership change is also likely to inspire caution among
consumers.
Some economists are even more bearish on the Mainland’s
prospects, given the slowing growth and reduced demand
for exports. “We think the best days are over for the
China growth story,” says John O’Connell, global head of
research at Macquarie Bank in Sydney.
O’Connell fears that China is approaching a middleincome
trap, referring to the economic stagnation that
can occur – as happened to Brazil and South Africa –
when countries reach a middle level of income and
are unable to compete with either advanced
economies in high-skill innovations or with
low-income economies in cheap production.
“The shift to consumption
needs to be managed carefully
to avoid the middle-income
trap,” he adds.
Part of China’s
problem lies
January 2013 39

The year ahead
“ Mexico will gain at
China’s expense
as it becomes
the destination
of choice for
manufacturing
fixed-asset
investment.”
off its own shores, analysts say. Among
its significant developed export markets,
the euro zone remains in a slump and the
United States continues to struggle. Among
key emerging markets, former high-flying
economies such as Brazil and India have
posted sluggish growth.
Besides, O’Connell notes that China has
a blunter competitive advantage than it
used to when it comes to manufacturing.
“Given China is already seeing strong wage
growth, and is likely to face labour shortages,
we believe companies will look to locate
new plants elsewhere.”
China’s manufacturing costs have risen
relative to those of Mexico, which has a
large and growing pool of workers, close
proximity to U.S. export demand and exten-
40 January 2013
sive trade agreements. “Mexico will gain at
China’s expense as it becomes the destination
of choice for manufacturing fixed-asset
investment,” says O’Connell.
Accounting
For accountants, 2013 may be a year of reflection.
Hans Hoogervorst, chairman of
the International Accounting Standards
Board, said last month that stakeholders
want a period of relative calm for a few
years, to “let the dust settle” and allow everyone
to get used to rules made effective
over the past couple of years.
In Hong Kong, 2013 kicked off with three
inter-connected standards: HKFRS 10 Consolidated
Financial Statements, HKFRS 11
Joint Arrangements and HKFRS 12 Disclo-
sure of Interests in Other Entities.
“Accountants will be making sure this
consolidation package is given proper attention,”
says Catherine Morley, head of the
technical department at KPMG and deputy
chairman of the Institute’s financial reporting
standards committee, on the three new
standards.
“It’s a new mind set,” Morley adds, describing
the new standards as cause for
careful thought by executives as well as
auditors. “Whether you’re the auditor or
the CFO, think about the entities you’re involved
with – for example, you might call
them associates but you need to have a de
facto control discussion,” she advises.
“Similarly, you’re quite happy with the
phrase ‘joint venture’ but IFRS 11 makes a

distinction between joint operations and
joint ventures and if it has an impact, it
could be quite pervasive across the balance
sheet,” she adds.
“We may see a new revenue standard before
the end of 2013, although it will have
a long effective date,” says Morley, referring
to IAS 18. “And we might have another exposure
draft of the leasing standard to think
about,” referring to IAS 17.
She adds that auditors and company
secretaries need to start thinking about the
new Companies Ordinance, provisions of
which will come into force in 2014. “This
year is a year of preparation,” she says.
In the U.S., CPAs see an uncertain time
for the profession. “I hope the Securities and
Exchange Commission will provide some
“ Whether you’re the
auditor or the CFO,
think about the entities
you’re involved with – for
example, you might call
them associates but you
need to have a de facto
control discussion.”
clarity on incorporation of International Financial
Reporting Standards in 2013,” says
Barry Melancon, president and CEO of the
American Institute of CPAs. He also expects
the Public Company Accounting Oversight
Board to complete its review of mandatory
audit firm rotation this year.
Capital markets
Funds raised through initial public offerings
in Hong Kong should reach HK$125
billion in 2013 after hitting a four-year low
in 2012, according to KPMG forecasts. This,
however, may depend on whether China’s
economic slowdown has bottomed.
“We expect a better outlook in 2013,” says
Ringo Choi, Asia-Pacific IPO leader at Ernst
& Young and an Institute member. “Many
new supportive policies will start to take
effect,” he adds, referring to selective monetary
easing and measures to boost capital
markets activity from Mainland companies.
For example, E&Y expects to see more
H-share IPO offerings in Hong Kong following
the introduction of policies that allow
small- and medium-sized privately owned
enterprises from the Mainland to list in Hong
Kong. “IPO activities in the latter half of 2013
are set to improve, suggesting that it could be
the right time for companies currently in the
pipeline to list this year,” says Choi.
KPMG agrees that Mainland privatesector
enterprises will be a key driver of
Hong Kong IPOs, some of which have been
waiting for the market to recover. “We
expect that while market volatility will
January 2013 41

The year ahead
persist, there exists a backlog of deals to be
launched as market sentiment improves,”
says Paul Lau, a China partner with the firm
and an Institute member.
China’s domestic IPO market also stalled
in 2012, and that undermined sentiment for
IPOs of Mainland companies in Hong Kong.
More than 800 applicants on the China Securities
Regulatory Commission list are
projected to raise about 500 billion yuan,
compared to total funds of 103 billion yuan
raised by A-share IPOs in 2012, according to
Patrick Law, an assurance partner at E&Y.
A revival in China’s domestic market could
boost success rates for new overseas listings
in 2013.
Not everyone is convinced, however,
that the domestic market is ready for a large
recovery. Domestically listed A-shares remain
in a bear market – they now trade
more cheaply on average than their H-share
counterparts in Hong Kong.
China’s stock markets will remain problematic,
according to UBS chief economist
Wang Tao. “Issues include problems in the
IPO process, insufficient transparency in
company disclosures, inadequate investor
protection and insider trading,” she says.
“The government often sees the stock market
more as a source of financing for the
economy than as a way to improve capital
allocation.”
Mergers and acquisitions
The value of global mergers and acquisitions
deals in 2012 was barely half the
amount made five years ago at the beginning
of the global financial crisis, accord-
42 January 2013
ing to Ernst & Young. M&A value totalled
US$2.25 trillion last year, against US$4.3
trillion in 2007, E&Y data says.
However, Chinese acquirers are increasing
their activity. Chinese investors made
direct investments in 2,163 overseas enterprises
in 116 territories in the first half of
2012, according to Mergermarket, a London-based
data provider. Total non-financial
direct investment overseas amounted
to US$35.42 billion in 2012, a year-on-year
rise of 48.2 percent. This momentum is
expected to continue, partly fuelled by a
stronger yuan, especially against the euro.
“In the eyes of some Chinese investors,
the ongoing euro zone uncertainties improve
their chances of striking good deals
with debt-ridden European companies,”
notes Allan Zhang, a director at PricewaterhouseCoopers
who advises on outbound
China deals.
The U.S. is also becoming a favoured
destination for Chinese investors. “It is a
good market,” says Anthony Root, who
heads the Asia corporate practice of
law firm Milbank, Tweed, Hadley
& McCloy in Hong Kong.
Root says that as recently
as two years ago, Chinese investment
in the U.S. was focused
on natural resources.
“Since then it has evolved
beyond natural resources
into infrastructure, branded
consumer products, aircraft
parts and automotive
parts,” he adds.
Despite increased regu-
“ The government
often sees the
stock market more
as a source of
financing for the
economy than as
a way to improve
capital allocation.”

