Dahua Certified Public Accountants (special general partnership)
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Annual report of zirconium Technology Co., Ltd. in 2021
Reply to inquiry letter
Dahuhezi [2022] No. 009666
Dahua Certified Public Accountants (special general partnership)
Da Hua Certified Public Accountants（Special General Partnership）
Dahua Certified Public Accountants (special general partnership)
Reply to the inquiry letter on the 2021 annual report of Guangdong Guangdong Orient Zirconic Ind Sci And Tech Co.Ltd(002167) Technology Co., Ltd. issued by Shenzhen Stock Exchange
Page 1 of the table of contents: Dahua Certified Public Accountants (special general partnership) on the notice of Shenzhen 1-39 Stock Exchange on Guangdong Guangdong Orient Zirconic Ind Sci And Tech Co.Ltd(002167) Technology Co., Ltd
Reply to the inquiry letter of the company’s 2021 Annual Report
Dahua Certified Public Accountants (special general partnership) 12 / F, building 7, No. 16 courtyard, Middle West Fourth Ring Road, Haidian District, Beijing [100039] Tel: 86 (10) 58350011 Fax: 86 (10) 58350006 www.dahua-cpa com. Dahua Certified Public Accountants (special general partnership)
Reply to the inquiry letter on the annual report of Guangdong Dongfang zirconium Technology Co., Ltd. in 2021 issued by Shenzhen Stock Exchange
Dahuhezi [2022] 009666 listed company management department of Shenzhen Stock Exchange:
We have accepted the entrustment to audit the 2021 annual financial statements of Guangdong Orient Zirconic Ind Sci And Tech Co.Ltd(002167) (hereinafter referred to as “the company” or ” Guangdong Orient Zirconic Ind Sci And Tech Co.Ltd(002167) ). The company received the inquiry letter on the annual report of Guangdong Orient Zirconic Ind Sci And Tech Co.Ltd(002167) 2021 from your ministry on May 9, 2022 (annual report inquiry letter of the Ministry of company [2022] No. 210, hereinafter referred to as” the inquiry letter “). According to the relevant requirements of the inquiry letter, the relevant questions are replied as follows: I. [inquiry letter question 2]
Question 2: during the reporting period, your company acquired Jiaozuo Weina Technology Co., Ltd. (hereinafter referred to as “Weina technology”) and formed a goodwill of 23 million yuan. Please explain whether there is a large difference between the actual net profit of Wiener technology and the predicted net profit assessed by the income method at the time of acquisition, explain the specific process of goodwill impairment test, and explain whether goodwill needs to be impaired and the reasons in combination with the above situation. The annual audit institution is requested to check and express clear opinions.
reply:
(I) please explain whether there is a large difference between the actual net profit of Wiener technology and the predicted net profit assessed by the income method at the time of acquisition.
From April to December 2021, Wiener technology realized a net profit of 344625 million yuan. During the acquisition, the income method was used to evaluate and predict that the net profit from April to December was 141665 million yuan, with a difference of 20.296 million yuan.
Main reasons for the difference: on the one hand, in July 2021, Wiener technology leased Lb Group Co.Ltd(002601) zirconium oxychloride and zirconium dioxide production lines (annual production capacity of 16000 tons of zirconium oxychloride and 1600 tons of zirconium dioxide), and the new products sold 7897 tons of zirconium oxychloride and 238 tons of zirconium dioxide, resulting in a net profit of 147253 million yuan; On the other hand, in the second quarter of 2021, the market of zirconium industry recovered, zirconia and other products were in short supply, and the rise of sales price resulted in an increase of 5.5707 million yuan over the expected net profit.
(II) describe the specific process of goodwill impairment test, and explain whether goodwill needs to be impaired and the reasons in combination with the above situation.
