2018E — Page 76

INDEPENDENT AUDITOR'S REPORT (CONTINUED)

KEY AUDIT MATTERS (Continued)

Valuation of investment properties

Refer to note 1 (accounting policy) and note 11 to the consolidated financial statements

The Key Audit Matter

The Group's investment properties which comprise retail properties, car parking spaces and godowns are located in Hong Kong. These investment properties were stated at their fair values of HK$2,151 million as at

31 December 2018 which accounted for 54% of the Group's non-current assets as at that date.

The fair values of the Group's investment properties as at 31 December 2018 were assessed by the board of

directors based on independent valuations prepared by a firm of qualified external property valuers. The net changes in fair values of investment properties recorded in the consolidated profit or loss represented 13% of the Group's profit for the year ended 31 December

2018.

The valuation of the Group's investment properties is complex and involves a significant degree of management judgement and estimation in respect of the determination of capitalisation rates and prevailing market rents, particularly given the dissimilar nature of the investment properties held by the Group.

We identified valuation of investment properties as a key audit matter because these properties represent the majority of the Group's non-current assets and because the valuations are inherently subjective and involve a significant degree of judgement and estimation by management which increases the risk of error or potential management bias.

How the matter was addressed in our audit

Our audit procedures in relation to valuation of investment properties included the following:

obtaining and inspecting the valuation reports prepared by the external property valuers engaged by the Group and on which the directors' assessment of the fair values of investment properties was based;

assessing the external property valuers' qualifications, experience and expertise in the properties being valued and considering their objectivity and independence;

with the assistance of our internal property valuation specialists, discussing with the external property valuers their valuation methodology, without the presence of management, and challenging the key estimates and assumptions adopted in the valuations by comparing capitalisation rates, prevailing market rents and comparable market transactions with the market available data and government produced market statistics;

comparing tenancy information, including committed rents and occupancy rates, provided by the Group to the external property valuers with underlying contracts and related documentation, on a sample basis.

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Hong Kong Ferry (Holdings) Company Limited Annual Report 2018