UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(
(Mark One)
OR
For the fiscal year ended
OR
OR
Date of event requiring this shell company report
For the transition period from to
Commission file number:
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
People’s Republic
of
(Address of principal executive offices)
Tel: +
E-mail:
Fax: +
People’s Republic
of
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Ticker Symbol(s) | Name of Each Exchange on Which Registered | ||
| The | ||||
| American depositary shares, each representing 20 ordinary shares | (The NASDAQ Global Select Market) |
| * | Not for trading, but only in connection with the listing on The NASDAQ Global Select Market of American depositary shares, each representing 20 ordinary shares. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes
☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | ||
| Non-accelerated filer ☐ | Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act. ☐
| † | The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| International Financial Reporting Standards as issued Other ☐ | ||
| by the International Accounting Standards Board ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐ No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
TABLE OF CONTENTS
| Explanatory Note | 1 | |
| Item 18. Financial Statements | 2 | |
| Item 19. Exhibits | 2 | |
| Signatures | 4 |
- i -
EXPLANATORY NOTE
Fanhua Inc. (the “Company”) is filing this Amendment No. 1 to our annual report on Form 20-F for the fiscal year ended December 31, 2022 (the “Amendment No. 1”), which was originally filed with the Securities and Exchange Commission (the “SEC”) on April 25, 2023 (the “Original Filing”). The purpose of this Amendment No. 1 is solely to correct a typographical error in the date of the “Report of Independent Registered Public Accounting Firm” for the fiscal year ended December 31, 2020 (the “2020 Audit Report”) issued by our predecessor auditor Deloitte Touche Tohmatsu on Page F-4 of the Original Filing from April 25, 2023 to April 28, 2021, the actual issuance date of the 2020 Audit Report.
In order to comply with certain requirements of the SEC’s rules in connection with this filing, this Amendment No. 1 includes Item 18. Financial Statements. Consistent with the rules of the SEC, the certifications of the Company’s principal executive officer and principal financial officer as of the date of this Amendment No. 1 are attached as exhibits to this Amendment No. 1.
Except as described above, no other changes have been made to the Original Filing. This Amendment No. 1 speaks as of the filing date of the Original Filing. Other than as stated otherwise, this Amendment No. 1 does not, and does not purport to, amend, update or restate any other information or disclosure included in the Original Filing, or reflect any events that have occurred since the date thereof. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and any documents filed with or furnished to the SEC by the Company subsequent to April 25, 2023.
- 1 -
PART III
Item 18. Financial Statements
The consolidated financial statements of Fanhua Inc. and its subsidiaries and VIEs are included at the end of this annual report.
Item 19. Exhibits
- 2 -
| * | Filed with this Amendment No. 1. |
| ** | Furnished with this Amendment No. 1. |
| † | Portions of this exhibit have been omitted in accordance with Instruction 4 to Item 19 of Form 20-F. |
| *** | Previously filed with the Original Filing. |
- 3 -
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| FANHUA INC. | |||
| By: | /s/ Yinan Hu | ||
| Name: | Yinan Hu | ||
| Title: | Chief Executive Officer | ||
| Date: May 22, 2023 | |||
- 4 -
FANHUA INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Fanhua Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fanhua Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes and schedule I (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We did not audit the financial statements of CNFinance Holdings Limited, or CNFinance, the Company’s investment in which is accounted for by use of the equity method. The accompanying financial statements of the Company include its equity investment in CNFinance of RMB329 million as of December 31, 2021, and its equity earnings in CNFinance of RMB11 million for the year ended December 31, 2021. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for CNFinance, is based solely on the report of the other auditors.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 25, 2023, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Convenience Translation
Our audits also comprehended the translation of Renminbi amounts into United States dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2(u) to the financial statements. Such United States dollar amounts are presented solely for the convenience of readers outside of People’s Republic of China.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
F-2
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition: Estimate of variable renewal commissions for long-term life insurance products and impact on revenue recognized — Refer to Note 2(q) to the financial statements
Critical Audit Matter Description
The Company recognized agency revenues for the life insurance business of approximately RMB2,237.3 million in 2022 of which RMB245.7 million relates to estimated variable renewal commissions for long-term life insurance products. As described in Note 2(q) to its financial statements, the Company uses the expected value method and considers constraints as well to estimate variable renewal commissions, which are contingent on future renewals of initial policies or achievement of certain performance targets. Given the material uncertainty around the future renewal of the insurance policies, the estimated renewal commissions expected to be collected are recognized as revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is subsequently resolved.
Auditing management’s determination of estimated variable renewal commissions was complex and highly judgmental due to the complexity of the models used and the subjectivity required by the Company to estimate the amount for future renewals of policies, calculate the amount of commission revenue that is probable of not being reversed, and determine the timing and amount of any revenue adjustment that results from changes in the estimates of previously recorded estimated renewal commissions. The Company utilizes statistical methodologies to estimate renewal rate(s), which is a key driver when estimating the amount of future renewals of policies. To determine the constraint to be applied to estimated renewal commissions, the Company evaluates historical experiences and data and applies judgment. For the ongoing evaluation of assumptions, the Company also analyzes whether circumstances have changed and considers any known or potential modifications to the inputs into estimated renewal commissions model and the factors that can impact the amount of renewal commissions expected to be collected in future periods such as commission rates, insurance products composition, renewal terms of insurance products and changes in relevant laws and regulations. The judgment and assumptions are continuously re-evaluated and adjusted as needed along with the accumulation of historical experiences and data when new information becomes available.
Given the significant judgment required to determine the amount of estimated variable renewal commissions, performing audit procedures to evaluate the reasonableness of management’s assessment required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of the reasonableness of the Company’s estimate of variable renewal commissions for long-term life insurance products discussed above included the following, among others:
| ● | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls over the Company’s process to estimate variable renewal commissions for long-term life insurance products. |
| ● | We engaged our internal actuarial specialists to assist in our evaluation of the appropriateness of the methodology, including the determination of portfolio of contracts, and assumptions used by management to estimate variable renewal commissions by benchmarking the methods and assumptions against general market practice within the insurance industry. |
| ● | We tested the completeness and accuracy of the underlying data that served as the basis for our substantial analytical procedures. |
| ● | We developed a range of independent estimates and comparing those to the renewal rate selected by management for evaluating the reasonableness of management’s assumptions. |
| ● | We performed substantive analytical procedures by developing an independent expectation for comparison to the Company’s estimate applying our own methods as well as assumptions with the Company’s data, and evaluation of significant unexpected differences, if any. |
| ● | We performed retrospective review to compare the actual realized renewal commissions with the estimated value that has been recognized as revenues. |
/s/
April 25, 2023
We have served as the Company’s auditor since 2021.
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Fanhua Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of income and comprehensive income, shareholders’ equity, and cash flows of Fanhua Inc. and its subsidiaries (the “Company”) for the year ended December 31, 2020, and the related notes and schedule I (collectively referred to as the “financial statements”). In our opinion, based on our audits and the report of the other auditor, the financial statements present fairly, in all material respects, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We did not audit the financial statements of CNFinance Holdings Limited, or CNFinance, the Company’s investment in which is accounted for by use of the equity method. The accompanying financial statements of the Company include its equity earnings in CNFinance of RMB18 million for the year ended December 31, 2020. This statement was audited by other auditors whose report (which, as to 2020, included an explanatory paragraph concerning completion of a reorganization) has been furnished to us, and our opinion, insofar as it relates to the amounts included for CNFinance, is based solely on the report of the other auditors.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
/s/ Deloitte Touche Tohmatsu
Certified Public Accountants
Hong Kong
April 28, 2021
We began serving as the Company’s auditor in 2007. In 2021 we became the predecessor auditor.
F-4
FANHUA INC.
Consolidated Balance Sheets
(In thousands, except for shares and per share data)
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Note 2(u) | ||||||||||||
| ASSETS: | ||||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| Restricted cash (including restricted cash of the consolidated VIEs and VIEs’ subsidiaries that can only be used to settle obligations of the VIEs of RMB | ||||||||||||
| Short term investments (including investments measured at fair value of RMB | ||||||||||||
| Accounts receivable, net of allowances of RMB | ||||||||||||
| Contract assets, net of allowances of RMB | ||||||||||||
| Other receivables, net | ||||||||||||
| Other current assets, net | ||||||||||||
| Total current assets | ||||||||||||
| Non-current assets: | ||||||||||||
| Restricted bank deposit – non-current (including restricted cash of the consolidated VIEs and VIEs’ subsidiaries that can only be used to settle obligations of the VIEs of RMB | ||||||||||||
| Contract assets - non-current, net of allowances of RMB | ||||||||||||
| Property, plant, and equipment, net | ||||||||||||
| Goodwill, net | ||||||||||||
| Deferred tax assets | ||||||||||||
| Investments in affiliates | ||||||||||||
| Other non-current assets | ||||||||||||
| Right of use assets | ||||||||||||
| Total non-current assets | ||||||||||||
| Total assets | ||||||||||||
F-5
FANHUA INC.
Consolidated Balance Sheets—(Continued)
(In thousands, except for shares and per share data)
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Note 2(u) | ||||||||||||
| LIABILITIES AND EQUITY: | ||||||||||||
| Current liabilities: | ||||||||||||
| Short-term loan | ||||||||||||
| Accrued commissions | ||||||||||||
| Total current liabilities | ||||||||||||
F-6
FANHUA INC.
Consolidated Balance Sheets—(Continued)
(In thousands, except for shares and per share data)
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Note 2(u) | ||||||||||||
| Non-current liabilities: | ||||||||||||
| Accrued commissions – non-current | ||||||||||||
| Other tax liabilities (including other tax liability of the consolidated VIEs and VIEs’ subsidiaries without recourse to the Company of nil and RMB | ||||||||||||
| Deferred tax liabilities | ||||||||||||
| Total non-current liabilities | ||||||||||||
| Total liabilities | ||||||||||||
| Commitments and contingencies | ||||||||||||
| Equity: | ||||||||||||
| Ordinary shares (Authorized shares: | ||||||||||||
| Treasury stock | ( | ) | ( | ) | ||||||||
| Additional paid-in capital | ||||||||||||
| Statutory reserves | ||||||||||||
| Retained earnings | ||||||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ( | ) | ||||||
| Total shareholders’ equity | ||||||||||||
| Noncontrolling interests | ||||||||||||
| Total equity | ||||||||||||
| Total liabilities and shareholders’ equity | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-7
FANHUA INC.
Consolidated Statements of Income and Comprehensive
Income
(In thousands, except for shares and per share data)
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Note 2(u) | ||||||||||||||||
| Net revenues: | ||||||||||||||||
| Agency | ||||||||||||||||
| Life insurance business | ||||||||||||||||
| P&C insurance business | ||||||||||||||||
| Claims adjusting | ||||||||||||||||
| Total net revenues | ||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Agency | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Life insurance business | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| P&C insurance business | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Claims adjusting | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Selling expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating costs and expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income from operations | ||||||||||||||||
| Other income, net: | ||||||||||||||||
| Investment income related to the realized gain on available-for-sale investments | ||||||||||||||||
| Interest income | ||||||||||||||||
| Others, net | ( | ) | ( | ) | ||||||||||||
| Income before income taxes, share of income and impairment of affiliates, net | ||||||||||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Share of income of affiliates, net of impairment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income | ||||||||||||||||
| Less: net income attributable to the noncontrolling interests | ( | ) | ( | ) | ||||||||||||
| Net income attributable to the Company’s shareholders | ||||||||||||||||
F-8
FANHUA INC.
