The fair values of the investment properties as at 31 December 2017 were assessed by the Group based on independent valuations prepared by a qualified external property valuer which took into account the net income of each property, allowing for reversionary potential and redevelopment potential, where appropriate.

The net changes in fair value of investment properties recorded in the consolidated income statement represented 8% of the Group’s profit before taxation for the year ended 31 December 2017.

We identified the valuation of IP and IPUD as a key audit matter because these properties represent the majority of the Group’s total assets and a small adjustment to or variances in the assumptions and data used to compute the valuation of individual properties, when aggregated, could have a significant impact on the Group’s profit and because the valuation of IP and IPUD is inherently subjective requiring significant judgment and estimation, particularly in determining market rents and capitalisation rates, which increases the risk of error or potential management bias.

• obtaining and inspecting the valuation reports prepared by the external property valuer engaged by the Group;

• meeting the external property valuer to discuss and challenge the key estimates and assumptions adopted in the valuations, including prevailing market rents, market yields and comparable market transactions, and to assess the independence, objectivity, qualifications and expertise of the external property valuer in the properties being valued;

with the assistance of our internal property valuation specialists, assessing the valuation methodology adopted by the external property valuer and comparing the key estimates and assumptions adopted in the valuation of each investment property, including market rents and market yields, with available market data and government statistics; and

• conducting site visits to IP and comparing tenancy information, including market rents and occupancy rates adopted by the external property valuer with underlying contracts and related documentation, on a sample basis.
For IPUD our audit procedures also included the following:

• evaluating the design, implementation and operating effectiveness of key internal controls over the preparation, monitoring and management of the budgeted construction and other costs for each property development;

• comparing unit construction costs with research reports published by international property and construction consultants and other available market data; and

• conducting site visits to IPUD on a sample basis, discussing with management the progress of each property development and comparing the observed progress with the latest development budgets provided by management.

● evaluating the design, implementation and operating effectiveness of key internal controls over the preparation, monitoring and management of the budgeted construction and other costs for each property development project.

● conducting site visits to all property development projects, discussing with the Group’s internal property valuers the progress and comparing the observed progress with the latest development budgets for each property development project provided by management.

● assessing the internal property valuers’ qualifications, experience and expertise in the properties being valued.

● evaluating the internal property valuers’ valuation methodology and assessing the key estimates, data inputs and assumptions adopted in the valuations, which included comparing expected future average selling prices with available market data such as recently transacted prices for similar properties located in the nearby vicinity of each property development project and comparing costs to complete each property development project with publicly available construction cost information for similar properties (taking into account both property type and location) and the sales budget plans maintained by the Group.

● re-performing the calculations made by the internal property valuers in arriving at the year end assessments of net realisable value, on a sample basis, and comparing the estimated costs to complete each development with the Group’s updated budgets; and

● performing sensitivity analyses to determine the extent of change in those estimates that, either individually or collectively, would be required for PUD to be materially misstated and considering the likelihood of such a movement in those key estimates arising and whether there was any evidence of management bias.

Deposits from pre-sale of properties as at 31 December, 2017 totalled HK $9.1 billion.

Revenue from IP is recognised in equal instalments over the accounting periods covered by the lease term and includes contingent rental which is determined based on the turnover of certain retail outlets.

Revenue from DP is recognised upon the later of the execution of a formal sale and purchase agreement and the issue of the occupation/completion certificate by the relevant government authorities.

We identified the revenue recognition for IP and DP as a key audit matter because of its significance to the Group and because small errors in the revenue recognition, either individually or in aggregate, for each property could have a material impact on the Group’s profit for the year.

● evaluating the design, implementation of operating effectiveness of key internal controls over the recording of revenue for the investment property and development property segments.:

● comparing fixed rental revenue received and receivable with underlying tenancy information, including monthly rents and rental periods as set out in the signed rental agreements, on a sample basis, and assessing whether fixed rental revenue had been recorded in the appropriate accounting period. :

● re-performing the calculation of contingent rental received and receivable with reference to turnover reports submitted by the relevant retail outlets, on a sample basis, and assessing whether the contingent rental had been recorded and accounted for in the appropriate accounting period; and :

● inspecting occupation permits or completion certificates which had had been issued by the relevant government authorities on a sample basis for sales and pre-sales for each development property project and assessing whether the cash, for the s ample selected, had been received by comparing the amount received with bank statements and assessing whether revenue should be recorded in the current accounting period or should be deferred as deposits from pre-sale of properties. :

If there is a present obligation there are significant judgements in determining the measurement of provisions, which are subject to the future outcome of legal or regulatory processes.

