Independent auditor’s report to the Council members of Hong Kong Council for Accreditation of Academic and Vocational Qualifications
(Established under the Hong Kong Council for Accreditation of Academic and Vocational Qualifications Ordinance)

We have audited the financial statements of Hong Kong Council for Accreditation of Academic and Vocational Qualifications (the “Council”) set out on pages 53 to 90, which comprise the balance sheet as at 31 March 2014, statement of comprehensive income, statement of changes in reserves and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory information.

The council members are responsible for the preparation of financial statements that give a true and fair view in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and for such internal control as the council members determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Our responsibility is to express an opinion on these financial statements based on our audit. This report is made solely to you, as a body, in accordance with section 15 of the Hong Kong Council for Accreditation of Academic and Vocational Qualifications Ordinance (Cap.1150), and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the council members, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

In our opinion, the financial statements give a true and fair view of the state of affairs of the Council as at 31 March 2014 and of its deficit and cash flows for the year then

Hong Kong Council for Accreditation of Academic and Vocational Qualifications (the “Council”) is a body corporate established under the Hong Kong Council for Accreditation of Academic and Vocational Qualifications Ordinance. Under the Accreditation of Academic and Vocational Qualifications Ordinance (Cap. 592) (the “Ordinance”) the Council assumes its statutory role as the Accreditation Authority and QR Authority under the Qualifications Framework (“QF”). As the Accreditation Authority, the Council is responsible for developing and implementing the standards and mechanisms for accreditation of academic and vocational qualifications to underpin the QF and for organising the accreditation exercises for the purposes as specified in the Ordinance. The Council also provides advice to the Government of the Hong Kong Special Administrative Region (the “HKSAR Government”) on the registration of non-local academic and professional courses, the assessment on non-local qualifications and also on educational standards and qualifications generally. The Chairman, Vice Chairman, all other Members and Executive Director of the Council are appointed by the Chief Executive of the HKSAR Government. Also, the determination of accreditation fees, the financial budget and other operating policies of the Council are approved by the HKSAR Government. Therefore the Council considered itself to be a government-related entity.

Since the Council is not profit-oriented and is not subject to any externally imposed capital requirements, its primary financial and capital management objectives are to maintain a balance between annual income and expenditure, so that it has the ability to operate as a going concern and perform its statutory roles and functions.

The Council is primarily financed through the charging of fees for academic and vocational accreditation services rendered which include validations, revalidations, institutional reviews, qualifications assessments and advisory/consultancy services. Any operating surplus shall be carried forward to the following financial year to meet future expenditure required for the operations of the Council.

These financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and accounting principles generally accepted in Hong Kong. A summary of the significant accounting policies adopted by the Council is set out below.

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting year of the Council. The adoption of these new and revised HKFRSs has no material impact on the Council’s result of operations and financial position.

The Council has not applied any new standard or interpretation that is not yet effective for the current accounting period (note 19).

The measurement basis used in the preparation of the financial statements is the historical cost basis except that the investments in available-for-sale equity securities are stated at fair value as explained in the accounting policies set out below.

The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgement made by the council members in the application of HKFRSs that have significant effect on the financial statements is discussed in note 18.

Investments are recognised/derecognised on the date the Council commits to purchase/sell the investments or they expire. Investments in debt and equity securities are initially stated at fair value, which is their transaction price unless it is determined that the fair value at initial recognition differs from the transaction price and that fair value is evidenced by a quoted price in an active market for an identical asset or liability or based on a valuation technique that uses only data from observable markets. Cost includes attributable transaction costs. These investments are subsequently accounted for as follows, depending on their classification:

It is determined that the fair value at initial recognition differs from the transaction price and that fair value is evidenced by a quoted price in an active market for an identical asset or liability or based on a valuation technique that uses only data from observable market.

(i) Held-to-maturity debt securities
Dated debt securities that the Council has the positive ability and intention to hold to maturity are classified as held-tomaturity securities. Held-to-maturity securities are stated in the balance sheet at amortised cost less impairment losses.

Impairment losses for held-to-maturity securities are recognised when there is objective evidence of impairment and are measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of the asset). Objective evidence of impairment includes observable data that comes to the attention of the Council about events that have an impact on the asset’s estimated future cash flows such as:

- significant financial difficulty of the debtor; or

- significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor.