Consolidated Statements of Income and Comprehensive
Income—Continued
(In thousands, except for shares and per share data)
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Note 2(u) | ||||||||||||||||
| Net income per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted: | ||||||||||||||||
| Shares used in calculating net income per share: | ||||||||||||||||
| Basic: | ||||||||||||||||
| Diluted | ||||||||||||||||
| Net income | ||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ||||||||||||||
| Unrealized net gains (loss) on available-for-sale investments | ( | ) | ( | ) | ||||||||||||
| Share of other comprehensive (loss) gain of affiliates | ( | ) | ( | ) | ||||||||||||
| Total comprehensive income | ||||||||||||||||
| Less: Comprehensive income (loss) attributable to the noncontrolling interests | ( | ) | ( | ) | ||||||||||||
| Comprehensive income attributable to the Company’s shareholders | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-9
FANHUA INC.
Consolidated Statements of Shareholders’
Equity
(In thousands, except for shares and per share data)
| Share Capital | Additional | Treasury Stock | Accumulated Other | |||||||||||||||||||||||||||||||||||||
| Number
of Share | Amounts | Paid-in Capital | Number
of Share | Amounts | Statutory Reserves | Retained Earnings | Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | |||||||||||||||||||||||||||||||||
| Balance as of January 1, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Cumulative-effect adjustment to beginning balance from adoption of ASU 2016-13 | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ||||||||||||||||||||||||||||||||||||||
| Cancellation of treasury shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Share-based compensation (Note 2(o)) | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||||||||||||
| Provision for statutory reserves | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Distribution of dividend | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Unrealized net gains on available-for-sale investments | — | — | ||||||||||||||||||||||||||||||||||||||
| Share of other comprehensive loss of affiliates | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Provision for statutory reserves | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||
| Distribution of dividend | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Unrealized net gains on available-for-sale investments | — | — | ||||||||||||||||||||||||||||||||||||||
| Share of other comprehensive loss of affiliates | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | ( | ) | ||||||||||||||||||||||||||||||||||||||
F-10
FANHUA INC.
Consolidated Statements of Shareholders’ Equity—(Continued)
(In thousands, except for shares and per share data)
| Share Capital | Additional | Treasury Stock | Accumulated Other | |||||||||||||||||||||||||||||||||||||
| Number
of Share | Amounts | Paid-in Capital | Number of Share | Amounts | Statutory Reserves | Retained Earnings | Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | |||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Exercise of share options | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares from open market | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||||||||||||||
| Provision for statutory reserves | — | — | — | — | — | ( | ) | — | — | — | ||||||||||||||||||||||||||||||
| Cash dividend | — | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||||||||
| Pro rata distribution of equity method investee’s shares to shareholders (Note 8) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Unrealized net loss on available-for-sale investments | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Share of other comprehensive gain of affiliates | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 in US$ (Note 2(u)) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-11
FANHUA INC.
Consolidated Statements of Cash Flows
(In thousands)
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Note 2(u) | ||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income | ||||||||||||||||
| Adjustments to reconcile net income to net cash generated from operating activities: | ||||||||||||||||
| Depreciation expense | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Non-cash operating lease expense | ||||||||||||||||
| Provision for (reversal of) allowance for credit losses on financial assets | ( | ) | ||||||||||||||
| Compensation expenses associated with stock options | ( | ) | ||||||||||||||
| Loss on disposal of property, plant and equipment | ||||||||||||||||
| Investment income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on disposal of subsidiaries | ( | ) | ||||||||||||||
| Share of income of affiliates, net of impairment | ||||||||||||||||
| Deferred taxes | ||||||||||||||||
| Interest accrued for other receivables (loan receivables) | ( | ) | ( | ) | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | ( | ) | ( | ) | ( | ) | ||||||||||
| Contract assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Insurance premium receivables | ||||||||||||||||
| Other receivables | ( | ) | ||||||||||||||
| Other current assets | ||||||||||||||||
| Other non-current assets | ( | ) | ( | ) | ||||||||||||
| Accounts payable | ( | ) | ( | ) | ||||||||||||
| Accrued commissions | ||||||||||||||||
| Insurance premium payables | ( | ) | ( | ) | ( | ) | ||||||||||
| Other payables and accrued expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Accrued payroll | ( | ) | ( | ) | ||||||||||||
| Income taxes payable | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Lease liability | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other tax liabilities | ( | ) | ( | ) | ( | ) | ||||||||||
| Net cash generated from operating activities | ||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Purchase of short term investments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Proceeds from disposal of short term investments | ||||||||||||||||
| Purchase of property, plant and equipment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Proceeds from disposal of property and equipment | ||||||||||||||||
| Disposal of subsidiaries, net of cash disposed of , RMB | ||||||||||||||||
| Cash lent to third parties | ( | ) | ( | ) | ( | ) | ||||||||||
F-12
FANHUA INC.
Consolidated Statements of Cash Flows—(Continued)
(In thousands)
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Note 2(u) | ||||||||||||||||
| Repayment of loan receivables from third parties | ||||||||||||||||
| Prepayment for purchase of short-term investments | ( | ) | ( | ) | ||||||||||||
| Payment for business acquisition, net of cash acquired | ( | ) | ( | ) | ||||||||||||
| Others | ||||||||||||||||
| Net cash generated from (used in) investing activities | ( | ) | ( | ) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Proceeds from bank borrowings | ||||||||||||||||
| Repayment of refundable share rights deposits to the 521 Plan participants | ( | ) | ||||||||||||||
| Dividends paid | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Dividend distributed to noncontrolling interest | ( | ) | ||||||||||||||
| Repurchase of ordinary shares from open market | ( | ) | ( | ) | ||||||||||||
| Others | ( | ) | ||||||||||||||
| Net cash used in financing activities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents, and restricted cash | ( | ) | ( | ) | ||||||||||||
| Cash and cash equivalents and restricted cash at beginning of year | ||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||||||||||||
| Cash and cash equivalents and restricted cash at the end of the year | ||||||||||||||||
Reconciliation in amounts on the consolidated balance sheets: | ||||||||||||||||
| Cash and cash equivalents at the end of the year | ||||||||||||||||
| Restricted cash at the end of the year | ||||||||||||||||
| Total of cash and cash equivalents and restricted cash at the end of the year | ||||||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||
| Income taxes paid | ||||||||||||||||
| Supplemental disclosure of non-cash operating activity: | ||||||||||||||||
| Effect on operating assets upon the adoption of ASU 2016-13 on January 1, 2020 | ||||||||||||||||
F-13
FANHUA INC.
Consolidated Statements of Cash Flows—(Continued)
(In thousands)
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Note 2(u) | ||||||||||||||||
| Supplemental disclosure of non-cash investing activities: | ||||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations, net of decrease of right-of-use assets for early terminations | ||||||||||||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||||||||||
| Dividend distribution in equity method investee’s shares | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-14
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(1) Organization and Description of Business
Fanhua Inc. (the “Company”) (formally known as “CNinsure Inc.”) was incorporated in the Cayman Islands on April 10, 2007 and listed on the Nasdaq on October 31, 2007. The Company, its subsidiaries and the consolidated variable interest entities (the “VIEs”) are collectively referred to as the “Group”. The Group is principally engaged in the provision of agency services and insurance claims adjusting services in the People’s Republic of China (the “PRC”).
(2) Summary of Significant Accounting Policies
| (a) | Basis of Presentation and Consolidation |
The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated financial statements include the financial statements of the Company, all its subsidiaries and those VIEs of which the Company is the primary beneficiary from the dates they were acquired or incorporated. All intercompany balances and transactions have been eliminated in consolidation.
In order to comply with the PRC laws and regulations which prohibit or restrict foreign control of companies involved in provision of internet content and other restricted businesses, the Group operates certain of its businesses which are subject to restrictions in the PRC through PRC domestic companies, whose equity interests are held by certain individuals (“Nominee Shareholders”). The Group obtained control over these PRC domestic companies by entering into a series of contractual arrangements with these PRC domestic companies and their respective Nominee Shareholders. Management concluded that these PRC domestic companies are consolidated VIEs of the Group, of which the Group is the primary beneficiary. As such, the Group consolidated the financial results of these PRC domestic companies and their subsidiaries in the Group’s consolidated financial statements. See Note 10 for details.
| (b) | Use of Estimates |
The preparation of the consolidated financial statements in conformity with US GAAP requires management of the Group to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. The Group evaluates estimates, including those related to the amounts of variable considerations of revenue contracts with respect to long-term life insurance products, the allowance for credit losses of accounts receivable, contract assets, other receivables, fair values of certain debt and equity investments, the useful lives of property, plant and equipment, impairment of long-lived assets, goodwill, investments in affiliates and other long-term equity investments, and deferred tax valuation allowance among others. The Group, based their estimates on historical experience and various other factors, believed to be reasonable under the circumstances, that the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
F-15
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (c) | Cash and Cash Equivalents and Restricted Cash |
Cash and cash equivalents consist of cash on hand, bank deposits and short-term, highly liquid investments, which have original maturities of three months or less, and that are readily convertible to known amounts of cash, and have insignificant risk of changes in value related to changes in interest rates.
In its capacity as an insurance
agent, the Group collects premiums from the insureds and remits the premiums to the appropriate insurance companies. Accordingly, as reported
in the consolidated statements of balance sheets, “premiums” are receivables from the insureds of RMB
| (d) | Short Term Investments |
All highly liquid investments with original maturities less than twelve months or investments that are expected to be realized in cash during the next twelve months are classified as short-term investments. The Group accounts for short-term debt investments in accordance with ASC Topic 320, Investments – Debt Securities (“ASC 320”). The Company classifies the short-term investments in debt securities as held-to-maturity or available-for-sale, whose classification determines the respective accounting methods stipulated by ASC 320. Dividend and interest income for all categories of investments in securities are included in earnings. Any realized gains or losses on the sale of the short-term investments are determined on a specific identification method, and such gains and losses are reflected in earnings during the period in which gains or losses are realized.
Securities that the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and stated at amortized cost less allowance for credit losses. The Group has no debt investments classified as trading. The Group’s short term investments are mainly available-for-sale debt securities that do not have a quoted market price in an active market. Available-for-sale investments are carried at fair values and the unrealized gains or losses from the changes in fair values are included in accumulated other comprehensive income or loss. The Group benchmarks the values of its other investments against fair values of comparable investments and reference to product valuation reports as of the balance sheet date, and categorizes all fair value measures of short term investments as level 2 of the fair value hierarchy.
F-16
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (d) | Short Term Investments (Continued) |
The Group evaluates each individual available-for-sale debt securities periodically for impairment. For investments where the Group does not intend to sell, the Group evaluates whether a decline in fair value is due to deterioration in credit risk. Credit-related impairment losses, not to exceed the amount that fair value is less than the amortized cost basis, are recognized through an allowance for credit losses on the consolidated balance sheet with corresponding adjustment in the consolidated statements of income and comprehensive income. Subsequent increases in fair value due to credit improvement are recognized through reversal of the credit loss and corresponding reduction in the allowance for credit loss. Any decline in fair value that is non-credit related is recorded in accumulated other comprehensive income as a component of shareholder’s equity. As of December 31, 2022, there were no investments held by the Group that had been in continuous unrealized loss position.
No impairment loss on short term investments was identified for years ended December 31, 2020, 2021 and 2022, respectively.
| (e) | Accounts Receivable and Contract Assets |
Accounts receivable are recorded at the amount that the Group expects to collect and do not bear interest. Accounts receivables represent fees receivable on agency and claims adjusting services primarily from insurance companies.