latory scrutiny from Washington, Chinese
companies remain committed to expanding
their investment in the U.S. market, which
is generally viewed as a bargain, with
many assets having deflated in value in the
past few years because of poor economic
growth.
Private equity
Venture capital and private equity deals
should reach record levels in terms of the
number of deals and their overall value,
an upbeat PwC forecasts. According to a
report released last month, China-focused
venture capital and private equity companies
raised US$35.8 billion in the first three
quarters of last year, close to the amount for
the same period in 2011.
“We believe that 2013 will be a record
year for the market in China, and its development
in the mid-term will be strong,” says
Vincent Cheuk, leader of the north China
private equity group at PwC and an Institute
member.
Cheuk forecasts that deal activity will
strengthen from the second quarter of this
year, as “global economic conditions become
more settled, pricing expectations
adjust, IPO markets re-open and the leadership
transition takes effect.”
Taxation
In China, indirect tax reform will continue,
with more provinces joining the pilot valueadded
reform scheme following the issuance
of Circulars Caishui [2011] Nos. 110
and 111 by the Ministry of Finance and State
Administration of Taxation.
The scope of services being covered under
the pilot scheme is likely to be expanded
to real estate and construction, entertainment,
post and telecommunications and financial
services.
Beijing is also likely to close foreigninvestment
tax loopholes. “We expect to
see more rigorous enforcement of anti-tax
avoidance provisions against foreign investors
[such as Circular Guoshuihan [2009]
No. 698, on indirect disposal of China investments,
and Circular Guoshuihan [2009] No.
601], on beneficial ownership for the claiming
of tax treaty benefits,” notes Ayesha Lau,
a partner at KPMG and an Institute member.
Back in Hong Kong, legislation is expected
to amend the Inland Revenue Ordinance
and the Stamp Duty Ordinance to provide
a taxation framework for Islamic bonds,
known as sukuk, to put it on par with that
for conventional bonds.
Hong Kong is negotiating tax agreements
with several countries. This year, doubletaxation
avoidance agreements with South
Korea, Finland, India, Italy and South Africa
are expected.
Another possible change would allow
Hong Kong to enter into standalone tax information
exchange agreements, Lau forecasts.
Such agreements allow territories
that have signed them to share information
about taxpayers and transactions unhindered
by bank secrecy or other confidentiality
laws. Hong Kong’s present legislation
does not allow for standalone tax information
exchange agreements to be established
with jurisdictions that do not also have a
double-taxation avoidance agreement.
“ We believe that
2013 will be a
record year for the
[private equity]
market in China,
and its development
in the mid-term will
be strong.”
January 2013 43

Mainland accounting
Impact of new HKFRSs on
joint arrangements in China
Lee Yin-toa and Laurence Carabin explain how recently effective
standards affect the disclosure of relationships between entities
The Hong Kong Institute of CPAs
issued three new standards
during 2012: HKFRS 10
Consolidated Financial
Statements, HKFRS 11 Joint Arrangements
and HKFRS 12 Disclosures of Interests in
Other Entities. These standards aim to
increase the consistency, transparency and
comparability of accounting and disclosures
of relationships between entities.
They also intend to better reflect the
economic substance of these arrangements.
Thus the assessment of accounting is
required to extend beyond the legal
structure and well into the nature of rights
and obligations under the arrangements.
This article specifically focuses on
HKFRS 11, which replaces HKAS 31 Interests
in Joint Ventures and SIC 13 Jointly Controlled
Entities – Non-Monetary Contributions by
Venturers.
One of the significant differences
between HKFRS 11 and HKAS 31 lies in the
question of what drives accounting for
arrangements between two or more parties.
In HKAS 31, the legal form of the entity
through which arrangements were structured
was the sole driver of accounting.
On the other hand, in HKFRS 11, accounting
is driven by the core principles
that parties should recognize their rights
and obligations, using either proportionate
consolidation (gross accounting of rights to
assets and obligations for liabilities) or the
equity method (accounting for net assets
arising from arrangements).
As a consequence, HKFRS 11 eliminates
the accounting policy choice when account-
44 January 2013
ing for investments in structures defined as
joint ventures.
In this article, we first identify the entities
most likely to be affected, especially those
doing business via joint ventures in China; explain
the main modifications in identification,
classification and measurement; and analyse
both the financial and business implications.
Businesses affected
Entities most likely to be affected by changes
include those that operate in construction,
real estate, oil and gas or mining industries
that commonly participate in joint arrangements.
In addition, many companies doing
business in China will be affected, whatever
the sector. China is the country with the second
largest number of joint venture transactions
(after the United States), given the high
level of foreign direct investments.
Because Beijing requires Chinese
company participation or control in
some sectors, especially regulated and
defensive industries such as automotive,
energy, financial services, pharmaceutical
and telecommunications, most foreign
companies set up a joint venture structure.
Even when they are not required, joint
ventures are considered when a Chinese
partner has certain strengths, such as
central or local government support, brand
reputation, land, licences, distribution and
access to suppliers, which reduce start-up
costs and improve the foreign investor’s
chances of success.
The popularity and attractiveness of joint
transactions in China makes HKFRS 11 a
bigger challenge in this part of the world.
Definition
A “joint arrangement” is defined in HKFRS 11
as a contractual arrangement in which two
or more parties have joint control. The scope
of HKFRS 11 remains the same despite the
change in the standard’s terminology from
“joint ventures” to “joint arrangements” that
might suggest otherwise. The term “joint
venture” is commonly used in practice;
however, HKFRS 11 narrowly defines it as just
one of two types of joint arrangements.
Identification
The initial step is for entities to determine if
an arrangement is within or outside the scope
of HKFRS 11. The question is whether there
is joint control, which HKFRS 11 defines as
“the contractually agreed sharing of control
of an arrangement which exists only when
decisions about the relevant activities require
the unanimous consent of the parties sharing
control.” Given this definition, management
will need to carefully assess the three key
aspects of joint control: (1) contractually
agreed, (2) control and relevant activities and
(3) unanimous consent.
For instance, it is the norm that
contractual agreements are written, but not
always. Sometimes, only general principles
are agreed on but not specific terms that
could help in assessing whether there is
joint control. This is especially common in
China, where the legal framework is not as
well established as international standards.
There are also the complications rising from
related party transactions with government
entities that are implicit rather than explicit
in contractual agreements.

