WASHINGTON, D.C. 20549
(Name, Telephone, E-mail
and/or Facsimile number and Address of Company Contact Person)
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(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
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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.
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.
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.
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 RMB24,459 and RMB15,847
as of December 31, 2021 and 2022, respectively. Unremitted net insurance premiums are held in a fiduciary capacity until disbursed by
the Group. The Group invests these unremitted funds only in cash accounts held for a short term, and reports such amounts as restricted
cash in the consolidated balance sheets. Also, restricted cash balance includes the entrustment deposit received from the members of eHuzhu,
an online mutual aid platform operated by the Group, which is to be used during the one-year operating cycle and is therefore classified
as a current asset. The balance for entrustment deposit was RMB51,844 and RMB44,110 as of December 31, 2021 and 2022, respectively. Further,
restricted cash balance includes guarantee deposit required by China Banking and Insurance Regulatory Commission (“CBIRC”)
in order to protect insurance premium appropriation by insurance agency which is restricted as to withdrawal for other than current operations.
Thus, the Group classified the balance for guarantee deposit as a non-current asset. The balance for guarantee was RMB15,595 and RMB20,729
as of December 31, 2021 and 2022, respectively.
| (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.
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 | |
| 418,266 | | |
| 408,961 | |
Contract Assets (See Note 2(q)) | |
| 455,630 | | |
| 659,788 | |
Allowance for doubtful accounts | |
| (28,025 | ) | |
| (15,361 | ) |
Accounts receivable and Contract Assets, net | |
| 845,871 | | |
| 1,053,388 | |
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 | |
| 20,495 | | |
| 29,000 | | |
| 28,025 | |
Cumulative-effect adjustment upon adoption of ASU 2016-13 | |
| 7,436 | | |
| — | | |
| — | |
Current period provision (reversal of) for expected
credit losses | |
| 4,831 | | |
| 2,095 | | |
| (1,378 | ) |
Write-offs | |
| (3,762 | ) | |
| (3,070 | ) | |
| (11,286 | ) |
Balance at the end of the year | |
| 29,000 | | |
| 28,025 | | |
| 15,361 | |
| (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 | |
| 20-36 | | |
| 0% | |
Office equipment, furniture and fixtures | |
| 3-5 | | |
| 0%-3% | |
Motor vehicles | |
| 5-10 | | |
| 0%-3% | |
Leasehold improvements | |
| 5 | | |
| 0% | |
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 | |
| 199 | | |
| 791 | | |
| 822 | |
Selling expenses | |
| 7,350 | | |
| 5,778 | | |
| 5,106 | |
General and administrative expenses | |
| 10,109 | | |
| 11,773 | | |
| 13,545 | |
Depreciation expense | |
| 17,658 | | |
| 18,342 | | |
| 19,473 | |
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.
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 RMB8,898 as of December 31, 2021 and 2022, respectively. The trade names have an estimated useful
life of 9.4 to 10 years and accumulated amortization of RMB8,898 as of December 31, 2021and 2022, respectively. The residual balance is
nil as of December 31, 2021 and 2022, respectively. Aggregate amortization expenses for intangible assets were RMB281, RMB44 and nil for
the years ended December 31, 2020, 2021 and 2022, respectively.
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.
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 RMB10,929, nil and RMB20,110 during the years ended December 31, 2020, 2021 and 2022, respectively, in the consolidated statements
of income and comprehensive income.
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.
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.
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.
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.
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(393), nil and RMB461 for the years ended December 31, 2020, 2021 and 2022, respectively, were included in the selling,
general and administrative expenses. During fiscal year ended December 31, 2020, the Group reversed cumulative cost recognized in prior
periods as the stock option were not probable to be vested because the performance target was not probable to be met.
| (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.
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.
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 0.2%, 0.1% and 0.1% of the total commission and fee revenues during years ended December
31, 2020, 2021 and 2022, respectively.
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.
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 RMB17,265, RMB3,887 and RMB11,387, respectively.
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.
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 nil, RMB258,715 and RMB245,717, respectively.
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 RMB20,610, RMB19,235 and RMB14,681 for the years
ended December 31, 2020, 2021 and 2022, respectively.
Total value-added taxes
paid by the Group during the years ended December 31, 2020, 2021 and 2022 amounted to RMB179,663, RMB179,183 and RMB130,743 respectively.
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
December 31,
2021 | | |
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1) | | |
Significant
Other
Observable
Inputs
(Level 2) | | |
Significant
Unobservable
Inputs
(Level 3) | |
| |
RMB | | |
RMB | | |
RMB | | |
RMB | |
Short-term investments - debt security | |
| 857,682 | | |
| — | | |
| 857,682 | | |
| — | |
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
December 31,
2022 | | |
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1) | | |
Significant
Other
Observable
Inputs
(Level 2) | | |
Significant
Unobservable
Inputs
(Level 3) | |
| |
RMB | | |
RMB | | |
RMB | | |
RMB | |
Short-term investments - debt security | |
| 331,228 | | |
| — | | |
| 331,228 | | |
| — | |
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.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies
(Continued)
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.
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 RMB595,428 and RMB600,901 of cash and cash equivalents and restricted cash denominated in RMB
as of December 31, 2021 and 2022, respectively.