The Group evaluates the collectability of its trade receivables and contract assets based on a combination of factors. The Group generally does not require collateral on trade receivables and contract assets as the majority of the Group’s customers are large, well-established insurance companies. The Group estimates allowances for expected credit losses using relevant available information from internal and external sources, related to past events, the age of the accounts receivable and contract assets balances, current conditions, and reasonable and supportable forecasts. Credit loss expenses are assessed quarterly and included in general and administrative expense on the consolidated statements of income and comprehensive income.
Accounts receivable and Contract Assets, net is analyzed as follows:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| Accounts receivable | ||||||||
| Contract Assets (See Note 2(q)) | ||||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable and Contract Assets, net | ||||||||
F-17
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (e) | Accounts Receivable and Contract Assets (Continued) |
The following table summarizes the movement of the Group’s allowance for expected credit losses of accounts receivable and contract assets:
| 2020 | 2021 | 2022 | ||||||||||
| RMB | RMB | RMB | ||||||||||
| Balance at the beginning of the year | ||||||||||||
| Cumulative-effect adjustment upon adoption of ASU 2016-13 | ||||||||||||
| Current period provision (reversal of) for expected credit losses | ( | ) | ||||||||||
| Write-offs | ( | ) | ( | ) | ( | ) | ||||||
| Balance at the end of the year | ||||||||||||
| (f) | Property, Plant and Equipment |
Property, plant and equipment are stated at cost. Depreciation and amortization are calculated using the straight-line method over the following estimated useful lives, taking into account residual value:
| Estimated useful life (Years) | Estimated residual value | |||||||
| Building | ||||||||
| Office equipment, furniture and fixtures | ||||||||
| Motor vehicles | ||||||||
| Leasehold improvements | ||||||||
The depreciation methods and estimated useful lives are reviewed regularly. The following table summarizes the depreciation expense recognized in the consolidated statements of income and comprehensive income:
| 2020 | 2021 | 2022 | ||||||||||
| RMB | RMB | RMB | ||||||||||
| Operating costs | ||||||||||||
| Selling expenses | ||||||||||||
| General and administrative expenses | ||||||||||||
| Depreciation expense | ||||||||||||
F-18
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (g) | Business combinations and non-controlling interests |
In determining whether a particular set of activities and assets is a business, the Group assesses whether the set of assets and activities acquired includes, at a minimum, an input and substantive process and whether the acquired set has the ability to produce outputs. The Group has an option to apply a ‘concentration test’ that permits a simplified assessment of whether an acquired set of activities and assets is not a business. The optional concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.
Transactions in which the acquired is considered a business are accounted for as a business combination as described below. Conversely, transactions not considered as business acquisition are accounted for as acquisition of assets and liabilities. In such transactions, the cost of acquisition is allocated proportionately to the acquired identifiable assets and liabilities, based on their proportionate fair value on the acquisition date. In an assets acquisition, no goodwill is recognized, and no deferred taxes are recognized in respect of the temporary differences existing on the acquisition date.
The Group accounts for its business combinations using the acquisition method of accounting in accordance with ASC 805 “Business Combinations”. The cost of an acquisition is measured as the aggregate of the acquisition date fair value of the assets transferred, liabilities incurred by the Group to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets acquired and liabilities assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total costs of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill.
For the Group’s majority-owned subsidiaries, VIEs and subsidiaries of VIEs, a non-controlling interest is recognized to reflect the portion of their equity which is not attributable, directly or indirectly, to the Group. Consolidated net income on the consolidated statements of income and comprehensive income includes the net income attributable to non-controlling interests. The cumulative results of operations attributable to non-controlling interests, are recorded as non-controlling interests on the Group’s consolidated balance sheets.
| (h) | Goodwill and Other Intangible Assets |
Goodwill and amortization of intangible assets
Goodwill represents the excess of costs over fair value of net assets of businesses acquired in a business combination. Goodwill is not amortized, but is tested for impairment at the reporting unit level at least on an annual basis at the balance sheet date or more frequently if certain indicators arise. The Group operated in two reporting units for the years ended December 31, 2021 and 2022.
The impairment test is performed as of year-end or if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount by comparing the fair value of a reporting unit with its carrying value. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
The impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a significant impact on the amount of any impairment charge recorded. Estimates of fair value are primarily determined by using discounted cash flows. Discounted cash flows method is dependent upon assumptions of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future may differ significantly from those previously forecasted. Other significant assumptions include growth rates and the discount rate applicable to future cash flows.
F-19
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (h) | Goodwill and Other Intangible Assets (Continued) |
Goodwill and amortization of intangible assets (Continued)
In 2021 and 2022, management compared the carrying value of each reporting unit, inclusive of assigned goodwill, to its respective fair value. The fair value of all reporting units was estimated by using the income approach. Based on this quantitative test, it was determined that the fair value of each reporting unit tested exceeded its carrying amount and, therefore, the management concluded that goodwill was not impaired as of December 31, 2021and 2022, respectively.
Identifiable intangibles assets are required to be determined separately from goodwill based on their fair values. In particular, an intangible asset acquired in a business combination should be recognized as an asset separate from goodwill if it satisfies either the “contractual-legal” or “separability” criterion. Intangible assets with a finite economic life are carried at cost less accumulated amortization. Amortization for identifiable intangible assets categorized as customer relationships is computed using the accelerated method, while amortization for other identifiable intangible assets is computed using the straight-line method over the intangible assets’ economic lives. Intangible assets with indefinite economic lives are not amortized but carried at cost less any subsequent accumulated impairment losses. If an intangible asset that is not being amortized is subsequently determined to have a finite economic life, it will be tested for impairment and then amortized prospectively over its estimated remaining economic life and accounted for in the same manner as other intangible assets that are subject to amortization. Intangible assets with indefinite economic lives are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be impaired.
The intangible assets, net
consisted of trade names with a cost of RMB
Impairment of intangible assets with definite lives
The Group evaluates the recoverability of identifiable intangible assets with determinable useful lives whenever events or changes in circumstances indicate that these assets’ carrying amounts may not be recoverable. The Group measures the carrying amount of identifiable intangible assets with determinable useful lives against the estimated undiscounted future cash flows associated with each asset. Impairment exists when the sum of the expected future net cash flows is less than the carrying value of the asset being evaluated. Impairment loss is calculated as the amount by which the carrying value of the asset exceeds its fair value. Fair value is estimated based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Group to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. The Group recognized no impairment losses on identifiable intangible assets with determinable useful lives in the years ended December 31, 2020, 2021 and 2022.
Impairment of indefinite-lived intangible assets
An intangible asset that is not subject to amortization is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Such impairment test is to compare the fair values of assets with their carrying amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair values. The estimates of fair values of intangible assets not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions are inherent in this process, including estimates of discount rates or market price. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. Market prices are based on a potential purchase quote from a third party, if any. The Group recognized no impairment losses on its indefinite-lived intangible assets in the years ended December 31, 2020, 2021 and 2022.
F-20
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (i) | Investment in Affiliates |
The Group uses the equity method of accounting for investments in which the Group has the ability to exercise significant influence, but does not have a controlling interest.
The Group continually reviews its investment in equity investees to determine whether a decline in fair value to an amount below the carrying value is other-than-temporary. The primary factors the Group considers in its determination are the duration and severity of the decline in fair value; the financial condition, operating performance and the prospects of the equity investee; and other company specific information such as the stock price of the investee and its corresponding volatility, if publicly traded, the Group’s intent and ability to hold the investment until recovery, and changes in the macro-economic, competitive and operational environment of the investee. If the decline in fair value is deemed to be other-than-temporary, the carrying value of the equity investee is written down to fair value.
| (j) | Long-term Equity Investments |
Other non-current assets mainly represent long-term equity investments accounted for under the measurement alternative method.
Equity securities without readily determinable fair value
The Group has long-term investments in equity security of certain privately held companies which the Group exerts no significant influence or a controlling interest. As a result of adoption of “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”) in January 1, 2019, equity securities without readily determinable fair values that do not qualify for the practical expedient in ASC 820, Fair Value Measurements and Disclosure to estimate fair value using the net asset value per share (or its equivalent) of the investment, are measured and recorded using a measurement alternative that measures the securities at cost less impairment, if any, plus or minus changes resulting from qualifying observable price changes. Significant judgments are required to determine whether observable price changes are orderly transactions and identical or similar to an investment held by the Group.
During each reporting period, the Group makes a qualitative assessment considering impairment indicators to separately evaluate whether each of its equity securities without readily determinable fair value is impaired. Impairment indicators that the Group considers include, but are not limited to a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, factors such as negative cash flows from operations and working capital deficiencies that raise significant concerns about the investee’s ability to continue as a going concern, current economic and market conditions and other specific information. If a qualitative assessment indicates that the investment is impaired, the entity has to estimate the investment’s fair value in accordance with the principles of ASC 820. If the fair value is less than the investment’s carrying value, the Group recognizes an impairment loss in earnings equal to the difference between the carrying value and fair value.
The Group recorded an impairment
of RMB
F-21
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (k) | Impairment of Long-Lived Assets |
Property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset.
| (l) | Insurance Premium Payables |
Insurance premium payables are insurance premiums collected on behalf of insurance companies but not yet remitted as of the balance sheet dates.
| (m) | Treasury Shares |
Treasury shares represent ordinary shares repurchased by the Group that are no longer outstanding and are held by the Group. The repurchased ordinary shares are recorded whereby the total par value of shares acquired is recorded as treasury stock and the difference between the par value and the amount of cash paid is recorded in additional paid-in capital. If additional paid-in capital is not available or is not sufficient, the remaining amount is to reduce retained earnings.
| (n) | Income Taxes |
Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, net operating loss carryforwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Group records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Group recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Group recognizes interest and penalties related to unrecognized tax benefits, if any, on the income tax expense line in the accompanying consolidated statement of income and comprehensive income. Accrued interest or penalties are included on the other tax liabilities line in the consolidated balance sheets.
| (o) | Share-based Compensation |
All forms of share-based payments to employees and nonemployees, including stock options and stock purchase plans, are treated the same as any other form of compensation by recognizing the related cost in the consolidated statements of income and comprehensive income. The Group recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the amount of compensation cost recognized at any date must at least equal to the portion of the grant-date value of the award that is vested at that date. For awards with both service and performance conditions, if each tranche has an independent performance condition for a specified period of service, the Group recognizes the compensation cost of each tranche as a separate award on a straight-line basis; if each tranche has performance conditions that are dependent of activities that occur in the prior service periods, the Group recognizes the compensation cost on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. The Group has made an accounting policy election to account for forfeitures when they occur for an award with only service conditions. For an award with a performance condition, the Group continues to assess at each reporting period whether it is probable that the performance condition will be achieved. No compensation cost is recognized for instruments that employees and nonemployees forfeit because a service condition or a performance condition is not satisfied.
F-22
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (o) | Share-based Compensation (Continued) |
Employee share-based compensation
Compensation cost related to employee stock options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. If an award requires satisfaction of one or more performance or service conditions (or any combination thereof), compensation cost is recognized if the requisite service is rendered, while no compensation cost is recognized if the requisite service is not rendered.
Nonemployee share-based compensation
Consistent with the accounting requirement for employee share-based compensation, nonemployee share-based compensation within the scope of Topic 718 are measured at grant-date fair value of the equity instruments, which the Group is obligated to issue when the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.