Furthermore, it is not always clear at
what level to assess a joint arrangement to
determine if joint control exists, for instance
in the case of a master agreement – a single
contract with terms and conditions for
numerous entities and activities. In order to
assess whether a party has control, entities
should familiarize themselves with the new
rules in HKFRS 10.
Meanwhile, unanimous consent exists
when the parties have collective control over
the arrangement and no single party has
control. In fact, contractual arrangements
may not always be explicit to sufficiently
demonstrate existence of unanimous consent.
No matter what terminology is used to
describe the arrangement, only if all three
requirements for joint control are present
would the arrangement be considered a joint
arrangement. Otherwise, the arrangement
falls outside the scope of HKFRS 11.
Classification
Once a joint arrangement is considered
as present and identified, we can look at
its classification: either as a joint venture
or a joint operation. Unlike in HKAS 31,
structure or legal form is not the sole factor
in determining classification. HKFRS 11
focuses also on the nature and substance
of rights and obligations arising from the
arrangement.
If a joint arrangement is not structured
through a separate vehicle, it is a joint
operation. If it is so structured, the entity
should further assess whether the legal
form of the separate vehicle, terms of the
contractual arrangements and/or other
facts and circumstances (commitments,
restrictions, finance, guarantees and
responsibilities) extend to the parties’ rights
to the assets and obligations for liabilities of
the arrangement. Should this be the case,
the arrangement also qualifies as a joint
operation; otherwise, such an arrangement
may be considered a joint venture.
Measurement
The classification will lead to a different
treatment in the financial statements. A
joint operator will recognize its share of
assets, liabilities, revenues and expenses.
On the contrary, joint venturers will use the
equity method, as the Institute removed
the option of proportionate consolidation.
Joint venturers would then have to change
their accounting, depending on their
arrangements.
Business impact
Many jointly controlled entities expect to
be classified as joint ventures, even more
so when doing business in the Mainland.
Indeed, most Chinese joint ventures are currently
established as “equity joint ventures”
with a separate legal person under PRC law,
and profit, control, and risk are divided in
proportion to the equity shares invested by
the parties. HKFRS 11, combined with the
intention to keep proportionate consolida-
A PLUS
tion, could lead to the conclusion of “contractual
joint ventures” which are also called
cooperative agreements. In this case, profit,
control, and risks are divided according to
negotiated contract terms.
Financial impact
In case HKFRS 11 leads to a shift from
proportionate consolidation to the equity
method, management should consider how
key financial metrics would be impacted. As
a consequence, the investment in the joint
venture will be captured in a single line item
in the financial statement position.
Total assets and liabilities will decrease
to the extent of the entity’s previously
recognized share in the individual assets and
liabilities of the joint venture. The removal
of the entities’ proportionate share of debt
could cause the financial leverage ratio to be
smaller, including gearing.
Concerning the profit or loss, there will
be no change in net income. However, total
revenue and total expenses will decrease,
which could affect the total asset turnover
ratio, depending on the absolute and relative
changes of revenue and assets.
Conclusion
Entities should exercise an appropriate
level of care in accounting for their rights
and obligations under HKFRS 11. This new
standard has removed some “bright lines”
and led to the exercise of considerable
judgment. Accountants are therefore not
able to make conclusions alone and should
invite input from operations and legal
counsel as well as close involvement by
management.
Management should also consider the
requirements of HKFRS 11 when negotiating
new contracts or modifying existing
arrangements. In certain cases, audit committees
and independent auditors need to
discuss material areas and document key
discussions.
Contractual arrangements should be
analysed thoroughly, and accountants
should develop robust accounting policies
and modify performance metrics and debt
covenants. It should be noted that 1 January
is the mandatory adoption date for calendar
year-end companies.
Lee Yin-toa is a partner and Laurence Carabin is a
senior consultant, financial services, Asia Pacific financial
accounting advisory services, at Ernst & Young in Hong Kong.
January 2013 45

122
TechWatch
The latest standards and
technical developments
Financial reporting
IVSC exposure draft of The Valuation of
Forests
The Institute has issued an invitation to
comment on the IVSC’s exposure draft of
The Valuation of Forests, with comments
requested by 11 January.
The exposure draft deals with valuation
guidance for commercial forests. The IVSC
notes that there has been increasing interest
in forestry as an investment class, not
only because of the enduring demand for
timber but also because it meets the ethical
and sustainability criteria of many investors.
Governments have also been keen to
ensure investment in forests and many have
encouraged this through tax incentives.
However, unlike other asset classes
that have long been traded across borders
until comparatively recently, most forestry
investment was localized. This has led to a
wide variation in valuation practices being
developed in different countries and sectors.
Some financial regulators have also
expressed concerns about the lack of recognized
standards for valuation in the sector
and the risk this represents to investors.
Another consideration indicating the
need for international valuation guidance
has been the adoption of IFRS around the
world. An increasing number of entities
involved in forestry are required to account
for their interest under IAS 41 Agriculture,
which requires the fair value of biological
assets, represented by the tree crop, to be
estimated. Because the trees cannot exist
without the land on which they are growing,
this can create some conceptual difficulties
in allocating the value of the complete forest
to its different components.
IVSC exposure draft of Valuation
Uncertainty
The Institute has issued an invitation to comment
on the IVSC’s exposure draft of Valua-
46 January 2013
tion Uncertainty, with comments requested
by 11 January.
The proposed guidance looks at how
valuation uncertainty can be identified,
explained and disclosed in a way that is
informative to those relying on valuations.
The guidance has been produced in answer
to calls from the G-20 group of economies
and financial regulators around the world
for improved standards of transparency and
disclosure of valuation uncertainty factors.
This is in recognition that too many institutions
were placing wholly inappropriate confidence
in valuations in the period leading
up to the start of the global financial crisis in
2008, and that the sudden evaporation of
that confidence was a major contributor to
the subsequent crash.
The exposure draft makes a clear distinction
between market risk, which is both
generally understood and acknowledged by
investors and reflected in the pricing, and
uncertainty caused by disruption or dislocation
in the marketplace. It also gives guidance
to valuation providers on the principles
that should be observed in measuring and
disclosing uncertainty.
IASB exposure draft of Annual Improvements
to IFRSs 2011-2013 Cycle
The Institute has also issued an invitation
to comment on the IASB exposure draft of
Annual Improvements to IFRSs 2011-2013
Cycle, with comments requested by
16 January.
The proposed amendments reflect issues
discussed by the IASB in the project cycle that
began in 2011. These amendments meet the
criteria for the annual improvements process
set out in the Due Process Handbook for the
IASB. The criteria help in deciding whether
matters relating to the clarification or correction
of IFRSs should be addressed using the
annual improvements process.
The proposed effective date for the
amendments is for annual periods beginning
on or after 1 January 2014, although entities
would be permitted to adopt them earlier.
The topics addressed by these proposed
amendments are as follows:
• IFRS 1 First-time Adoption of International
Financial Reporting Standards (Meaning
of “effective IFRSs”)
• IFRS 3 Business Combinations (Scope
exceptions for joint ventures)
• IFRS 13 Fair Value Measurement (Scope
of paragraph 52 portfolio exception)
• IAS 40 Investment Property (Clarifying
the inter-relationship of IFRS 3 and
IAS 40 when classifying property as
investment property or owner-occupied
property)
Institute comments on exposure draft of
Put Options Written on Non-Controlling
Interests
The Institute made a submission to the IFRS
Interpretations Committee on its exposure
draft of Put Options Written on Non-Controlling
Interests. The interpretations committee
proposed that all changes in the measurement
of a put option written on non-controlling
interests should be recognized in profit
or loss in accordance with IAS 39 Financial
Instruments: Recognition and Measurement
and IFRS 9 Financial Instruments.
The Institute agreed that diversity in practice
existed in accounting for the subsequent
measurement of the financial liability that
was recognized in a parent entity’s consolidated
financial statements. However, the
Institute was concerned with the narrow
focus of this project which did not address
the broad range of issues arising from the
accounting for derivatives written over noncontrolling
interests.
In addition, the Institute was concerned
that the proposal may not reflect the commercial
substance of some non-controlling
interests put transactions and that the
proposed accounting may result in counter
intuitive outcomes.