The company entrusted Yinxin Assets Appraisal Co., Ltd. to carry out the impairment test on the balance sheet date on the goodwill related asset group formed by the merger of Wiener technology, and issued the appraisal report Yinxin pingbao Zi (2022) Hu No. 0397. The details of impairment test are as follows:
1. Main assumptions and premises
(1) The asset group entrusted for appraisal must continue to be used according to the intended purpose, and the income period can be determined;
(2) There is a stable relationship between the asset group entrusted for appraisal and the operating income;
(3) The future operating income can be correctly predicted and measured;
(4) The risk reward related to the expected return can be estimated and measured.
2. Impairment measurement method
According to the relevant provisions of the accounting standards for business enterprises, if an asset (Group) shows signs of impairment, its recoverable amount shall be estimated, and then the estimated recoverable amount of the asset shall be compared with its book value to determine whether the asset has been impaired, and whether it is necessary to make provision for asset impairment and recognize the corresponding impairment loss. At the same time, it is stipulated that when an enterprise conducts an impairment test on the relevant asset group or asset portfolio containing goodwill, if there are signs of impairment in the asset group or asset portfolio related to goodwill, it shall be handled according to the following steps: first, conduct an impairment test on the asset group or asset portfolio not containing goodwill, calculate the recoverable amount, compare it with the relevant book value, and confirm the corresponding impairment loss; Then carry out impairment test on the asset group or combination of asset groups containing goodwill, and compare the book value of these relevant asset groups or combination of asset groups (including the part of the book value of goodwill apportioned) with their recoverable amount. If the recoverable amount of relevant asset groups or combination of asset groups is lower than its book value, impairment and loss shall be recognized for the difference, The amount of impairment loss shall first offset the book value of goodwill allocated to the asset group or asset group combination; Then, according to the proportion of the book value of other assets other than goodwill in the asset group or asset group combination, the book value of other assets shall be deducted in proportion.
Therefore, the goodwill impairment test needs to determine the recoverable amount of various assets related to goodwill (the higher between the net amount of its fair value minus disposal expenses and the present value of the estimated future net cash flow).
Since there is no sales agreement for the asset group and there is no active asset market in the local area, it is impossible to estimate the recoverable amount by deducting the disposal expenses from the fair value of the asset group. Therefore, the current value of the estimated future cash flow of the asset group is taken as the recoverable amount, that is, the income method is used for calculation.
The present value of the estimated future cash flow of the asset group shall be determined according to the estimated future cash flow generated by the asset group in the process of continuous use and final disposal, and the amount after discounting shall be determined by selecting an appropriate discount rate.
3. Calculation process
In this goodwill impairment test, the tested object is identified as a complete asset group, and its value is determined by discounted cash flow method according to the idea of overall asset evaluation of the enterprise.
The discounted cash flow method is a method to determine the recoverable amount of the asset group by converting the expected future net cash flow into the present value. The basic idea is to estimate the expected net cash flow of assets in the future and convert them into current value at an appropriate discount rate.
This test is based on the financial statements after excluding non operating assets and liabilities and interest payment liabilities, and the future operating cash flow adopted is the enterprise free cash flow model.
(1) Calculation formula
Where: P: value of operating assets;
RI – net operating cash flow of the appraisal object in the i-th year in the future;
R – discount rate;
N – the future operation period of the property right holder.
(2) Selection of parameters
① Net operating cash flow
This test uses net cash flow from operations as the income indicator of operating assets.
Net operating cash flow = EBIT + depreciation and amortization – capital expenditure – increase in working capital
EBIT = operating income – operating costs – business taxes and surcharges – selling expenses – administrative expenses – R & D expenses
② Discount rate
According to the relevant provisions of accounting standards for Business Enterprises No. 8 – asset impairment and accounting supervision risk tips No. 8 – goodwill impairment, the prediction of discount rate should match the corresponding macro, industry, region, specific market and specific market subject risk factors, and should be consistent with the future net cash flow, using the pre tax caliber.