Classification of award
Options or similar instruments on shares shall be classified as liabilities instead of equity if either of the following conditions is met:
| ● | The underlying shares are classified as liabilities; |
| ● | The Group can be required under any circumstances to settle the option or similar instrument by transferring cash or other assets. |
The Group measures a liability award under a share-based payment arrangement based on the award’s fair value remeasured at each reporting date until the date of settlement. The corresponding credit is recorded as a share-based liability. Compensation cost for each period until settlement shall be based on the change (or a portion of the change, depending on the percentage of the requisite service that has been rendered at the reporting date) in the fair value of the instrument for each reporting date.
The Group measures an equity award based on the awards’ fair value on grant date and recognizes the compensation cost over the vesting periods, with the corresponding credit recorded as additional paid-in capital.
F-23
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (o) | Share-based Compensation (Continued) |
Modification of an Award
A change in any of the terms or conditions of the awards is accounted for as a modification of the award. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, measured based on the fair value of the awards and other pertinent factors at the modification date. For vested awards, the Group recognizes incremental compensation cost in the period the modification occurs. For unvested awards, the Group recognizes over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date. If the fair value of the modified award is lower than the fair value of the original award immediately before modification, the minimum compensation cost the Group recognizes is the cost of the original award.
Cancellation of an Award
A cancellation of an award that is not accompanied by the concurrent grant of (or offer to grant) a replacement award or other valuable consideration shall be accounted for as a repurchase for no consideration. Accordingly, any previously unrecognized compensation cost shall be recognized immediately at the cancellation date.
Share-based compensation
expenses of RMB(
| (p) | Employee Benefit Plans |
As stipulated by the regulations of the PRC, the Group’s subsidiaries in the PRC participate in various defined contribution plans organized by municipal and provincial governments for its employees. The Group is required to make contributions to these plans at a percentage of the salaries, bonuses and certain allowances of the employees. Under these plans, certain pension, medical and other welfare benefits are provided to employees. The Group has no other material obligation for the payment of employee benefits associated with these plans other than the annual contributions described above. The contributions are charged to the consolidated statements of income and comprehensive income as they become payable in accordance with the rules of the above mentioned defined contribution plans.
| (q) | Revenue Recognition |
The Group’s revenue from contracts with insurance companies is derived principally from the provision of agency and claims adjusting services, and insurance companies are defined as the Group’s customers under ASC 606 “Revenue from Contracts with Customers” (“ASC 606”). The Group disaggregates its revenue from different types of service contracts with customers by principal service categories, as the Group believes it best depicts the nature, amount, timing and uncertainty of its revenue and cash flows. See Note 22 for detailed disaggregated revenue information that is disclosed for each reportable segment.
F-24
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (q) | Revenue Recognition (Continued) |
The following is a description of the accounting policy for the principal revenue streams of the Group.
Insurance agency services revenue
The Group derives agency revenue serving as a sales agent to distribute various life insurance and property and casualty (“P&C”) insurance products on behalf of insurance companies by which the Group is entitled to receive an initial commission from the insurance companies based on the premium paid by the policyholders for the related insurance policy sold. For life insurance agency, the Group is also entitled to renewal commissions when the policyholder renews the policy within the renewal term of the original policy as such life insurance products are typically long-term products.
The Group has identified its promise to sell insurance products on behalf of an insurance company as the performance obligation in its contracts with the insurance companies. The Group’s performance obligation to the insurance company is satisfied and revenue is recognized at a point in time when an insurance policy becomes effective. Specifically for life insurance agency business, certain contracts include the promise to provide certain post-sales administrative services to policyholders on behalf of the insurance company, such as responding to the policyholder inquiries, facilitating the renewal process and/or gathering information from the policyholder to assist the insurance companies to update the contact information of the policy holder, the Group has concluded such services are administrative in nature and immaterial, and none of these activities on their own results in a transfer of a good or services to the insurance company in the context of the contract. Accordingly, no performance obligation exists after a policy becomes effective.
Initial placement of an insurance policy
The Group recognizes agency
revenue related P&C insurance products (which is short term in nature and related premiums are collected upfront) when an insurance
policy becomes effective. The commission to be earned is required to be partially refunded contingently on policy cancellations. Based
on its past experience, subsequent commission adjustments in connection with P&C insurance policy cancellations have been de minims
to date, and are recognized upon notification from the insurance carriers. Actual commission and fee adjustments in connection with the
cancellation of P&C insurance policies were
For life insurance products, there is generally a 10 to 15 days hesitation period after an initial placement of a life insurance policy, during which the policyholder has a legal right to unconditionally cancel the effective policy regardless of the reasons. According to relevant terms of the insurance agency contracts with customers, the Group reconciles information of policies sold which also includes policies that have been cancelled by policyholders within the hesitation period, with the insurance companies on a monthly basis. Therefore, the Group estimates cancellation of policies that have become effective but are still within the hesitation period based on subsequent actual data at each reporting date. The cancellation of an effective life insurance policy by the policyholder after the hesitation period does not require the Group to refund initial commission to insurance companies, but rather impacts the Group’s estimate on future commission related to renewal(s) of the policy.
F-25
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (q) | Revenue Recognition (Continued) |
Insurance agency services revenue (Continued)
Initial placement of an insurance policy (Continued)
In addition, for life insurance
agency, the Group may receive a performance bonus from insurance companies as agreed and per contract provisions. Once the Group achieves
a certain sales volume based on respective agency agreements, the bonus will become due. Performance bonus represents a form of variable
consideration associated with certain sales volume, for which the Group earns commissions. The Group estimates the amount of consideration
with a constraint applied that will be received in the coming year such that a significant reversal of revenue is not probable, and includes
performance bonus as part of the transaction price. For the years ended December 31, 2020, 2021 and 2022, the Group recognized contingent
performance bonus of RMB
Renewals of a life insurance policy
For the long-term life insurance products, in addition to the initial commission earned, the Group is also entitled to subsequent renewal commission and compensation, and renewal performance bonus which represents variable considerations and are contingent on future renewals of initial policies or the Group achieves its performance target.
When making estimates of the amount of variable consideration to which the Group expects to be entitled, the Group uses the expected value method and evaluates many factors, including but not limited to, insurance companies mix, product mix, renewal term of various products, renewal premium rates and commission rates, to determine the method(s) of measurement, relevant inputs and the underlying assumptions. The Group considers constraints as well when determining the amount which should be included in the transaction price.
For years prior to 2021, revenue related to the variable consideration is recorded when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, i.e., when a policyholder pays the renewal premium to the insurance company, and the policy is renewed because the Group was not able to conclude a significant reversal to the estimated variable consideration is not probable, considering factors such as a) the Group has limited history of selling its current life insurance products with its current customers, such that the Group’s past experience in outdated products is of little predictive value in renewal(s) rate estimate; b) the occurrence of a renewal is outside the Group’s control and the estimate of renewal premium rates is complex and requires significant assumptions; and c) the contingency lasts across a long period of time.
The Group performs ongoing evaluation of the appropriateness of the constraint applied, and will consider the sufficiency of evidence that would suggest that the long-term expectation underlying the assumptions has changed. Starting from January 1, 2021, the Group believes that it has already accumulated adequate scale of historical data and experiences at a confidence level that through which the Group can utilize to make a reasonable estimate of variable considerations over its portfolio of contracts. The estimated renewal commissions are contingent on future renewals of initial policies or achievement of certain performance targets. Given the material uncertainty around the future renewal of the insurance policies, the estimated renewal commissions expected to be collected are recognized as revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is subsequently resolved. The judgment and assumptions are continuously re-evaluated and adjusted as needed along with the accumulation of historical experiences and data when new information becomes available. Actual renewal commissions in the future may differ significantly from those previously estimated.
F-26
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (q) | Revenue Recognition (Continued) |
Insurance agency services revenue (Continued)
Renewals of a life insurance policy (Continued)
For the year ended December
31, 2020, 2021 and 2022, the Group recognized revenues related to estimated variable renewal commissions with respect to long-term life
insurance products amounting to , RMB
Insurance claims adjusting services revenue
For insurance claims adjusting services, performance obligations are considered met and revenue is recognized when the services are rendered and completed, at the time loss adjusting reports are confirmed being received by insurance companies. The Group does not accrue any service fee before the receipt of an insurance company’s acknowledgement of receiving the adjusting reports. Any subsequent adjustments in connection with discounts which have been de minims to date are recognized in revenue upon notification from the insurance companies.
Contract balances
The Group’s contract balances include accounts receivable and contract asset. The balances of accounts receivable as of December 31, 2021 and 2022 are all derived from contracts with customers.
Started in 2021, the Group recognized revenues and correspondent contract assets derived from estimated renewal commissions. Accordingly, the Group presented separately, in the consolidated balance sheets as of December 31, 2021 and 2022, respectively.
The Group has no advance from customers in advance of revenue recognition, or contract liability and, therefore, none of the revenue recognized in the current period was previously recognized as a contract liability.
Practical expedients and exemptions
The Group generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses in the consolidated statements of income and comprehensive income, as the amortization period is less than one year and the Group has elected the practical expedient included in ASC 606.
The Group has applied the optional exemption provided by ASC 606 to not disclose the value of remaining performance obligations not yet satisfied as of period end for contracts with original expected duration of one year or less.
Value-added tax and surcharges
The Group presents revenue
net of tax surcharges and value-added taxes incurred. The tax surcharges amounted to RMB
Total value-added taxes
paid by the Group during the years ended December 31, 2020, 2021 and 2022 amounted to RMB
F-27
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (r) | Fair Value of Financial Instruments |
Fair value is considered to be the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs may be used to measure fair value include:
| Level 1 | Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. | |
| Level 2 | Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. | |
| Level 3 | Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. |
The carrying values of the Group’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, insurance premium payables, other receivables, accounts payable and other payables, approximate their fair values due to the short-term nature of these instruments.
Measured at fair value on a recurring basis
As of December 31, 2021 and 2022, information about inputs into the fair value measurements of the Group’s assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follows.
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Description | As
of | Quoted | Significant | Significant | ||||||||||||
| RMB | RMB | RMB | RMB | |||||||||||||
| Short-term investments - debt security | ||||||||||||||||
F-28
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (r) | Fair Value of Financial Instruments (Continued) |
Measured at fair value on a recurring basis (Continued)
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Description | As
of | Quoted | Significant | Significant | ||||||||||||
| RMB | RMB | RMB | RMB | |||||||||||||
| Short-term investments - debt security | — | — | ||||||||||||||
The majority of debt security consists of investments in bank financial products, trust products and asset management plans that normally pay a prospective fixed rate of return. These investments are recorded at fair values on a recurring basis. The Group measured these investments at fair values and the unrealized gains or losses from the changes in fair values are included in accumulated other comprehensive income or loss, at the balance sheet date. It is classified as Level 2 of the fair value hierarchy since fair value measurement at the reporting date is benchmarked against fair value of comparable investments.
Measured at fair value on a non-recurring basis
The Group measures certain assets, including equity securities without readily determinable fair values, equity method investments and intangible assets, at fair value on a nonrecurring basis when they are deemed to be impaired. The fair values of these investments and intangible assets are determined based on valuation techniques using the best information available, and may include management judgments, future performance projections, etc. An impairment charge to these investments is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary. Impairment charge to the intangible assets is recorded when their carrying amounts may not be recoverable.