The Institute had significant concerns
regarding the IASB’s proposed approach
in dealing with non-controlling interests
puts and in the proposed scope of
the draft interpretation. The Institute
encouraged the IASB to reconsider its
previous decision not to proceed with
the limited amendment to the scope of
IAS 32 Financial Instruments: Presentation
as proposed by the IFRS Interpretations
Committee in September 2011;
or, as an alternative, for the IFRIC to
consider whether the basis for the conclusion
reached in IFRIC 17 Distributions of Non-cash
Assets to Owners concerning the re-measurement
of a dividend is equally valid by analogy
for the re-measurement of a non-controlling
interests put.
Rather than proceeding with an interpretation,
the Institute believed the IASB should
address the accounting for non-controlling interests
puts on a more comprehensive basis
and urged the IASB to consider the broader
issues in the Financial Instruments with the
Characteristics of Equity project, which the
IASB had expressed support to be added
to its research programme with the aim of
developing more principles-based guidance.
Audit and assurance
Invitation to comment on exposure
draft of PN 750
The Institute has issued an invitation to comment
on exposure draft Practice Note 750
Review of Financial Information under the
Hong Kong Listing Rules for a Very Substantial
Disposal with comments requested by
23 January.
The purpose of the practice note is to
provide guidance to practitioners as to their
responsibilities when they are engaged to
review the financial information included
in a circular issued in relation to a very
substantial disposal under the Rules Governing
the Listing of Securities on The Stock
Exchange of Hong Kong Limited Chapter
14.68(2)(a)(i) or the Rules Governing the
Listing of Securities on the Growth Enterprise
Market of The Stock Exchange of Hong
Kong Limited Chapter 19.68(2)(a)(i) and on
the form and content of the report.
The practice note addresses the significant
issues that may be encountered by practitioners
when undertaking such an engagement
and summarizes the principal matters
which should be taken into consideration by
the practitioners. Once finalized and issued,
the note should help to ensure consistency
in the scope of work done by auditors when
reporting on a very substantial disposal.
Ethics
Institute comments on IESBA exposure
draft on governance
The Institute made a submission to the
IESBA exposure draft Proposed Change to
the Definition of “Those Charged with Governance”
and was supportive of the changes
proposed by the board to more closely
align the definition of “those charged with
governance” in the board’s Code of Ethics
for Professional Accountants with that in ISA
260 Communication with Those Charged
with Governance.
The Institute agreed with the IESBA’s
analysis that the communications required
under the code should be to the same group
of people as the communications to “those
charged with governance” under ISA 260.
The Institute also agreed with the IESBA’s
proposed changes to incorporate within the
code the requirements on the determination
by an auditor with whom within the entity’s
governance structure the auditor should
communicate.
In addition, the Institute recommended
the IESBA to consider providing practitioners
with non-authoritative guidance to assist
in their implementation of the proposed
changes to the code.
Professional accountants
in business
Proposed international guidance on
Project and Investment Appraisal for
Sustainable Value Creation
The IFAC Professional Accountants in Business
Committee has released an exposure
draft of a proposed additional international
good practice guidance, Project and
Investment Appraisal for Sustainable Value
Creation. This exposure draft provides
A PLUS
principles-based guidance to help the
accountancy profession facilitate sustainable
organizations, financial markets, and
economies by taking into account economic,
environmental and social considerations for
project appraisal and investment decisions.
The deadline for comments is 28 February.
Corporate governance
Institute’s submission on board diversity
In September 2012, the Hong Kong stock
exchange published a consultation paper
on board diversity. In its submission, the
Institute, supported in principle the objective
of bringing diversity into boardrooms. The
direction to adopt a broad concept of diversity
was also welcomed. However, it was also
recommended that the exchange provide
more information and guidance for listed
companies to help them understand what this
means in terms of the practical application.
Taxation
Taxability of granting rights to exhibit
TV programmes outside Hong Kong
The Court of First Instance has published the
judgment in Turner Entertainment Networks
Asia for Muse Communication Co. v Commissioner
of Inland Revenue.
It was ruled that the sums derived from
granting rights from Muse Communication
Co. to Turner Entertainment Networks Asia
to exhibit certain television programmes in
Taiwan were taxable under section 15(1)(ba)
of the Inland Revenue Ordinance in the name
of Turner Entertainment Networks Asia.
The taxpayer had argued that the sums
did not represent the use of or right to use of
any copyright materials, as mentioned in the
relevant section, that the exhibition of the
television programmes should be governed
by section 15(1)(a) and therefore the sums
should not be taxable.
On the other hand, the technical costs
received by Muse Communication Co. from
Turner Entertainment Networks Asia were
ruled to be not taxable as they represented
services, rather than the use of copyright material
rendered by Muse Communication Co.
This case may be subject to further appeal.
Please refer to the full version of TechWatch 122,
available as a PDF on the Institute’s website:
www.hkicpa.org.hk
January 2013 47