If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through surplus or deficit. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years.

(ii) Available-for-sale securities
Other investments in securities, being those held for non-trading purposes, are classified as available-for-sale securities. At the balance sheet date the fair value is remeasured, with any resultant gain or loss being recognised in other comprehensive income and accumulated separately in equity in the investment revaluation reserve. As an exception to this, investments in equity securities that do not have a quoted price in an active market for an identical instrument and whose fair value cannot otherwise be reliably measured are recognised in the balance sheet at cost less impairment losses. Dividend income from equity securities and interest income from debt securities calculated using the effective interest method are recognised in surplus or deficit in accordance with the policies set out in notes 2(l)(vii) and 2(l) (vi), respectively. Foreign exchange gains and losses resulting from changes in the amortised cost of debt securities are also recognised in surplus or deficit.

When there is objective evidence that available-for-sale securities are impaired, the cumulative loss that has been recognised in the investment revaluation reserve is reclassified to surplus or deficit. The amount of the cumulative loss that is recognised in surplus or deficit is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that asset previously recognised in surplus or deficit. Objective evidence of impairment includes observable data that comes to the attention of the Council concerning the underlying financial stability of the investee as well as a significant or prolonged decline in the fair value of an investment below its cost.

Impairment losses recognised in surplus or deficit in respect of available-for-sale equity securities are not reversed through surplus or deficit. Any subsequent increase in the fair value of such assets is recognised directly in other comprehensive income.

Impairment losses in respect of available-for-sale debt securities are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was recognised. Reversals of impairment losses in such circumstances are recognised in surplus or deficit.

Fixed assets are stated in the balance sheet at cost less accumulated depreciation and impairment losses.

Depreciation is calculated to write off the cost of items of fixed assets, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follows:

- Leasehold improvements                         Over the remaining term of the lease

- Furniture and equipment                          5 years

Both the useful life of an asset and its residual value, if any, are reviewed annually.

The carrying amounts of fixed assets are reviewed for indications of impairment at the balance sheet date. An impairment loss is recognised in surplus or deficit if the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. The recoverable amount of an asset, or of the cash generating unit to which it belongs, is the greater of its fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the assets. An impairment loss is reversed if there has been a favourable change in estimates used to determine the recoverable amount.

Gains or losses arising from the retirement or disposal of an item of fixed assets are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in surplus or deficit on the date of retirement or disposal.

An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Council determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.

(i) Classification of assets leased to the Council
Assets that are held by the Council under leases which transfer to the Council substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Council are classified as operating leases.

(ii) Operating lease charges
Where the Council has the use of assets under operating leases, payments made under the leases are charged to surplus or deficit in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in surplus or deficit as an integral part of the aggregate net lease payment made.

Accounts and other receivables are initially recognised at fair value and thereafter stated at amortised cost using the effective interest method, less allowance for impairment of doubtful debts, except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less allowance for impairment of doubtful debts.

Impairment losses for bad and doubtful debts are recognised when there is objective evidence of impairment and are measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the asset’s original effective interest rate where the effect of discounting is material. Objective evidence of impairment included observable data that comes to the attention of the Council about events that have an impact on the asset’s estimated future cash flows such as significant financial difficulty of the debtor.

Impairment losses for accounts and other receivables whose recovery is considered doubtful but not remote are recorded using an allowance account. When the Council is satisfied that recovery is remote, the amount considered irrecoverable is written off against accounts and other receivables directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in surplus or deficit.

Other payables are initially recognised at fair value and thereafter stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

Cash and cash equivalents comprise cash at bank and in hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition.

Salaries, annual bonuses, paid annual leave, contributions to defined contribution retirement plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

The Council is exempted from Hong Kong Profits Tax by virtue of section 87 of the Inland Revenue Ordinance.

Provisions are recognised for liabilities of uncertain timing or amount when the Council has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

Income is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Council and the income and costs, if applicable, can be measured reliably, income is recognised in surplus or deficit as follows:

(i) fees for rendering of accreditation services to institutions are recognised in the period to the extent the accreditation work is completed;

(ii) advisory fees and consultancy fees are recognised in the period in which such services are rendered;

(iii) fees for rendering of qualifications assessment services are recognised in the period in which such assessment work is completed;

(iv) qualifications registry fees are recognised in the period in which such services are rendered;

(v) government grants are recognised in the balance sheet initially as deferred income when there is reasonable assurance that they will be received and that the Council will comply with conditions attached to them. Grants that compensate the Council for expenses incurred are recognised as income in surplus or deficit on a systematic basis in the same periods in which the expenses are incurred;

(vi) interest income is recognised as it accrues using the effective interest method; and

(vii) dividend income from listed investments is recognised when the share price of the investment goes ex-dividend.