Goodwill (Note 7) and intangible assets (Note 2(h)) with indefinite lives are measured at fair value on a nonrecurring basis, and they are recorded at fair value only when impairment is recognized by applying unobservable inputs such as forecasted financial performance of the acquired business, discount rate, etc. to the discounted cash flow valuation methodology that are significant to the measurement of the fair value of these assets (Level 3).
Investments in affiliates (Note 8) are measured at fair value on a nonrecurring basis, and they are recorded at fair value only when there is other-than-temporary-impairment. The fair value of investment in an affiliate that is publicly listed is determined based on the market value of its share (Level 1) on the date such impairment is recorded.
F-29
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (s) | Foreign Currencies |
The functional currency of the Company is the United States dollar (“USD”). Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income or loss in the consolidated statements of income and comprehensive income. The Group has chosen the Renminbi (“RMB”) as their reporting currency.
The functional currency of most of the Company’s subsidiaries is RMB. Transactions in other currencies are recorded in RMB at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are translated into RMB at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in the consolidated statements of income and comprehensive income.
| (t) | Foreign Currency Risk |
The RMB is not a freely convertible
currency. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion
of RMB into foreign currencies. The value of RMB is subject to changes in central government policies and international economic and political
developments that affect supply and demand in the China Foreign Exchange Trading System market of cash and cash equivalents and restricted
cash. The Group had aggregate amounts of RMB
| (u) | Translation into USD |
The consolidated financial
statements of the Group are stated in RMB. Translations of amounts from RMB into USD are solely for the convenience of the readers outside
of China and were calculated at the rate of US$
| (v) | Segment Reporting |
As of December 31, 2021 and 2022, the Group operated two segments: (1) the insurance agency segment, which mainly consists of providing agency services for P&C insurance products and life insurance products to individual clients, and (2) the claims adjusting segment, which consists of providing pre-underwriting survey services, claim adjusting services, disposal of residual value services, loading and unloading supervision services, and consulting services. Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the Group’s chief operating decision maker in deciding how to allocate resources and in assessing performance.
Substantially all revenues of the Group are derived in the PRC and all long-lived assets are located in the PRC.
| (w) | Earnings per Share (“EPS”) or ADS |
Basic EPS is calculated by dividing the net income available to common shareholders by the weighted average number of ordinary shares /ADS outstanding during the year. Diluted EPS is calculated by using the weighted average number of ordinary shares /ADS outstanding adjusted to include the potentially dilutive effect of outstanding share-based awards, unless their inclusion in the calculation is anti-dilutive.
The contingently issuable shares /ADS related to the 521 Plan (see Note 21(b) for details), are subject to fulfillment of the performance conditions as stipulated under the 521 Plan. Therefore, these shares are excluded from basic earnings per share until the shares are fully vested upon the achievement of performance conditions under the 521 Plan by the Participants. In December 2020, the Group cancelled the 521 Plan and no impact in 2021 and 2022.
F-30
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (x) | Advertising Costs |
Advertising costs are expensed
as incurred. Advertising costs amounted to RMB
| (y) | Leases |
The Group leases office space,
vehicles and certain equipment under operating leases for terms ranging from short term (under 12 months) to
The Group determines whether a contract contains a lease at contract inception. A contract contains a lease if there is an identified asset and the Group has the right to control the use of the identified asset. At the commencement of each lease, management determines its classification as an operating or finance lease. For leases that qualify as operating leases, the Group recognizes a right-of-use (“ROU”) asset and a lease liability based on the present value of the lease payments over the lease term in the consolidated statements of balance sheets at commencement date. As all of the leases do not have implicit rates available, the Group uses incremental borrowing rates based on the information available at lease commencement date in determining the present value of future payments. The incremental borrowing rates are estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased assets are located.
The ROU asset is measured at the amount of the lease liabilities with adjustments, if applicable, for lease prepayments made prior to or at lease commencement, initial direct costs incurred and lease incentives. For office space leases, the Group identifies the lease and non-lease components (e.g., common-area maintenance costs) and accounts for non-lease components separately from lease component. The Group’s office space lease contracts have only one separate lease component and have no non-components (e.g., property tax or insurance). Most of the office space lease contracts have no non-lease components. For the office space lease contracts include non-lease components, the fixed lease payment is typically itemized in the office space lease contract for separate lease component and non-lease components. Therefore, the Group does not allocate the consideration in the contract to the separate lease component and the non-lease components.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Group has made an accounting policy election to exempt leases with an initial term of 12 months or less without a purchase option that is likely to be exercised from being recognized on the balance sheet. Payments related to those leases continue to be recognized in the consolidated statement of income and comprehensive income on a straight-line basis over the lease term.
In addition, the Group does not have any related-party leases or sublease transactions.
F-31
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
| (z) | Accumulated Other Comprehensive Income |
The Group presents comprehensive income in the consolidated statements of income and comprehensive income with net income in a continuous statement.
Accumulated other comprehensive income mainly represents foreign currency translation adjustments, changes in fair value of short term investments and share of other comprehensive income of the affiliates for the period.
(aa) Government grants
Government grants primarily
consist of financial subsidies received from provincial and local governments for operating a business in their jurisdictions and compliance
with specific policies promoted by the local governments. The Group records such government subsidies as other income or reduction of
expenses or cost of revenues when it has fulfilled all of its obligation related to the subsidy. The Group recognized RMB
(ab) Recently Adopted Accounting Pronouncements
Government Assistance (Topic 832) – In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832) — Disclosures by Business Entities about Government Assistance (“ASU 2021-10”). It requires issuers to make annual disclosures about government assistance, including the nature of the transaction, the related accounting policy, the financial statement line items affected and the amounts applicable to each financial statement line item, as well as any significant terms and conditions, including commitments and contingencies. The amendments in this Update are effective for all entities within their scope for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted this guidance on January 1, 2022 with no material impact on its audited consolidated financial statements.
Business Combinations (Topic 805) – In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) — Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which provides guidance on the acquirer’s accounting for acquired revenue contracts with customers in a business combination. The amendments require an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination at the acquisition date in accordance with ASC 606 as if it had originated the contracts. This guidance also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination. The new guidance should be applied prospectively to business combinations occurring on or after the date of adoption. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods therein. Early adoption is permitted. The Group early adopted the new standard beginning January 1, 2022 with no material impact on the consolidated financial statements.
F-32
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(3) Acquisitions and disposals
Acquisition of an agency intermediate company in 2022
In August of 2022, to support
the Group’s new strategy on “Open Platform”, the Group acquired
The consideration, fair value of assets acquired and liabilities assumed, as well as goodwill resulted from the acquisition are as follows:
| RMB | ||||
| Consideration: | ||||
| Cash | ||||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | ||||
| Cash and cash equivalents | ||||
| Short term investments | ||||
| Accounts receivables | ||||
| Other receivable and current assets | ||||
| Property and equipment | ||||
| Right of use assets | ||||
| Total assets acquired | ||||
| Accounts payables | ( | ) | ||
| Accrued expenses and other current liabilities | ( | ) | ||
| Lease liability | ( | ) | ||
| Total liabilities assumed | ( | ) | ||
| Net assets acquired | ||||
| Goodwill | ||||
Goodwill arising from the acquisition of this agency intermediate was attributable to the benefit of expected synergies as of the date of acquisition and recorded in insurance agency segment. The resulted goodwill is not expected to be tax deductible for tax purposes.
The result of operation of aforementioned acquisition has been consolidated by the Group from August 2022, and the results of operations for the aforementioned acquisition is not material to the Group’s consolidated financial statements as a whole.
Pro forma financial information is not presented for the aforementioned business acquisition in the fiscal year 2022 as it is immaterial to the reported results.
Disposal of subsidiaries in 2021
In 2021, the Group disposed
of two subsidiaries for a total consideration of RMB
F-33
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(4) Other Receivables, net
Other receivables, net consist of the following:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| Advances to staff (i) | ||||||||
| Advances to entrepreneurial agents (i) | ||||||||
| Advances to a third party channel vendor (ii) | ||||||||
| Rental deposits | ||||||||
| Amount due from third parties (iii) | ||||||||
| Other | ||||||||
| Less: Allowance for current expected credit losses | ( | ) | ( | ) | ||||
| Other receivables, net | ||||||||
| (i) |
| (ii) |
|
| (iii) |
(5) Property, Plant and Equipment, net
Property, plant and equipment, net, is comprised of the following:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| Building | ||||||||
| Office equipment, furniture and fixtures | ||||||||
| Motor vehicles | ||||||||
| Leasehold improvements | ||||||||
| Total | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Construction in progress | ||||||||
No impairment for property, plant and equipment was recorded for the years ended December 31, 2020, 2021 and 2022.
(6) Other current assets, net
Other current assets consist of the following:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| Prepayment for acquisition of short-term investments | ||||||||
| Prepaid operating costs | ||||||||
| Prepaid miscellaneous daily expenses | ||||||||
| Other | ||||||||
| Less: Allowance for current expected credit losses | ( | ) | ||||||
F-34
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(7) Goodwill, net
The gross amount of goodwill and accumulated impairment losses by reporting unit as of December 31, 2021 and 2022 are as follows:
Agency | Claims Adjusting segment | Total | ||||||||||
| RMB | RMB | RMB | ||||||||||
| Gross as of December 31, 2021 | ||||||||||||
| Addition in 2022 | ||||||||||||
| Accumulated impairment loss as of December 31, 2021 and 2022 | ( | ) | ( | ) | ( | ) | ||||||
| Net as of December 31, 2021 | ||||||||||||
| Net as of December 31, 2022 | ||||||||||||
The Group performed annual impairment analysis as of the balance sheet date. No impairment loss was recognized in goodwill for the years ended December 31, 2020, 2021 and 2022.
(8) Investments in Affiliates
As of December 31, 2021 and 2022, the Group’s investments accounted for under the equity method were as follows:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| CNFinance | ||||||||
| Others | ||||||||
| Total | ||||||||
Investment in CNFinance Holdings Limited (“CNFinance”)
The Group invested
On May 27, 2022 (the “Declare
Date”), the board of directors authorized and approved the Group’s distribution of
The summarized financial information of equity method investees is illustrated as below:
| As of December 31, 2021 | ||||
| RMB | ||||
| Statements of Balance Sheet | ||||
| Total assets | ||||
| Total liabilities | ||||
| Year Ended December 31, | ||||||||
| 2020 | 2021 | |||||||
| Results of Operation | RMB | RMB | ||||||
| Income from operations | ||||||||
| Net profit (loss) | ( | ) | ||||||
Upon the completion of the disposal of CNFinance, the remaining two investees did not meet the significance test in accordance with SEC Regulation S-X, Rule 1-02(w) (i.e., the asset, investment, or income test). In accordance with SEC Regulation S-X, Rules 4-08(g), the Group did not disclose the investee’s summarized financial information for the year ended December 31, 2022.
F-35
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(9) Leases
The Group’s lease for office space include only fixed rental payments with no variable lease payment terms. As of December 31, 2021 and 2022, there were no leases that have not yet commenced.