Tech Q&A
In preparing financial statements for the year ending 31 December 2012,
what new or revised HKFRSs must I consider?
The Institute has issued the following
new and revised standards and
interpretations that are applicable
to December 2012 year-end and may have a
significant impact to preparers:
• Amendment to HKFRS 1 First-time Adoption
of HKFRSs – Severe Hyperinflation
and Removal of Fixed Dates for Firsttime
Adopters
• Amendments to HKFRS 7 Financial
Instruments: Disclosures – Transfers of
Financial Assets
• Amendments to HKAS 12 – Deferred Tax:
Recovery of Underlying Assets
Regarding the amendments to HKAS 12 –
Deferred Tax: Recovery of Underlying Assets,
in general the measurement of deferred tax
assets and liabilities under HKAS 12 is based
on the expected manner of recovery or
settlement of the underlying asset or liability.
The amendments to the standard provide
an exception to this measurement principle
with respect to investment property measured
using the fair value model in accordance
with HKAS 40 Investment Property.
Under the exception, the standard contains
a rebuttable presumption that the carrying
amount of the investment property will be
recovered entirely through sale.
This presumption is rebutted if the investment
property is depreciable and is held
within a business model where the objective
is to consume substantially all of the economic
benefits embodied in the investment
property over time, rather than through sale.
The rebuttable presumption contained
in the standard also applies when a deferred
tax liability or a deferred tax asset arises from
measuring investment property in a business
combination if the entity will use the fair
value model when subsequently doing so.
As a result of the amendments, HK(SIC)-21
Income Taxes — Recovery of Revalued Non-
48 January 2013
Depreciable Assets would no longer apply.
The amendments also incorporate into
HKAS 12 the remaining guidance previously
contained in HK(SIC)-21, which is accordingly
withdrawn.
In accordance with paragraph 30 of
HKAS 8 Accounting Policies, Changes
in Accounting Estimates and Errors,
when an entity has not applied a new or
revised HKFRS (including standard and
interpretation) that has been issued but is
not yet effective, the entity shall disclose
this fact. It shall also provide known or
reasonably estimable information relevant
to assessing the possible impact that
application of the new HKFRS will have
on the entity’s financial statements in the
period of initial application.
New or revised standards and interpretations
that have been issued by the Institute
as of 31 December 2012 but have yet to be
effective are listed as follows:
• Amendments to HKFRS 1 – Government
Loans
• Amendments to HKFRS 7 – Disclosures –
Offsetting Financial Assets and Financial
Liabilities
• HKFRS 9 Financial Instruments
• Amendments to HKFRS 9 and HKFRS 7 –
Mandatory Effective Date of HKFRS 9 and
Transition Disclosures
• HKFRS 10 Consolidated Financial
Statements
• HKFRS 11 Joint Arrangements
• HKFRS 12 Disclosure of Interests in Other
Entities
• Amendments to HKFRS 10, HKFRS 11
and HKFRS 12 – Consolidated Financial
Statements, Joint Arrangements and
Disclosure of Interests in Other Entities:
Transition Guidance
• Amendments to HKFRS 10, HKFRS 12 and
HKAS 27 (2011) – Investment Entities
• HKFRS 13 Fair Value Measurement
• Amendments to HKAS 1 (revised) Presentation
of Financial Statements – Presentation
of Items of Other Comprehensive
Income
• HKAS 19 (2011) Employee Benefits
• HKAS 27 (2011) Separate Financial
Statements
• HKAS 28 (2011) Investments in Associates
and Joint Ventures
• Amendments to HKAS 32 Financial
Instruments: Presentation – Offsetting
Financial Assets and Financial Liabilities
• HK(IFRIC) – Int 20 Stripping Costs in the
Production Phase of a Surface Mine
• Annual Improvements 2009-2011 Cycle
The Institute has compiled a list to summarize
those new and revised HKFRSs issued
that are applicable to December 2012 yearend
and after. It can be found on our website’s
technical resources section – the staff
summary of financial reporting standards.
Send your questions and comments to
commentletters@hkicpa.org.hk. The standard setting
team will answer these questions in accordance
with its policy, posted on the Institute’s website.

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metals, household goods and electronics.
Chan also has extensive experience in initial
public offerings, as well as mergers and
acquisitions in Hong Kong.
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Principal, assurance
Au has extensive experience
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assignments over a wide variety of industries,
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insurance and securities, and oil production.
She also specializes in transaction
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54 January 2013
Crowe Horwath (HK)
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Mau has more than 15 years
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specializes in initial public
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audits in the United States. He is responsible
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Events
Your guide to courses, workshops and member activities
Business finance
Analysing financial
statements will explore in detail
the typical fund management structure
and related taxation issues for
private equity activities in the region,
including Hong Kong, Singapore and
the Mainland.
CPD hours: 3.5
Language: English
Date: 19 January
Time: 9:30 a.m. – 1:00 p.m.
Financial accounting
and reporting
Corporate governance
code and associated listing
rules explains how the new code and
rules effective since April 2012 improve
corporate governance and lead to
increased public confidence and trust.
CPD hours: 1.5
Language: English
Date: 22 January
Time: 6:30 – 8:00 p.m.
Financial reporting update
on consolidation and joint
arrangement discusses the three new
Hong Kong Financial Reporting Standards
that came into effect on 1 January:
• HKFRS 10 Consolidated Financial
Statements
• HKFRS 11 Joint Arrangements
• HKFRS 12 Disclosure of Interests in Other
Entities
CPD hours: 3
Language: English
Date: 24 January
Time: 6:30 – 9:30 p.m.
Workshop on HKAS 36
Impairment of Assets will provide
an overview of this standard and explain
the process of impairment assessment
using practical case studies.
CPD hours: 4
Languages: Cantonese and English
Date: 26 January
Time: 9:00 a.m. – 1:00 p.m.
General management
skills
PAIB seminar on directors’
and officers’ responsibilities
and liabilities under the new
companies and securities laws
will highlight and discuss the requirements
under the new Companies Ordinance,
which is expected to commence in
2014, and the Securities and Futures
(Amendment) Ordinance 2012, effective on
1 January, in a straightforward way.
CPD hours: 1.5
Language: English
Date: 21 January
Time: 6:30 – 8:00 p.m.
Taxation
Common China tax problems
of SMEs and possible
solutions will discuss potential
answers for Mainland tax issues that
SMEs and auditors face, including
Mainland companies without sufficient
funds for operation and business via
representative offices in China.
CPD hours: 1.5
Language: English
Date: 16 January
Time: 6:30 – 8:00 p.m.
Hong Kong tax updates –
cross-border considerations will
review the 26 double-taxation agreements
Hong Kong has signed. It will discuss the
deduction of capital expenditure on plant
and machinery with reference to a recent
Board of Review case and an overseas tax
case. The speakers will highlight several
discussion items in the 2012 annual
meeting between the Inland Revenue
Department and the Institute with respect
to double-taxation agreements.
CPD hours: 1.5
Language: English
Date: 31 January
Time: 6:30 – 8:00 p.m.
Visit the Institute’s website for other programmes and
to enrol and pay online: www.hkicpa.org.hk
January 2013 55