(1) A person, or a close member of that person’s family, is related to the Council if that person:

(i) has control or joint control over the Council;

(ii) has significant influence over the Council; or

(iii) is a member of the key management personnel of the Council.

(2) An entity is related to the Council if any of the following conditions applies:

(i) The entity and the Council are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

(iii) Both entities are joint ventures of the same third party.

(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

(v) The entity is a post-employment benefit plan for the benefit of employees of either the Council or an entity related to the Council.

(vi) The entity is controlled or jointly controlled by a person identified in (1).

(vii) A person identified in (1)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.

(Deficit)/surplus for the year is arrived at after charging/(crediting):

No provision for Hong Kong Profits Tax is required to be made in these financial statements as the Council is exempted from taxation pursuant to section 87 of the Inland Revenue Ordinance.

As at 31 March 2014, certain of the Council’s available-for-sale equity securities were individually determined to be impaired on the basis of significant or prolonged decline in their fair value below cost. Impairment losses on these investments were recognised in surplus or deficit in accordance with the policy set out in note 2(c)(ii).

The grants are for supporting the costs of the Qualifications Framework project and relocation costs of the new office of the Council.

Deferred revenue represent amounts billed or received for programme accreditation, advice on the registration of non-local courses and qualifications assessment, less amounts recognised as income during the year.

The opening and closing balances of each component of the Council’s reserves and reconciliation between these amounts are set out in the statement of changes in reserves.

The investment revaluation reserve comprises the cumulative net change in the fair value of available-for-sale securities held at the balance sheet date and is dealt with in accordance with the accounting policies in note 2(c)(ii).

Exposure to credit and liquidity risks arises in the normal course of the Council’s operations. The Council is also exposed to equity price risk arising from its equity investments in other entities.

The Council’s exposure to these risks and the financial risk management policies and practices used by the Council to manage these risks are described below..

The Council’s credit risk is primarily attributable to bank deposits, accounts receivables and investments in debt securities. Management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis.

In respect of accounts receivables, individual credit evaluations are performed on all customers requiring credit over a certain amount. These take into account the customer’s past payment history, financial position and other factors. These receivables are due on presentation of billings. Normally, apart from certain customers with good credit ratings, advances are requested from customers to cover the service fee before rendering of services by the Council.

The Council’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. At the balance sheet date, the Council had a certain concentration of credit risk as 20% and 81% (2013: 33% and 79%) of the total accounts receivables were due from the largest customer and the five largest customers.

Bank deposits are normally placed with financial institutions which have good credit ratings. Investments in debt securities are with counterparties of sound credit ratings. Given their high credit ratings, management does not expect any investment counterparty to fail to meet its obligations.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. The Council does not provide any other guarantees which would expose it to credit risk.

Further quantitative disclosures in respect of the Council’s exposure to credit risk arising from accounts receivable are set out in note 9.

The Council’s policy is to regularly monitor its liquidity requirements to ensure that it maintains sufficient reserves of cash and readily realisable marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and long term.

The earliest settlement dates of the Council’s financial liabilities at the balance sheet date are all within one year or on demand and the contractual amounts of the financial liabilities are all equal to their carrying amounts.

The Council is exposed to equity price changes arising from equity investments classified as available-for-sale equity securities (see note 8).

The Council’s equity investments are blue-chip companies listed on the Stock Exchange of Hong Kong. These equity investments have been chosen based on their longer term growth potential and are monitored regularly for performance against expectations.

At 31 March 2014, it is estimated that an increase/(decrease) of 10% (2013: 10%) in the market price of the Council’s available-for-sale equity securities, with all other variables held constant, would not affect the Council’s surplus or deficit unless there are impairments. The Council’s total reserves would have increased/decreased by $1,417,602 (2013: $1,320,449).