The following represents the aggregate ROU assets and related lease liabilities as of December 31, 2021 and 2022:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| Operating lease ROU assets | ||||||||
| Current operating lease liability | ||||||||
| Non-current operating lease liability | ||||||||
| Total operating leased liabilities | ||||||||
The weighted average lease term and discount rate as of December 31, 2021 and 2022 were as follows:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| Weighted average lease term: | ||||||||
| Operating leases | ||||||||
| Weighted average discount rate: | ||||||||
| Operating leases | % | % | ||||||
The components of lease expenses for the years ended December 31, 2021 and 2022 were as follows:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| Operating lease expense | ||||||||
| Short term lease expense | ||||||||
| Total | ||||||||
Supplemental cash flow information related to leases for the years ended December 31, 2021 and 2022 were as follows:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows for operating leases | ||||||||
| Supplemental noncash information: | ||||||||
| Right-of-use assets obtained in exchange for lease obligations net of decrease in right-of-use assets for early determinations | ||||||||
F-36
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(9) Leases (Continued)
Maturities of lease liabilities at December 31, 2022:
| Minimum Lease Payment | ||||
| RMB | ||||
| Year ending December 31: | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total remaining undiscounted lease payments | ||||
| Less: Interest | ||||
| Total present value of lease liabilities | ||||
| Less: Current operating lease liability | ||||
| Non-current operating lease liability | ||||
(10) Variable Interest Entities (“VIEs”)
VIE related to Xinbao Investment and Fanhua RONS Technologies
The Measures on the Supervision of Internet Insurance Business implemented in February 2021 requires an insurance institution conducts online insurance business through its own online platform who owns the domain name.
Fanhua RONS Insurance Sales & Services Co., Ltd., (“Fanhua RONS”), a wholly-owned subsidiary of Shenzhen Xinbao Investment Co., Ltd. (“Xinbao Investment”), used to conduct its online P&C insurance business through an online platform (www.baoxian.com) owned and operated by another subsidiary within the Group. To comply with the newly implemented rules, the Group transferred the domain name and ICP license to Fanhua RONS. As the applicant for an ICP license may be subject to foreign investment restriction, the Group commenced a restructuring to re-establish the VIE structure.
Xinbao Investment was a wholly
owned subsidiary of the Group who in December 2021 became
Through the contractual arrangements entered in December 2021, with Xinbao Investment and its nominee shareholder, the Group has the power to direct the activities that most significantly impact to and entitles to receive economic benefits from Xinbao Investment, the consolidated VIE.
In preparation for the application of an ICP license for Fanhua RONs (Beijing) Technology Co., Ltd. (“Fanhua RONS Technologies”), in July 2022, Beijing Fanlian Investment Co., Ltd. (“Fanlian Investment”), a wholly owned subsidiary, transferred its entire equity interests holding in Fanhua RONS Technologies to Mr. Peng Ge, the chief financial officer of the Group, who holds the equity interests on behalf of Fanlian Investment. Concurrently, Fanlian Investment entered into contractual arrangements with Fanhua RONS Technologies and Mr. Ge which are substantially similar to those among Fanhua Group Company, Xinbao Investment and its individual nominee shareholder.
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FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(10) Variable Interest Entities (“VIEs”) (Continued)
VIE related to Xinbao Investment and Fanhua RONS Technologies (Continued)
As a result, the Group currently conducts its insurance agency and claims adjusting business in China primarily through its wholly-owned subsidiaries Fanhua Group Company and Fanlian Investment (collectively the “relevant PRC entities”), and its subsidiaries and the VIEs for part of its online insurance business in China. The following is a summary of the contractual agreements that the Group entered into with Xinbao Investment, Fanhua RONS Technologies and their individual nominee shareholders:
Agreements that Provide the Group Effective Control over Xinbao Investment and Fanhua RONS Technologies
| ● | Loan Agreement |
Mr. Jiang and Mr. Ge (collectively the “nominee shareholders”) entered into a loan agreement, with the Group’s wholly-owned subsidiaries. The principal loan amounts equal to the capital contributions to VIEs.
The term of the loan agreement
is for
| ● | Equity Pledge Agreement |
Relevant nominee shareholders entered into an equity pledge agreement, pledging their respective equity interests in VIEs to relevant PRC entities to secure their obligations under the loan agreement. Relevant nominee shareholders also agreed not to transfer or create any encumbrances adverse to relevant PRC entities on their equity interests in VIEs. During the term of the equity pledge agreement, relevant PRC entities are entitled to all the dividends declared on the pledged equity interests. The equity pledge agreements will expire when the individual shareholders fully performs their respective obligations under the loan agreement. The equity pledge was recorded on the shareholder’ register of VIEs, and registered with the relevant local administration of industry and commerce.
| ● | Power of Attorney |
Relevant nominee shareholders
executed powers of attorney, each appointing a person designated by relevant PRC entities as his attorney-in-fact on all matters requiring
shareholder approval. Further, if relevant PRC entities designate the shareholder to attend a shareholder’s meeting of VIEs, the
individual shareholder agrees to vote his shares as instructed by relevant PRC entities. The term of the power of attorney is for
Agreements that Transfer Economic Benefits to the Group
| ● | Exclusive Purchase Option Agreement |
Relevant nominee shareholders entered into an exclusive purchase option agreement to irrevocably grant relevant PRC entities an exclusive option to purchase part or all of their equity interests in VIEs, when and to the extent permitted by PRC law. The purchase price will be the minimum price permitted under applicable PRC law.
F-38
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(10) Variable Interest Entities (“VIEs”) (Continued)
VIE related to Xinbao Investment and Fanhua RONS Technologies (Continued)
Agreements that Transfer Economic Benefits to the Group (Continued)
| ● | Technology Consulting and Service Agreement |
Pursuant to technology service
agreements between (i) relevant PRC entities, and (ii) VIEs, relevant PRC entities agreed to provide VIEs with training services and consulting
and other services relating to IT platform and internal control compliance. In exchange, VIEs agree to pay a quarterly fee calculated
primarily based on a percentage of its revenues. The agreement has a term of
Because of contractual arrangements with VIEs and their nominee shareholders, the Group is the primary beneficiary of VIEs and their subsidiaries and consolidated them into consolidated financial statements.
VIEs related to the 521 Plan
On June 14, 2018, the Group
announced that its board of directors approved a 521 Share Incentive Plan (the “521 plan”). The 521 Plan is designed to incentivize
the Group’s employees and independent sales agents (collectively the “Participants”). The 521 Plan provides Participants
an opportunity to benefit from appreciation of the Company’s ordinary shares by purchasing the Company’s ordinary shares at
a stated subscription price in exchange for employee and non-employee services, if service and performance conditions are achieved.
Pursuant to the 521 Plan, the Group set up three companies which are Fanhua Employees Holdings Limited, Step Tall Limited and Treasure Chariot Limited (collectively the “521 Plan Employee Companies”) to hold the Group’s ordinary shares on behalf of the Participants of the 521 Plan. Each of the 521 Plan Employee Companies is a legal entity formed in the British Virgin Islands with a sole shareholder appointed by the Group. Each shareholder is either an employee, or a founder who is also a shareholder and director of the Group.
The following is a summary of the contractual agreements that the Group entered into relating to the 521 Plan:
The nature and structure
of the 521 Plan Employee Companies is that they are investment vehicle companies holding the Company’s shares on behalf of the Participants
for the purpose of the 521 Plan. Loan agreements and entrusted share purchase agreements were signed among the Group’s wholly-owned
subsidiary CISG Holdings Ltd., the 521 Plan Employee Companies and each of the Participants. To effect the 521 Plan, Participants agreed
to pay
F-39
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(10) Variable Interest Entities (“VIEs”) (Continued)
VIE related to Xinbao Investment and Fanhua RONS Technologies (Continued)
Agreements that Transfer Economic Benefits to the Group (Continued)
VIEs related to the 521 Plan (Continued)
The sole director and sole shareholder of each of the 521 Plan Employee Companies is either a significant shareholder and director, or an employee of the Group, who has executed powers of attorney on behalf of the Group. Under the power of attorney, they will follow, without any conditions, the Group’s instructions to manage all the activities of each of the 521 Plan Employee Companies. In addition, the Group can replace the sole director and shareholder of each of the 521 Plan Employee Companies to another designated party at its discretion.
The ordinary shares are the only significant assets held by the 521 Plan Employee Companies. Through the loan agreements, entrusted share purchase agreements and letters of undertaking described above, the Group controls the decision-making rights of the 521 Plan Employee Companies with respect to the shares held by the 521 Plan Employee Companies as collateral to the loans issued to the Participants during the vesting period. Given the only substantial recourse to the loans issued by the Group are the ordinary shares, the Group has potential exposure to the economics of the 521 Plan Employee Companies resulting from the fluctuation in value of the ADS (principally decreases), which is more than insignificant. Further, the Group will also participate in the variability and absorb the economic benefits of the 521 Plan Employee Companies, through an increase in value of the shares held by the 521 Plan Employee Companies, if the performance conditions are not met or partially met based on the profit distribution arrangements. Based on above, the Group is the primary beneficiary of the 521 Plan Employee Companies and consolidates them because it has the power to direct the activities that most significantly impact the 521 Plan Employee Companies’ economic performance, and the obligation to absorb losses of the 521 Plan Employee Companies that could potentially be significant to them and the right to receive benefits from the 521 Plan Employee Companies that could potentially be significant to the 521 Plan Employee Companies. Therefore, the Group has variable interests in the 521 Plan Employee Companies during the vesting period.
As disclosed in Note 21(b),
the Group entered into supplemental agreements with all remaining Participants in December 2020 to cancel the 521 Plan upon which the
521 Plan Employee Companies returned all subscribed
In December 2020, upon the
cancellation of the 521 Plan, the Group refunded all share rights deposits amounted to RMB
Risks in relation to the VIE Arrangement (Continued)
In the opinion of the Company’s legal counsel, (i) the ownership structure relating to the consolidated VIEs of the Company is in compliance with PRC laws and regulations; (ii) the contractual arrangements with the consolidated VIEs and the individual shareholders are legal, valid and binding obligation of such party, and enforceable against such party in accordance with their respective terms; and (iii) the execution, delivery and performance of the consolidated VIEs and its shareholders do not result in any violation of the provisions of the articles of association and business licenses of the VIEs, and any violation of any current PRC laws and regulations.
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FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(10) Variable Interest Entities (“VIEs”) (Continued)
Risks in relation to the VIE Arrangement (Continued)
Uncertainties in the PRC legal system could cause the Company’s current corporate structure to be found in violation of any existing and/or future PRC laws or regulations and could limit the Company’s ability, through the Primary Beneficiary, to enforce its rights under these contractual arrangements. Furthermore, the shareholders of the VIEs may have interests that are different from those of the Company, which could potentially increase the risk that the shareholders would seek to breach the existing terms of the aforementioned agreements.
In addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future PRC laws, the Company may be subject to penalties, which may include but not be limited to, the cancellation or revocation of the Company’s business and operating licenses, being required to restructure the Company’s operations or discontinue the Company’s operating activities. The imposition of any of these or other penalties may result in a material and adverse effect on the Company’s ability to conduct its operations. In such case, the Company may not be able to operate or control VIEs, which may result in deconsolidation of VIEs.
Summarized below is the information related to VIEs, including total assets, total current liabilities, total liabilities, net revenues, total operating costs and expenses, net income (loss) and cash flows after intercompany elimination are as follows:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| Total assets | ||||||||
| Total current liabilities | ( | ) | ( | ) | ||||
| Total liabilities | ( | ) | ( | ) | ||||
| Year Ended December 31, | ||||||||||||
| 2020 | 2021 | 2022 | ||||||||||
| RMB | RMB | RMB | ||||||||||
| Net revenues | ||||||||||||
| Operating costs and expenses | ||||||||||||
| Net income (loss) | ( | ) | ||||||||||
| Net cash generated from operating activities | ||||||||||||
| Net cash used in financing activities | ( | ) | ||||||||||
As
of December 31, 2022 there were no consolidated VIE assets that are collateral for the VIE’s obligations or are restricted solely
to settle the VIEs’ obligations, other than aforementioned in the restricted cash as described in Note 2(c).