Gangnam was already well-known
to Koreans – and visitors to Seoul –
long before pudgy rapper Psy made
it world famous with his catchy
“Gangnam Style” song and music video. It’s
one of the Korean capital’s ritziest districts,
packed with boutiques, bars, restaurants and
clubs. Still, according to the Korea Culture and
Tourism Institute, an industry group, that song
was all it took to lift the district to become the
No. 1 attraction in the city.
Gangnam is one of Seoul’s 25 gu or districts
(further subdivided into dong or wards) – its
name means “south of the river.” To be sure,
a visitor could spend an exhilarating long
56 January 2013
Business travel
Surprising Seoul
In the wake of the worldwide “Gangnam Style” music phenomenon, Travelzoo Asia
Pacific CFO and Institute member Honnus Cheung sizes up the Korean capital
weekend in Seoul without ever leaving Gangnam.
The main streets of Cheongdam-dong –
Cheongdam and Apgujeong – are lined with
almost every name in international haute couture
as well as stylish local boutiques.
Enjoy brunch at one of the cafes in Sinsa
and Garosu-gil. Nearby Samseong-dong features
COEX Mall, Asia’s largest underground
shopping centre, which boasts an aquarium
and the Megabox cinema. And for some real
Gangnam style, hit one of the many beauty
salons in Cheongdam-dong, which are renowned
for skilful hair, skin and nail artisans.
Of course, there’s more to Seoul than
Gangnam. Visitors are likely to spend most of
their time in the city’s northern part, which
has the majority of historic sites such as palaces
and temples. Jong-gu, north of the river,
features Myeong-dong, the city’s most popular
shopping district.
Jong-gu is also the site of the Cheonggyecheong,
an innovative 8.4-kilometre park
opened in 2005. The 386 billion won (HK$2.8
billion) project turned a smelly, garbagestrewn
creek under a highway into an 8.4-kilometre
riverbank oasis featuring fountains
and urban wetlands as well as historical and
artistic displays.
Adjacent Seongdong, though built-up and
commercial, is the site of the 255 billion won

Previous page: Ceremony in Gyeongbokgung Palace
This page (from top): The National Folk Museum of
Korea; Gangnam district; Workers at a street food stall
in Myeong-dong; a nightly light show with a dancing
fountain on the Banpo Bridge
Seoul Forest park, a project designed to give the
city a much-needed central lung.
Further north is Gyeongdong, with its large
herbal medicine market offering roots, herbs,
fungi and leaves. Northwest of the central area
is Mapo, home to the lively Hongdae area near
Hongik University.
Seoul is split by the Han River. Many historic
and attractive bridges cross it (as do some garishly
modern ones). The Banpo Bridge, built in
1982, has a nightly light show with dancing waters
– the world’s longest bridge fountain measuring
1,140 metres. Visitors can enjoy the fountain
and night views aboard a cruise ship .
Korea was a monarchy until 1910 when Emperor
Sunjong was overthrown by the Japanese,
who had assumed control of Korea in 1905 and
deposed his predecessor Gojong in 1907. A number
of palaces and other royal relics remain.
The grandest is Gyeongbokgung, built from
1394, which served as the main palace of the Joseon
Dynasty until 1910. Highlights within the
palace grounds include the National Folk Museum
of Korea and the Hwangwonjeong Pavilion.
Seoul’s most comprehensive collection of artifacts
can be found in the National Museum of
Korea. With more than 135,000 exhibits in 18
halls, the institution traces thousands of years of
settlement on the peninsula. The History in Glass
exhibition showcases 3,000 years of glassware
from the Mediterranean and West Asia until 17
February.
Seoul has some of Asia’s best street food,
including dumplings, noodles, fish cakes, rice
snacks such as tteokbokki, sweet pancakes and
endless varieties of grilled meat. Specialties
include sundae (blood sausage) and beondegi
(steamed or boiled silkworm pupae).
One of the unique qualities of Korean cuisine
is the number of banchan, or side dishes; up to
12 can accompany a meal. Korean food can be
spicy: popular condiments include kochujang
(chili pepper paste), kochukaru (chili pepper
flakes), daenjang (soybean paste), garlic and ginger.
Wash it all down with likeable Korean lager
such as OB or Jinro brand soju, an easy-drinking
spirit made from grain or potatoes.
Koreans are intensely proud of their most
recognizable food, kimchi – actually a pickled
condiment and side dish. For those who want to
eat Gangnam style, don’t miss the Kimchi Field
Museum in the COEX Mall, which offers tasting
sessions and kimchi-making classes.
Where to eat
• Byokjae Galbi Authentic beef
barbecue. 1-4 Yangjae-daero 71-gil,
Songpa-gu (Bangi station). 2415-5522.
• Doore Modern takes on bibimbap and
other traditional cuisine. 5-24, Insa-dong
4-gil, Jongno-gu (Anguk). 732-2919.
• East Village Bistro & Gastropub
Tteokgalbi, ssambap and other beef
dishes. 736-9 Hannam-dong Yongsangu
(Itaewon). 2790-7782.
• Sanchon Vegetarian set courses. 30-21
Insadong-gil, Jongno-gu (Insadong).
2735-0312.
• Sawore Boribap Healthy traditional
cuisine. 610-5 Sinsa-dong, Gangnam-gu
(Apgujeong). 2540-5292.
Where to stay
• Banyan Tree Club & Spa Seoul Urban
oasis. 5-5 Jangchung-dong 2(i)-ga, Junggu
(Dongguk University). 2250-8000.
• Doulos Hotel Reasonably priced
rooms in nice area. 112 Gwansu-dong,
Jongno-gu (Jongno 3-ga). 2266-2244.
• Holiday Inn Seongbuk Popular
business hotel. 3-1343 Jongam-dong,
Seongbuk-gu (Gireum). 2929-2000.
• IP Boutique Hotel Trendy and
stylish address. 737-32 Hannam-dong,
Yongsan-gu (Itaewon). 3702-8000.
• JW Marriott Hotel Luxury overlooking
the Han. 19-3 Banpo-dong, Seocho-gu
(Banpo). 6282-6262.
What to see
• Bongeunsa 1,100-year-old temple in
the city centre. 73 Samseong-dong,
Gangnam-gu (Samseng). 2511-6070.
• Korean Folk Village Outdoor
history in the suburbs. 107 Bora-dong,
Giheung-gu, Yongin-si, Gyeonggi-do,
(Suwon). (031) 287-1332.
• Lotte World Huge indoor amusement
park. 40-1 Jamsil-dong, Songpa-gu
(Jamsil). 2411-2000.
• Namdaemun Largest traditional street
market. 49-1 Namchang-dong, Jung-gu
(Hoehyeon). 2753-2805.
• Seoul N Tower Lookout built on
Mount Nam. 1-3 Yongsandong 2(i)-ga,
Yongsan-gu (Chungmuro). 3455-9277.
January 2013 57

