Question

Luxe International Hotels Group Limited (“Luxe” or the “Group”), a company incorporated in Hong Kong, is principally engaged in hotel operations and management. The Group owns and operates 41 hotels in Hong Kong and the PRC.

Human Capital is the most significant asset of the Group. In fact, payroll expenses account for more than 50% of the Group’s operating expense. All the directors and senior management are considered crucial to the Group due to their significant experience in the hotel industry. The continuous success of the Group also depends on its ability to attract and retain a group of trained employees who are experience in the provision of various hotel-related services. In order to retain these employees, the Group offers attractive remuneration including housing allowances, performance bonuses, defined benefit pension schemes, share options and various other incentive schemes. Salaries are paid on a semi-monthly basis on the 5^th of each month for the pay-period from the 16^th to the 30^th and on the 20^th of each month for the pay-period from the 1^st to 15^th. The Group uses PeopleSmart, a specialized payroll system, for the processing of its payroll. Approval of the semi-monthly payroll is done electronically by PeopleSmart.

The Group’s performance bonus scheme for its senior management is quite complicated. In order to motivate its senior management, each individual’s bonus scheme is tailor-made and measurement of performance is based on a matrix of controllable variables for each individual’s role, position and responsibilities.

The Group is subject to numerous government, employment regulations in the PRC including minimum wage requirements, overtime, working conditions and work permit requirements. The Group has a strong Human Resources team to ensure that all employment regulations are complied with.

The group uses an external independent actuary to prepare the actuarial report for its defined benefit pension scheme. The Group has also engaged an external independent valuer to perform the fair value calculation of the Group’s share options granted during the year.

Question:

As the audit team will rely on actuarial and valuation reports prepared by the independent external actuary and valuer for audit purposes, described the factors which you will consider as well as any procedures to be performed in this case.

Answer 1

There are many factors which need to be considered for the Actuarial valuation of Pension scheme for the Company:

1.Need to check the quality of the data - Should ensure completeness of the data, all employees data are provided and for each employee, all required information has been provided

2. Accuracy of the data - Date of joining, Basic salary, age etc., should be thoroughly checked and verified by an independent authority.All the data should be in uniform format. Date of joining is very important because inaccuracy may result in incorrect calculation of number of years and incorrect valuation

3. Data consistency- Salary data for opening & closing valuation should be in sync else will not get movement in liability correctly

4. Assumptions should be appropriate - Correctness of assumptions will calculate the liability with higher accuracy. In Pension scheme the Mortality rate is very important because it impacts the number of years for which pension will be payable to the employee.

5. Reconciliation of liability movement - An actual salary growth of 10% against 5% assumed in opening valuation will result in experience loss.We need to study experience adjustments to judge the efficiency of assumptions

6. Employee wise liability - These valuations are calculated at individual employee level, so we need to check how the data is behaving year to year. This will give a better confidence on the accuracy of the data.

7. Appropriate Disclosures in Notes to Accounts - If any deviation is made based on Actual experience or assumptions as regards to salary growth rate should be documented and given in Notes to Accounts for compliance