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FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(11) Other Payables and Accrued Expenses
Components of other payables and accrued expenses are as follows:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| Business and other tax payables | ||||||||
| Refundable deposits from employees and agents | ||||||||
| Professional fees | ||||||||
| Accrued expenses to third parties | ||||||||
| Contributions from members of eHuzhu mutual aid program (Note 2(c)) | ||||||||
| Others | ||||||||
| Total | ||||||||
(12) Short-term loan
Short-term loans and total
outstanding balance as of December 31, 2021 and 2022 amounted to and RMB
As of December 31, 2021 and
2022, the weighted average interest rates for the outstanding borrowings were approximately and
(13) Employee Benefit Plans
Employees of the Group located in the PRC are covered by the retirement schemes defined by local practice and regulations, which are essentially defined contribution plans.
In addition, the Group is required by law to contribute a certain percentage of applicable salaries for medical insurance benefits, unemployment and other statutory benefits. The contribution percentages may be different from district to district which is subject to the specific requirement of local regime government. The PRC government is directly responsible for the payments of the benefits to these employees.
For the years ended December
31, 2020, 2021 and 2022, the Group contributed and accrued RMB
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FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(14) Income Taxes
The Company is a tax exempted company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to tax on its income or capital gains. In addition, upon any payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax is imposed.
Subsidiaries in Hong Kong
are subject to Hong Kong Profits Tax rate at
The Group’s subsidiaries
and VIEs incorporated in the PRC are subject to the PRC Enterprise Income Tax and a unified
Preferential EIT rates at
Pursuant to the relevant
laws and regulations in the PRC, Shenzhen Huazhong United Technology Co., Ltd. (“Shenzhen Huazhong”), a subsidiary of the
Group, was regarded as a software company and thus exempted from PRC Income Tax for two years starting from its first profit-making year,
followed by a
The Group’s subsidiaries
that are the PRC tax resident are required to withhold the PRC withholding tax of
One of the Group’s
wholly-owned subsidiaries, CNinsure Holdings Limited, was determined by Hong Kong Taxation Bureau to be a Hong Kong resident enterprise
since July 2018. The Hong Kong resident certificate was issued by the Hong Kong Inland Revenue Department valid till the year ending December
31, 2022. Accordingly, CNinsure Holdings Limited qualified as a Hong Kong resident and was entitled to enjoy a reduced tax rate of
The Group accounts for uncertain income tax positions by prescribing a minimum recognition threshold in the financial statements. The Group’s liabilities for unrecognized tax benefits were included in other tax liabilities. As of December 31, 2021 and 2022, the balance of unrecognized tax benefits is comprised of amounts mainly arising from gain on disposal of subsidiaries and certain transfer pricing arrangements.
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FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(14) Income Taxes (Continued)
The movements of unrecognized tax benefits are as follows:
| RMB | ||||
| Balance as of January 1, 2020 | ||||
| Change in unrecognized tax benefits | — | |||
| Decrease in tax positions | ( | ) | ||
| Balance as of December 31, 2020 | ||||
| Change in unrecognized tax benefits | ||||
| Increase in tax positions | ||||
| Balance as of December 31, 2021 | ||||
| Change in unrecognized tax benefits | ||||
| Decrease in tax positions | ( | ) | ||
| Balance as of December 31, 2022 | ||||
The uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. Based on the outcome of any future examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits for tax positions taken regarding previously filed tax returns, might materially change from those recorded as liabilities for uncertain tax positions in the Group’s consolidated financial statements. In addition, the outcome of these examinations may impact the valuation of certain deferred tax assets (such as net operating losses) in future periods. The Group’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits, if any, as a component of income tax expense. The Group does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next twelve months.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of income taxes is due to computational errors made by the taxpayer. The statute of limitations will be extended to five years under special circumstances, which are not clearly defined, but an underpayment of income tax liability exceeding RMB100 is specifically listed as a special circumstance. In the case of a transfer pricing related adjustment, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. During the current year, the Group reversed transfer pricing related uncertain tax position amounting to RMB36,566 when its statute of limitation expired in 2022.
Income tax expenses are comprised of the following:
| Year Ended December 31, | ||||||||||||
| 2020 | 2021 | 2022 | ||||||||||
| RMB | RMB | RMB | ||||||||||
| Current tax expense | ||||||||||||
| Deferred tax expense | ||||||||||||
| Income tax expense | ||||||||||||
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FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(14) Income Taxes (Continued)
The principal components of the deferred income tax assets and liabilities are as follows:
| As of December 31, | ||||||||
| 2021 | 2022 | |||||||
| RMB | RMB | |||||||
| Deferred tax assets: | ||||||||
| Operating loss carryforward | ||||||||
| Intangible assets, net | ||||||||
| Less: valuation allowances | ( | ) | ( | ) | ||||
| Total | ||||||||
| Deferred tax liabilities: | ||||||||
| Fair value adjustments in relation to short-term investments | ||||||||
| Estimated profit arising from future renewal commissions | ||||||||
| PRC dividend withholding taxes | ||||||||
| Total | ||||||||
The Group considers positive
and negative evidence to determine whether some portion or all of the deferred tax assets will more likely than not be realized. This
assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the
duration of statutory carry forward periods, the Group’s experience with tax attributes expiring unused and tax planning alternatives.
Valuation allowances have been established for deferred tax assets based on a more-likely-than-not threshold. The Group’s ability
to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carry forward periods provided
for in the tax law. The Group has provided RMB
The Group had total operating
loss carry-forwards of RMB
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FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(14) Income Taxes (Continued)
Reconciliation between the
provision for income taxes computed by applying the PRC enterprise income rate of
| Year Ended December 31, | ||||||||||||
| 2020 | 2021 | 2022 | ||||||||||
| RMB | RMB | RMB | ||||||||||
| Income from continuing operations before income taxes, share of income of affiliates, net | ||||||||||||
| PRC statutory tax rate | % | % | % | |||||||||
| Income tax at statutory tax rate | ||||||||||||
| Expenses not deductible for tax purposes: | ||||||||||||
| —Entertainment | ||||||||||||
| —Other | ||||||||||||
| Effect of tax holidays on concessionary rates granted to PRC entities | ( | ) | ( | ) | ( | ) | ||||||
| Effect of different tax rates of subsidiaries operating in other jurisdictions | ||||||||||||
| Change in valuation allowance | ( | ) | ||||||||||
| Deferred income tax for dividend distribution | ||||||||||||
| Effect of non-taxable income* | ( | ) | ( | ) | ( | ) | ||||||
| Unrecognized tax benefits arising from certain transfer pricing arrangements | ( | ) | ||||||||||
| Other | ||||||||||||
| Income tax expense | ||||||||||||
| * |
Additional PRC income taxes
that would have been payable without the tax exemption amounted to approximately RMB
If the entities were to be non-resident for PRC tax purposes, dividends paid to it out of profits earned after January 1, 2008 would be subject to a withholding tax. In the case of dividends paid by PRC subsidiaries, the withholding tax would be 10%, whereas in the case of dividends paid by PRC subsidiaries which are 25% or more directly owned by tax residents in the Hong Kong Special Administrative Region, the withholding tax would be 5%. The Group’s subsidiary, CNinsure Holdings Limited qualified as Hong Kong resident and was entitled to enjoy a 5% reduced tax rate under Bulletin [2018] No. 9 for the years ended December 31, 2020 and 2021, respectively.
Aggregate undistributed earnings
of the Group’s subsidiaries and VIEs in the PRC that are available for distribution to the Group of approximately RMB
F-46
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(14) Income Taxes (Continued)
During the years ended December
31, 2020，2021 and 2022, the Group provided RMB
Under applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to the excess of financial reporting over tax basis, including those differences attributable to a more-than-50-percent-owned domestic subsidiary. However, recognition is not required in situations where the tax law provides a means by which the reported amount of that investment can be recovered tax-free and the enterprise expects that it will ultimately use that means.
(15) Capital Structure
During 2022,
(16) Net Income per Share
The computation of basic and diluted net income per ordinary share is as follows:
| Year Ended December 31, | ||||||||||||
| 2020 | 2021 | 2022 | ||||||||||
| RMB | RMB | RMB | ||||||||||
| Basic: | ||||||||||||
| Net income | ||||||||||||
| Less: Net income (loss) attributable to the noncontrolling interests | ( | ) | ||||||||||
| Net income attributable to the Company’s shareholders | ||||||||||||
| Weighted average number of ordinary shares outstanding | ||||||||||||
| Basic net income per ordinary share | ||||||||||||
| Basic net income per ADS | ||||||||||||
F-47
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(16) Net Income per Share (Continued)
| Year Ended December 31, | ||||||||||||
| 2020 | 2021 | 2022 | ||||||||||
| RMB | RMB | RMB | ||||||||||
| Diluted: | ||||||||||||
| Net income | ||||||||||||
| Less: Net income (loss) attributable to the noncontrolling interests | ( | ) | ||||||||||
| Net income attributable to the Company’s shareholders | ||||||||||||
| Weighted average number of ordinary shares outstanding | ||||||||||||
| Weighted average number of dilutive potential ordinary shares from share options | ||||||||||||
| Total | ||||||||||||
| Diluted net income per ordinary share | ||||||||||||
| Diluted net income per ADS | ||||||||||||
(17) Distribution of Profits
As stipulated by the relevant
PRC laws and regulations applicable to China’s foreign investment enterprise, the Group’s subsidiaries and VIEs in the PRC
are required to maintain non-distributable reserves which include a statutory surplus reserve as of December 31, 2021 and 2022. Appropriations
to the statutory surplus reserve are required to be made at not less than
The statutory surplus reserve
is used to offset future losses. These reserves represent appropriations of retained earnings determined according to PRC law and may
not be distributed. The accumulated amounts contributed to the statutory reserves were RMB
Under PRC laws and regulations,
there are restrictions on the Company’s PRC subsidiaries and VIEs with respect to transferring certain of their net assets to the
Company either in the form of dividends, loans, or advances. Amounts of restricted net assets include paid in capital and statutory surplus
reserve of the Company’s PRC subsidiaries and the net assets of the VIEs in which the Company has no legal ownership, totaling RMB
F-48
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(18) Related-party Balances and Transactions
The principal related-party balances as of December 31, 2021 and 2022, and transactions for the years ended December 31, 2020, 2021 and 2022 are as follows:
| (i) | On December 28, 2020, the Group entered into a framework
strategic partnership agreement, or, the “Agreement”, with Puyi Enterprise Management Consulting Co., Ltd (“Puyi Consulting”),
which was controlled by Puyi, the Group’s affiliate. Pursuant to the Agreement, both parties, on the basis of full compliance with
relevant regulatory and legal requirements will share customer and channel resources and explore collaboration opportunities on the provision
of value-added asset management services to Chinese households, by leveraging both parties’ respective strength in insurance and
financial services. For the year ended December 31, 2021, the Group incurred RMB |
| (ii) | On March 7, 2022, the Group entered into an agreement with
Puyi Consulting. Pursuant to this agreement, Puyi Consulting provided training services and customer salon support services to the Group.