Exports of Port
weather storms
Consumption in China of
Portugal’s signature product
soars from a low baseline,
writes George W. Russell
Hong Kong’s festive season, which
extends from December to February
– thanks to Christmas, the calendar
and lunar new years – and is pleasantly
chilly and gloomy, should be an ideal time to
drink Port, a wintry beverage if ever there
was one.
However, the silky smoothness of Port
hasn’t really yet caught on in Asia, although
the Mainland is becoming much more receptive
to its charms. Exports of Port to China in
the first nine months of 2012 rose 80 percent
to 36,000 litres year-on-year, according to the
Instituto dos Vinhos do Douro e do Porto in
Porto, Portugal, home of the fortified wine.
That is tiny compared with exports to
France, which totalled 22.5 million litres
in 2011. The French (and the Dutch and the
Belgians) drink Port like Dubonnet, as an
aperitif, while the Chinese consume it in the
traditional manner, after dinner.
Port is made in the Douro region from a
combination of up to 30 different grape varieties,
all native to the Iberian Peninsula and
its very warm and dry weather conditions.
The dominant varieties are Touriga Francesa,
Touriga Nacional, Tinta Roriz, Tinta
Barroca, Tinta Amarela and Tinto Cão.
While virtually every other wine process
has been automated to some extent at least,
making Port still usually involves crushing
the grapes under the estate workers’ feet, a
source of consternation to some Chinese consumers.
“We don’t show foot treading in our
brochure aimed at the Mainland market,”
says Sophia Bergqvist, owner of the Quinta
de la Rosa estate in Pinhão.
When trodden completely, fermenta-
58 January 2013
After hours
Barrels of port mature in the cellars at Taylor’s Port,
Vila Nova de Gaia, Portugal.
tion begins to release tannins from the skins.
“Treading is still the best way of achieving gentle
but complete extraction, producing wines
with structure, depth of flavour and balance,”
says David Guimaraens, head of winemaking
at Taylor’s Port in Vila Nova de Gaia.
As the alcohol content rises and the sugar
density falls, the fermenting wine, known
as must, is prepared for fortification. The
wine is mixed with brandy as both liquids are
poured into a vat. There are various ratios of
brandy to must, and different temperatures
and sugar densities, depending on the product
desired.
The brandy raises the alcohol strength of
the wine to a level where the yeasts responsible
for fermentation can no longer survive.
Fermentation stops before all the sugar has
been turned into alcohol so some of the natural
sweetness of the grape is preserved. The
Port is then matured in wooden casks or barrels,
blended and bottled.
There are several varieties of Port, among
them ruby (the cheapest and youngest), reserve
(an aged ruby), tawny (sweet to medium with
at least two years in barrels), late-bottled vintage
(a ready to drink and filtered Port with
three to four years in barrels) and vintage
(made with grapes from a single year).
A nice entry-level product is Barros Ruby
Port (HK$98, Watson’s Wine Cellar, Central).
It’s fruity – by Port standards – and can
be served slightly chilled with strong cheese
such as Stilton.
For a basic tawny, made by mixing light
and dark wines, try Cockburn’s Fine Tawny
Port (HK$116, Rare and Fine Wines, Sheung
Wan), a toffee-like blend. Cockburn’s 10-Year-
Old Tawny Port (HK$212, Rare and Fine
Wines, Sheung Wan) is more chocolate flavoured
and has a lightly spicy finish.
A late-bottled vintage to look forward to
in 2013 is Quinta de la Rosa LBV, available in
Hong Kong from this year. Bergqvist explains
that brandy is added when the alcohol content
rises to 17-18 percent, and the density is
7.5 Baumé, producing a silky, medium-bodied
wine. “It’s not a jammy full-bodied Port,”
she says.
Vintage Ports develop muscular characteristics
such as the licorice-infused Dow’s
Vintage Port 1997 (HK$898, Watson’s Wine
Cellar, Central). At the top end is the Fonseca
Vintage Port 1960 (HK$3,380, Rare and Fine
Wines, Sheung Wan) with its mauve colour
and redolence of luxuriously aged fruit.
And never mind that the best Port is always
trodden by foot. Not only are they the cleanest
of extremities but also, as Bergqvist points
out, “fermentation kills everything.”