According to the above provisions, this test adopts the net cash flow of operation as the income prediction index. When predicting the future net cash flow, it should be based on the current status of assets and the pre tax caliber. The estimated future cash flow of assets shall not include the cash inflow or outflow from financing activities and the cash flow related to income tax receipt and payment. According to the matching principle, this test adopts the weighted average cost of capital (WACC) as the discount rate R, and then converts the after tax discount rate into the pre tax discount rate R, i.e. R / (1-T).
The discount rate R is calculated as follows:
WACC=Ke × E/(D+E)+Kd × D/(D+E) × (1－t)
Where: e is the market value of equity;
D is the market value of the debt;
Ke is the cost of equity capital;
KD is the cost of debt capital;
T is the income tax rate of the assessed enterprise;
D / E: the debt to equity ratio of the evaluated enterprise estimated according to the target capital structure
Ke=Rf1+Beta × ERP+Rc
Where: Ke is the cost of equity capital;
RF1 is the current risk-free interest rate;
Beta is the systematic risk coefficient of equity;
ERP is the market risk premium;
RC is the excess return rate of individual risks of the company;
(3) Detailed forecast period and income period
According to the relevant provisions of accounting standards for Business Enterprises No. 8 – asset impairment and accounting regulatory risk tips No. 8 – goodwill impairment, when determining the forecast period of future net cash flow, it shall be based on the latest financial budget or forecast data approved by the management, and in principle, it shall cover up to 5 years.
When determining the forecast period of the future net cash flow of the relevant asset group or asset group combination, the remaining useful lives of the main fixed assets and intangible assets contained in the relevant asset group or asset group combination shall also be considered, and there shall be no significant difference.
In this test, based on the comprehensive analysis of enterprise income cost structure, capital structure, capital expenditure, investment income and risk level, combined with macro policies, industry cycle and other factors, it is reasonably determined that the detailed prediction period is from 2022 to the end of 2026, and the income period is indefinite. As of December 31, 2021, under relevant assumptions and limited conditions, the recoverable amount of Weiner technology’s asset group with goodwill is 828 million yuan, which is higher than the asset book value corresponding to the asset group with goodwill of 1026875 million yuan. There is no sign of impairment and no provision for impairment is required.
(III) verification procedures and opinions of Accountants
1. Verification procedure:
(1) Obtain the evaluation report issued by Yinxin asset evaluation Co., Ltd. and view the specific process of goodwill impairment test, including but not limited to the main assumptions and parameters and test methods of goodwill impairment test.
(2) Discuss the selection and confirmation of evaluation parameters and methods with evaluation experts.
2. Verification opinions
After verification, we believe that the main assumptions and parameters involved in the evaluation of Wiener technology in Guangdong Orient Zirconic Ind Sci And Tech Co.Ltd(002167) 2021 are reasonable, the test method and process comply with relevant regulations, and the provision for goodwill impairment is reasonable.
2、 [question 3 of inquiry letter]
Question 3: your company’s subsidiary Mingrui zirconium industry Co., Ltd. (hereinafter referred to as “Mingrui zirconium industry”) has achieved operating revenue of RMB 2032300, RMB 1228500 and RMB 1159800 respectively in recent three years, and realized net profits of RMB -919144 million, RMB 267072 million and RMB -465400 respectively. Please explain the reason and rationality of the large fluctuation of performance in recent three years in combination with the business development of Mingrui zirconium industry and the source of income and profit. The annual audit institution is requested to check and express clear opinions.
reply:
(I) please explain the reason and rationality of the large fluctuation of performance in recent three years in combination with the business development of Mingrui zirconium industry and the source of income and profit.
1. Business development of Mingrui zirconium industry
The owner of Mingrui zirconium is engaged in the exploration, mining, processing and sales of zirconium and other minerals. The company completed the acquisition of mindarie project in October 2010, and established Mingrui zirconium industry team in early 2011 to restart the mindarie project. In 2012, the market price of zircon sand rose to US $2500 / ton, but in 2015, zircon sand