For the year ended December 31, 2022, the Group incurred RMB |
(19) Commitments and Contingencies
| (i) | See Note 9 for the Group’s commitments for future minimum lease payments under operating leases. |
| (ii) | As of December 31, 2022, there was no pending legal proceeding to which the Group is a party that will have a material effect on the Group’s business, results of operations or cash flows. |
(20) Concentrations of Credit Risk
Concentration risks
Customers accounting for
| Year ended December 31, | ||||||||||||||||||||||||
| 2020 | % of sales | 2021 | % of sales | 2022 | % of sales | |||||||||||||||||||
| RMB | RMB | RMB | ||||||||||||||||||||||
| Sinatay Life Insurance Co., Ltd. (“Sinatay”) | % | % | % | |||||||||||||||||||||
| Aeon Life Insurance Co., Ltd. (“Aeon”). | % | % | ||||||||||||||||||||||
| Huaxia Life Insurance Company Limited (“Huaxia”) | % | % | ||||||||||||||||||||||
| Evergrande Life Insurance Co., Ltd. (“Evergrande”) | % | |||||||||||||||||||||||
| Subtotal | % | % | % | |||||||||||||||||||||
| * |
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FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(20) Concentrations of Credit Risk (Continued)
Concentration risks (Continued)
Customers which accounted
for
| As of December 31, | ||||||||||||||||
| 2021 | % | 2022 | % | |||||||||||||
| RMB | RMB | |||||||||||||||
| Sinatay | % | % | ||||||||||||||
| Greatwall Life Insurance Co., Ltd | % | |||||||||||||||
| Subtotal | % | % | ||||||||||||||
| * |
The Group performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable.
The Group places its cash and cash equivalents and short-term investments with financial institutions with low credit risk.
(21) Share-based Compensation
(a) 2012 Option G
On March 12, 2012, the Company
granted options (“2012 Options G”) to its directors and employees to purchase up to
For the years ended December 31, 2021 and 2022, share-based compensation expenses of were recognized in connection with the 2012 Options G, respectively.
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FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(21) Share-based Compensation (Continued)
(a) 2012 Option G (Continued)
For the year ended December 31, 2022, changes in the status of total outstanding options, were as follows:
| Number of options | Weighted average remaining contractual life (years) | Weighted average exercise price in RMB | Aggregate Intrinsic Value RMB | |||||||||||||
| Outstanding as of January 1, 2022 | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding as of December 31, 2022 | ||||||||||||||||
| Exercisable as of December 31, 2022 | ||||||||||||||||
As of December 31, 2022, all of the above options were fully vested and exercised.
(b) The 521 Plan
The 521 Plan was designed to incentivize the Participants and was originally accounted for as grant of share options.
The Participants’ rights
to ownership benefits of the shares are subject to the Participants’ achievement of service and performance vesting conditions.
Each award agreement contains a condition for service from January 1, 2019 through December 31, 2023 (which coincides with loan maturity
date) as well as individually determined performance conditions based on cumulative sales over the service period.
In December 2020, the Group
entered into supplemental agreements with all remaining Participants to cancel the 521 Plan. In accordance with the supplemental agreements,
all the relevant original contractual agreements were terminated and lapsed and upon which, the 521 Plan Employee Companies returned a
total of
For the year ended December
31, 2019, the Group recognized RMB
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FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(21) Share-based Compensation (Continued)
(c) 2022 Options
On August 12, 2022, the Company
granted share options (“2022 Options”) to its independent directors to purchase up to
The Group used the Black-Scholes option pricing model in determining the fair value of the options granted, which requires the input of highly subjective assumptions, including the expected life of the stock option, stock price volatility, dividend rate and risk-free interest rate. The assumptions used in determining the fair value of the 2022 Options on the grant date were as follows:
| Assumptions | August 12, 2022 | |
| Expected dividend yield (Note i) | ||
| Risk-free interest rates (Note ii) | ||
| Expected volatility (Note iii) | ||
| Expected life in years (Note iv) | ||
| Fair value of options on grant date | US$ |
| (i) | Expected dividend yield: |
The expected dividend yield was estimated by the Group based on its historical and future dividend policy.
| (ii) | Risk-free interest rate: |
Risk-free interest rate was estimated based on the US Government Bond yield and pro-rated according to the tenor of the options as of the valuation date.
| (iii) | Expected volatility: |
The volatility of the underlying ordinary shares was estimated based on the annualized standard deviation of the continuously compounded rate of return on the daily average adjusted share price of the Group as of the Valuation Date.
| (iv) | Expected life: |
The expected life was estimated based on the midpoint between the end of the vesting period and the contractual term of the award of the 2022 Options.
As of December 31, 2022, the Group had reserved
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FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(21) Share-based Compensation (Continued)
(c) 2022 Options (Continued)
A summary of share options outstanding as of December 31, 2022, and activity during the year then ended, is presented below:
| Number of options | Weighted average exercise price in USD | Weighted average remaining contractual life (In years) | Aggregate Intrinsic Value USD | |||||||||||||
| Outstanding as of January 1, 2022 | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding as of December 31, 2022 | 558 | |||||||||||||||
For the year ended December
31, 2022, share-based compensation expenses of RMB
(22) Segment Reporting
As of December 31, 2021 and
2022, the Group operated
F-53
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(22) Segment Reporting (Continued)
The following table shows the Group’s operations by business segment for the years ended December 31, 2020, 2021 and 2022. Other represents revenue and expenses that are not allocated to reportable segments and corporate related items.
| Year ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Net revenues | ||||||||||||||||
| Agency | ||||||||||||||||
| Claims Adjusting | ||||||||||||||||
| Total net revenues | ||||||||||||||||
| Operating costs and expenses | ||||||||||||||||
| Agency | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Claims Adjusting | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating costs and expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from operations | ||||||||||||||||
| Agency | ||||||||||||||||
| Claims Adjusting | ( | ) | ( | ) | ||||||||||||
| Other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income from operations | ||||||||||||||||
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| Segment assets | ||||||||||||
| Agency | ||||||||||||
| Claims Adjusting | ||||||||||||
| Other | ||||||||||||
| Total assets | ||||||||||||
Substantially all of the Group’s revenues for the three years ended December 31, 2020, 2021 and 2022 were generated from the PRC. A substantial portion of the identifiable assets of the Group is located in the PRC. Accordingly, no geographical segments are presented.
F-54
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(23) Subsequent events
Acquisitions of quality insurance intermediaries companies
On January 3, 2023, the
Group entered into definitive agreements with the existing shareholders of Zhongrong Smart Finance Information Technology Co., Ltd.
(“Zhongrong”), to acquire
On February 6, 2023, the
Group entered into a definitive agreement with the existing shareholders of Jilin Zhongji Shi’An Insurance Agency Co., Ltd (“Zhongji”),
to acquire
On February 8, 2023, the
Group entered into an another definitive agreement with the existing shareholders of Wuhan Taiping Online Insurance Agency Co., Ltd. (“Taiping”),
to acquire
The Group is in the process of assessing the accounting treatment of the above mentioned acquisitions.
Share incentive plan
On February 6, 2023, the
board of directors (the “board”) has approved the grant options to purchase an aggregate of
F-55
FANHUA INC.
SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF THE COMPANY
Balance Sheets
(In thousands, except for shares and per share data)
| As of December 31, | ||||||||||||
| 2021 | 2022 | 2022 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| ASSETS: | Note2(u) | |||||||||||
| Current assets: | ||||||||||||
| Cash and cash equivalents | ||||||||||||
| Short term investments | ||||||||||||
| Other receivables and amounts due from subsidiaries and affiliates | ||||||||||||
| Total current assets | ||||||||||||
| Non-current assets: | ||||||||||||
| Investment in subsidiaries | ||||||||||||
| Investment in an affiliate | ||||||||||||
| Total assets | ||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY: | ||||||||||||
| Current liabilities: | ||||||||||||
| Other payables and accrued expenses and amounts due to subsidiaries | ||||||||||||
| Total liabilities | ||||||||||||
| Ordinary shares (Authorized shares: | ||||||||||||
| Treasury Stock | ( | ) | ( | ) | ||||||||
| Additional paid-in capital | ||||||||||||
| Retained earnings | ||||||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ( | ) | ||||||
| Total equity | ||||||||||||
| Total liabilities and shareholders’ equity | ||||||||||||
F-56
FANHUA INC.
SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF THE COMPANY—(Continued)
Statements of Income and Comprehensive Income
(In thousands)
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Selling expenses | ||||||||||||||||
| Interest income | ||||||||||||||||
| Others, net | ||||||||||||||||
| Equity in earnings of subsidiaries and an affiliate | ||||||||||||||||
| Net Income attributable to the Company’s shareholders | ||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ||||||||||||||
| Unrealized net gains on available-for-sale investments | ( | ) | ( | ) | ||||||||||||
| Share of other comprehensive (loss) gain of affiliates | ( | ) | ( | ) | ||||||||||||
| Comprehensive income attributable to the Company’s shareholders | ||||||||||||||||
F-57
FANHUA INC.
SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF THE COMPANY—(Continued)
Statements of Cash Flows
(In thousands)
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2021 | 2022 | 2022 | |||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| Cash flow from operating activities: | ||||||||||||||||
| Net income | ||||||||||||||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||||||
| Equity in earnings of subsidiaries and an affiliate | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Compensation expenses associated with stock options | ( | ) | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Other receivables | ||||||||||||||||
| Other payables | ( | ) | ( | ) | ||||||||||||
| Net cash (used in) from operating activities | ( | ) | ( | ) | ||||||||||||
| Cash flows (used in) generated from investing activities | ||||||||||||||||
| Purchase of short-term investments | ( | ) | ||||||||||||||
| Changes in investment in subsidiaries and an affiliate | ||||||||||||||||
| Advances to subsidiaries and affiliates | ( | ) | ( | ) | ||||||||||||
| Proceeds from disposal of short-term investments | ||||||||||||||||
| Net cash generated from investing activities | ||||||||||||||||
| Cash flows generated from (used in) financing activities: | ||||||||||||||||
| Proceeds on exercise of stock options | ||||||||||||||||
| Dividends paid | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Repurchase of ordinary shares from open market | ( | ) | ( | ) | ||||||||||||
| Repayment of subscription from the 521 Plan participants | ( | ) | ||||||||||||||
| Net cash generated used in financing activities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ( | ) | ( | ) | ||||||||||
| Cash and cash equivalents and restricted cash at beginning of year | ||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||||||||||||
| Cash and cash equivalents and restricted cash at end of the year | ||||||||||||||||
F-58
FANHUA INC.
Note to Schedule I
(In thousands, except for shares)
Schedule I has been provided
pursuant to the requirements of Rule 12-04(a), 5-04(c) and 4-08(e)(3) of Regulation S-X, which require condensed financial information
as to the financial position, cash flows and results of operations of a parent company as of the same dates and for the same periods for
which audited consolidated financial statements have been presented when the restricted net assets of the consolidated and unconsolidated
subsidiaries (including variable interest entities) together exceed
As of December 31, 2022,
RMB
As of December 31, 2022, there were no material contingencies, significant provisions of long-term obligations, and mandatory dividend or redemption requirements of redeemable shares or guarantees of the Company except for those which have been separately disclosed in the consolidated financial statements, if any.
Basis of preparation
The condensed financial information of the Company has been prepared using the same accounting policies as set out in the accompanying consolidated financial statements except that the equity method has been used to account for investments in its subsidiaries.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The footnote disclosures contain supplemental information relating to the operations of the Company and, as such, these statements should be read in conjunction with the notes to the consolidated financial statements of the Group as of December 31, 2021 and 2022 and the years ended 2020, 2021 and 2022.
F-59