Heavy metal
More discreet than gold,
though almost as expensive,
platinum watches are popular,
writes Wendy Hu
Legendary rock guitarist
and singer Eric
Clapton has the kind
of self-confidence required to
wear platinum watches. His
subtle and dignified Patek
Philippe 2499/100 – one of
only two made in platinum –
was sold, reportedly to a Chinese
private collector, for 3.44
million Swiss francs (HK$29
million) at a Christie’s auction in
November.
It wasn’t the highest price of
that day’s Geneva sales, either. Clap-
ton’s watch was topped by another
platinum timepiece, a 60-year-old
Patek Philippe 2458 made for the American
collector J.B. Champion, which fetched more
than 3.77 million francs and set a record for a
watch made without a complication.
Generally, platinum has long played second
fiddle to gold as a metal of desire, even
when it has cost more. It’s regarded as an
industrial metal due to its wide use in the
automotive and petrochemical industries.
But that quality has also attracted lovers of
rugged, individual timepieces combined
with the beauty of a precious metal.
To connoisseurs, platinum is refined and
distinctive but not ostentatious – as a watchcase
material it often looks no different to
steel from a distance. However, it also has a
warmth and shine to its finish unmatched by
other metals. It wears far better than white
gold, keeping its lustre with minimal care.
Platinum has been used in jewellery since
prehistoric times, and achieved popularity as
jewellery for the European nobility during the
18th century: King Louis XVI of France was
a fan. The venerable Swiss horlogers Breguet
and Vacheron Constantin produced pioneering
platinum watchcases in the 1820s – it isn’t
clear who was first – and at that time platinum,
Roger Dubuis
Le Monégasque collection
rarer and harder to work with
than gold, was more expensive.
The metal is still pricey,
trading at a discount to
gold of only about US$50
to US$60 per ounce during
2012. Wayne Jansen,
a partner at KPMG
in Johannesburg, says
prices are likely to hold up in
2013 due to supply-side disturbances
– such as industrial
unrest in South Africa – and mining
project delays.
Today’s choice of platinum
horology ranges from evocations
of classics to ground-breaking new
designs. Most modern offerings are made in
“950” platinum – an alloy that includes five
percent iridium – which is the purest commercially
workable form of the metal.
From Italy, the Radiomir Platinum
Tourbillon GMT by Panerai
is aesthetically very similar to
a legendary Panerai watch
designed for military use 70
years ago. The new watch has
a hand-wound movement
with a power reserve of six
days and features a power
reserve, extra time zone
and day/night indicators.
The Vacheron Constantin
Patrimony Contemporaine
is a simple yet classically styled
wristwatch of 40 millimetres
diameter with an 18-karat gold
dial and an alligator strap.
Patek Philippe also continues to produce
platinum watches – and you don’t have to be
a rock star, or even a Mainland millionaire,
to own one. The 42 mm 5208 model offers
a minute repeater, “monopusher” chronograph
with 60-minute and 12-hour counters
and instantaneous perpetual calendar with
aperture displays. The charcoal grey sunburst
dial has hour markers applied in gold.
The Roger Dubuis Le Monégasque collection
includes a platinum model housed in an
elegant case 44 mm in diameter. The Monégasque
Tourbillon Volant boasts highly legible
date and power reserve displays and features
a flying tourbillon made, decorated and
polished by hand.
IWC, meanwhile, offers two platinum
timepieces from its Portuguese range. The
Schaffhausen-based manufacturer’s Portuguese
Perpetual Calendar (limited to 250
pieces) features a four-digit year display,
seven-day automatic movement,
Pellaton winding system and a power
reserve display housed in a 44.2
mm platinum case. Its classic blue
moon phase display is punctuated
at 12 o’clock.
The Omega Hour Vision
Co-Axial Skeleton Platinum
Limited Edition
is crafted from “950”
platinum and features a
360-degree transparent sapphire
case body. This allows
unobstructed views of both sides
of the exclusive Omega Co-Axial
Calibre 8403. The movement has
polished screws, an 18-karat gold
From Breguet, the 43 mm Clas-
rotor with a sapphire plate movesique
features a gold dial, which IWC ment and a silicon balance spring.
depicts the continents of Asia and Portuguese Given its catalytic properties,
Perpetual Calendar
Oceania hand-engraved on a rose
it’s no surprise that platinum has
engine with a “wave” motif coated with become a medium of technological innova-
translucent lacquer.
tion among watchmakers.
January 2013 59

Mr. Tax Person: I have six
children but they are all cats.
“Dear
Can I list them as ‘dependants’
in my tax form?”
“Dear Cat Lover: Yes, you can fill in their
names as ‘dependants’ on your tax form. You
will, however, go to prison. So think about
where you’d like to live before making a final
decision.”
The good news is that it may not be long
before pet owners actually are able to list their
four-legged “children” on their tax forms. You
see, Hong Kong is becoming steadily more
pet-crazy.
In the newspaper, there’s a photograph
of Black Hood Man being led away from his
apartment block by police. (Hong Kong has
so little crime that the newspapers secretly
fund a guy called Black Hood Man to do
things that keep the crime pages filled.) His
latest crime? Leaving his terrarium near a
window, allowing a turtle to fall to its death.
He’s getting more coverage for this incident
than for his usual, terrible crimes, such as
robbery, arson and buying Eason Chan CDs.
The day before writing this article, I met
two couples, both of whom have house animals
instead of children. That’s 100 percent
of the people I met that day. If we extrapolate
these figures to the rest of the city (sorry, but
as a journalist I am obliged to do ridiculous
things like this), that means nobody is having
children. After one generation, Hong
Kong will be inhabited only by small white
dogs named Fluffy. On the positive side,
this may trigger a rise in the level of intel-
60 January 2013
Let’s get fiscal
Get your daily dose of Nury’s humour at www.mrjam.org
Income tax: my pet topic
Four-legged dependants can lower your liability,
says Nury Vittachi
lectual discourse in the Oriental Daily News,
Apple Daily, etc.
Pets are not just ubiquitous: they are expensive.
In the past month, my household
had two medical bills to pay: One for me for
HK$50, and one for the dog for HK$2,000.
Like any sane person, I am deeply tempted to
eat the dog’s pills and give her mine.
Once a society takes pet worship to this
extreme, major changes follow. Hong Kong
will probably take after the United States,
where there are powerful campaigns to have
pets recognized as children for tax purposes.
“This past winter I spent US$2,500 in a week
trying to save my kitten’s life,” wrote a woman
named Heather Neff in an Internet discussion
on the topic. “They are our babies even if they
aren’t human.”
Regulating the claims will be tricky, so
we need to set up a pet tax consultancy. For
legitimate pet owners, we fill in their forms.
For the Inland Revenue Department, we
supply inspectors to go to people’s homes to
catch cheats.
Inspector: “You claimed an exemption for
a dog. May we see the dog please?” Taxpayer:
“Er, it’s gone out.” Inspector: “Without you?”
Taxpayer: “It’s a very independent dog.” Inspector:
“May I wait?” Taxpayer: “Actually, it’s
on holiday and I don’t know when it’ll return.
You know dogs, they never tell you anything.”
The challenges will escalate when owners
of pets, other than cats and dogs, start to
demand the same exemptions. What if you
have 10 hamsters or 25 performing fleas? You
could try making a rule that pets can’t be too
“ Regulating the
claims will be
tricky, so we need
to set up a pet tax
consultancy.”
small, but you’ll be accused of size discrimination.
Where will it end? “Dear Commissioner
of Inland Revenue: I have 10 million
pet bacteria I keep on a furry grey pot of yoghurt
in the fridge. I wish to claim child benefits
for all of them.”
A person reading this article over my
shoulder has just pointed out that dogs
are already tax-exempted in many places,
if they are owned by someone who has
a disadvantage, such as poor hearing or
defective eyesight.
Interesting, although I suspect that the list
of acceptable disadvantages for such schemes
will not include any of the defects my colleagues
and family members have: brainlessness,
laziness, evilness, clumsiness, smelliness,
humourlessness, etc.
Now I need to go and take my pill. Or
the dog’s.
Nury Vittachi is a bestselling author, columnist, lecturer and
TV host. He wrote the Institute’s first two storybooks, May
Moon and the Secrets of the CPAs and May Moon Rescues
the World Economy. A third, May Moon’s Book of Choices,
was published in 2012.