The sensitivity analysis above indicates the instantaneous change in the Council’s surplus for the year (and accumulated surpluses) and investment revaluation reserve that would arise assuming that changes in the market value had occurred at the balance sheet date and had been applied to re-measure those financial instruments held by the Council which expose the Council to equity price risk at balance sheet date. It is also assumed that none of the Council’s available-for-sale equity securities would be considered impaired as a result of a decrease in the prices of respective equity securities and that all other variables remain constant. The analysis is performed on the same basis for 2013.

(i) Financial instruments carried at fair value
The following presents the fair value of the Council’s financial instruments measured at the balance sheet date on a recurring basis, categorised into the three-level fair value hierarchy as defined in HKFRS 13, Fair value measurement. The level into which a fair value measurement is classified is determined with reference to the observability and significance of the inputs used in the valuation technique as follows:

- Level 1 valuations: Fair value measured using only Level 1 inputs, i.e. unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

- Level 2 valuations: Fair value measured using only Level 2 inputs, i.e. observable inputs which fail to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available.

- Level 3 valuations; Fair value measured using significant unobservable inputs.

At 31 March 2014 and 2013, the only financial instruments of the Council carried at fair value were available-for-sale equity securities of $14,176,016 (2013: $13,204,486) listed on the Stock Exchange of Hong Kong (see note 8). These instruments fall into Level 1 of the fair value hierarchy described above.

During the year, there were no transfers among instruments in Level 1, Level 2 or Level 3.

(ii) Fair values of financial instruments carried at other than fair value
The carrying amounts of the Council’s financial instruments carried at cost or amortised cost are not materially different from their fair values as at 31 March 2014 and 2013 except as follows:

The fair value of available-for-sale equity securities held by the Council is based on quoted market prices at the balance sheet date. The quoted market price used for available-forsale equity securities held by the Council is the current bid price.

Capital commitments outstanding at 31 March 2014 in respect of leasehold improvements not provided for in the financial statements were as follows:

At 31 March 2014, the total future minimum lease payments under non-cancellable operating leases in respect of properties are payable as follows:



The Council leases its office premises under operating leases. The lease runs for an initial period of five years, with an option to renew the lease when all terms are renegotiated. The lease does not include contingent rentals.

Except as disclosed in (iv) below, all transactions related to the procurement of goods and services involving organisations in which a member of the Council, key management personnel and the HKSAR Government may have an interest are conducted in the normal course of business and in accordance with the Council’s financial obligations and normal procurement procedures.

All transactions related to the provision of accreditation services to organisations in which a member of the Council, key management personnel and the HKSAR Government may have an interest are conducted in the normal course of business and in accordance with the Council’s fee charging policy and fee schedule as prescribed by the Ordinance.

In addition to the transactions and balances disclosed elsewhere in these financial statements, the Council had the following related party transactions:

(i) Honorarium paid to Council members in the capacity of



Local Council members are not remunerated.

(ii) Key management personnel remuneration



Key management personnel comprise of the Executive Director, Deputy Executive Director and Financial Controller. The above remuneration is included in “staff costs” (see note 5(a)).

(iii) During the year ended 31 March 2014, approximately 27% (2013: 32%) of the Council’s total income are derived from services provided to the HKSAR Government, and approximately 6% (2013: 12%) of it are derived from services provided to other government-related entities. All the services are conducted in the normal course of business and in accordance with the Council’s fee charging policy and fee schedule as prescribed by the Ordinance.

(iv) Effective from 1 September 2011, the Council has entered into a lease with the HKSAR Government and rented a vacant school premises in Siu Sai Wan Estate, Chai Wan, Hong Kong at a charge of $1 per month as its new office for an initial term of five years. The Council completed the relocation of its office in July 2012. The HKSAR Government also provided $10 million funding support for conversion and renovation of the new office of the Council (see note 11).

Certain critical accounting judgement in applying the Council’s accounting policies is described below.

The Council follows the guidance of HKAS 39 in determining when an investment is other-than-temporarily impaired. This determination requires significant judgment. In making this judgement, the Council evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow.

Up to the date of issue of these financial statements, the HKICPA has issued a number of amendments and new standards which are not yet effective for the year ended 31 March 2014 and which have not been adopted in these financial statements.

The Council is in the process of making an assessment of what the impact of these amendments is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the Council’s results of operations and financial position.