Dilemma centres on method of booking earnings changes from revaluation of investment property New international accounting standards adopted in Hong Kong last year have ushered local company reports on to the same playing field as their global peers - but they have also opened a side door for listing candidates that has put the stock exchange in a quandary. At the heart of the exchange's dilemma are procedures for reporting changes in the valuation of investment properties. Under International Accounting Standards 40, or IAS 40, one of the more contentious new rules governing local company reports, firms need to book changes to the fair value of their investment properties in their profit-loss accounts. Previous practice required them to account for such fluctuations on their balance sheets as reserves. Property developers opposed the provisions unsuccessfully on the grounds reflecting such paper losses or gains on profit statements might lead to profit swings that would lead investors to believe their earnings had become volatile. But while the new rule looks like poison to some - it remains to be seen whether the objections of property developers is justified - it appears to be candy for others. Hong Kong Exchanges and Clearing is believed to have received many new listing applications from candidates that have found a way of using the new rule to help them hurdle a requirement for three consecutive years of profit totalling not less than $50 million. 'The method is simple. Listing applicants revalue their investment properties based on the new rule and mark the paper gains in the profit-loss accounts, boosting the profit to the required level,' a source said. It is completely 'legal' and does not breach any listing rules. But the concern is that those property revaluation gains are non-current income and fluctuate from time to time, going against the spirit of the listing requirement, namely the candidate's demonstration of sustainable core income. New Heritage Holdings is the most recent case. The property developer posted a combined net profit of $70.3 million for the past three years, $27.8 million of it from fair value adjustments on investment properties. Stripping out those revaluation gains, the firm made a combined net profit of $42.4 million in the past three financial years, thus falling short of the requirement. The controversy arising from the new accounting rule has prompted the stock exchange's listing division to seek advice from the listing committee. Given that there was no reasonable ground for selective acceptance of IAS 40, sources said the listing committee agreed comprehensive disclosure was the solution. 'The aim of implementing the new accounting standards is to allow Hong Kong to catch up with international peers, and the stock exchange has always been supportive of the matter,' a source said. 'The stock exchange must accept all of the new standards, but it can require newcomers to make in-depth disclosures of how they adopted the new rule, and to state clearly the risks involved,' he said. Investors will have to read the fine print in prospectuses. Edward Chow Kwong-fai, past president of the Hong Kong Institute of Certified Public Accountants, echoed the listing committee's view: 'Property revaluation gains are a natural consequence of implementing the new rules. We just can't pick the good and leave the bad.'