Our procedures included:

● Enquiry of lawyers: Meetings with the Group’s external counsel in the US and UK and the PRA (who are in regular contact with US and other regulatory bodies) to understand the nature and status of legal disputes and regulatory investigations to determine whether or not a provision should recognized.

● Assessing provisions: We critically assessed and challenged the adequacy of provisions and contingent liability disclosures including management’s ability to reliably estimate any monetary penalties. Our procedures included comparing assumptions to historical data, approved settlement agreements and enquiry of lawyers.

● Assessing transparency: Assessed whether the disclosures related to significant litigation and regulatory matters adequately disclose the potential liabilities and the significant uncertainties that exist.

● Our results: We considered the provisions for legal and regulatory matters recognised, including the related disclosures and the contingent liability disclosure made in relevant note

● Tests of detail: Comparing the carrying amount of a sample of the highest value investments, representing 99 percent of the total investment balance with the relevant subsidiaries’ draft balance sheet to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been profit-making.

● Assessing subsidiary audits: We assessed the work performed by the subsidiary audit team on that sample of those subsidiaries and considered the results of that work, on those subsidiaries’ profits and net assets.

● Our results: We considered the Company’s assessment of the recoverability of the investment in subsidiaries to be acceptable.

In CLP Power Hong Kong Limited (CLP Power Hong Kong), unbilled revenue is calculated using estimates including consumption quantity based on the electricity sent-out adjusted by a loss factor, pattern of residential and non-residential consumption, weather and certain other factors.

In Energy Australia Holdings Limited (Energy Australia) the amount is calculated based on the electricity purchased and applicable tariffs for the mass market customer segment, as well as actual meter readings and contracted rates for commercial and industrial customers. The amount is adjusted for physical energy loss and other measurable factors.

● Obtaining an understanding of and testing the key controls in place to determine the estimate of unbilled revenue for both CLP Power Hong Kong and Energy Australia, including the logic of any models.

● Testing the volume of electricity sent-out by CLP Power Hong Kong to supporting information.

● Testing the volume of electricity purchased by Energy Australia from the wholesale electricity market to the underlying Australian Energy Market Operator (AEMO) invoices on a sample basis and reconciling the total purchase volumes to revenue volumes; and

● Understanding and challenging the key assumptions relating to volumes and pricing used in determining the level of unbilled revenue for both CLP Power Hong Kong and Energy Australia by comparing against historical trends and against the weighted average tariff for prices.

Based on the work performed, the unbilled revenue amount is supported by the available evidence.

With respect to uncertain taxation positions, the directors make provision for taxation based on the most probable outcome.

As a result, taxation is considered a key audit matter due to the complexities and judgement arising from the considerations relating to the calculation, recognition, and classification of current and deferred tax balances.

The disclosures relating to taxation and deferred taxation are contained in note 9 of the consolidated financial statements.

● Analysing the taxation consequences arising on significant or unusual transactions to determine if the treatment adopted is appropriate under the circumstances, and/or based on appropriate legal counsel opinion obtained by the directors.

● Analysing the current and deferred taxation calculations for compliance with relevant taxation legislation

● Evaluating the directors’ assessment of the estimated manner in which the timing differences, including the recoverability of the deferred taxation assets, would be realised by comparing this to evidence obtained in respect of other areas of the audit, including cash flow forecasts, minutes of directors’ meetings and evidence obtained in other areas during the performance of our audit procedures.

● Critically evaluating the assumptions made by the directors for uncertain current and deferred taxation positions to assess whether appropriate current and deferred taxation provisions have been recognised and are based on the most probable outcome.

● We assessed the disclosures to ensure that this was accurately and appropriately recognised and found that the disclosures relating to the current and deferred tax are appropriate