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$1.00 = RMB6.8972, representing the noon buying rate in the City of New York for cable transfers
of RMB on December 30, 2022, the last business day in fiscal year 2022, as set forth in H.10 statistical release of the Federal Reserve
Bank of New York. The translation is not intended to imply that the RMB amounts could have been, or could be, converted, realized or settled
into USD at such rate.
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.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
(2) Summary of Significant Accounting Policies
(Continued)
Advertising costs are expensed
as incurred. Advertising costs amounted to RMB37,389, RMB35,300 and RMB18,822 for the years ended December 31, 2020, 2021 and 2022, respectively.
The Group leases office space,
vehicles and certain equipment under operating leases for terms ranging from short term (under 12 months) to 7 years. The Group does not
have options to extend or terminate leases, as the renewal or termination of relevant lease is on negotiation basis. As a lessee, the
Group does not have any financing leases and none of the leases contain material residual value guarantees or material restrictive covenants.
The Group’s office space leases typically have initial lease terms of 2 to 7 years, and vehicles and equipment leases typically
have an initial term of 12 months or less. The Group’s office space leases include fixed rental payments. The lease payments for
the Group’s office space leases do not consist of variable lease payments that depend on an index or a rate.
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.
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 RMB27,352, RMB17,448
and RMB10,396 in the year ended December 31, 2020, 2021 and 2022.
(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.
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 100% equity interest in an agency intermediate for cash
consideration of RMB31,390. The Group accounted for this acquisition as business combination.
The consideration, fair value
of assets acquired and liabilities assumed, as well as goodwill resulted from the acquisition are as follows:
| |
RMB | |
Consideration: | |
| |
Cash | |
| 31,390 | |
Recognized amounts of identifiable assets acquired and liabilities assumed: | |
| | |
Cash and cash equivalents | |
| 9,819 | |
Short term investments | |
| 5,360 | |
Accounts receivables | |
| 401 | |
Other receivable and current assets | |
| 33,192 | |
Property and equipment | |
| 11 | |
Right of use assets | |
| 521 | |
Total assets acquired | |
| 49,304 | |
Accounts payables | |
| (4,532 | ) |
Accrued expenses and other current liabilities | |
| (13,045 | ) |
Lease liability | |
| (465 | ) |
Total liabilities assumed | |
| (18,042 | ) |
Net assets acquired | |
| 31,262 | |
Goodwill | |
| 128 | |
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 RMB3,600 and recognized a gain of RMB2,051 in aggregate. As of December 31, 2021, RMB600
of the consideration remained outstanding as a payable which was subsequently settled in 2022.
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) | |
| 16,437 | | |
| 11,397 | |
Advances to entrepreneurial agents (i) | |
| 907 | | |
| 81 | |
Advances to a third party channel vendor (ii) | |
| 17,898 | | |
| 22,818 | |
Rental deposits | |
| 21,864 | | |
| 19,535 | |
Amount due from third parties (iii) | |
| — | | |
| 183,353 | |
Other | |
| 4,451 | | |
| 4,841 | |
Less: Allowance for current expected credit losses | |
| (802 | ) | |
| (10,976 | ) |
Other receivables, net | |
| 60,755 | | |
| 231,049 | |
(i) | Amounts represented advances to
staffs or entrepreneurial agents of the Group for daily business operations, which are unsecured, interest-free and repayable on demand. |
(ii) | Amount represented advances to Shenzhen Chetong Technology Co., Ltd. (“Chetong”) who provides platform services to the Group. The advances were unsecured, interest-free and repayable on demand. With the cease of cooperation with Chetong in 2022, the Group requested repayment of the advances. The Group estimated the net amount expected to be collected was RMB14,736 and accordingly recorded an allowance for credit losses of RMB8,082 in others, net of the consolidated statement of income and comprehensive income. |
(iii) | Amount represented 1) term-loan (matures in June 2023) to Sichuan Tianyi Real Estate Development Co., Ltd. (“Sichuan Tianyi”) of RMB80,000 and corresponding interest receivable RMB3,353 as of December 31, 2022. The loan is guaranteed by the ultimate controlling owner of Sichuan Tianyi, whom is jointly liable, with interest rate 7.2% per annum. 2) term-loan (matures in June 2023) to Shenzhen Yingxin Asset Management Co., Ltd. of RMB100,000 as of December 31, 2022, with the interest rate 7.3% per annum. The interest accrued until December 31, 2022 has been paid. These loan receivables are expected to be settled within one year. |
(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 | |
| 12,317 | | |
| 12,317 | |
Office equipment, furniture and fixtures | |
| 141,313 | | |
| 162,573 | |
Motor vehicles | |
| 19,694 | | |
| 18,641 | |
Leasehold improvements | |
| 36,791 | | |
| 39,993 | |
Total | |
| 210,115 | | |
| 233,524 | |
Less: Accumulated depreciation | |
| (163,315 | ) | |
| (191,945 | ) |
Construction in progress | |
| — | | |
| 56,880 | |
| |
| 46,800 | | |
| 98,459 | |
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 | |
| — | | |
| 390,000 | |
Prepaid operating costs | |
| 15,206 | | |
| 12,594 | |
Prepaid miscellaneous daily expenses | |
| 22,744 | | |
| 16,146 | |
Other | |
| 1,997 | | |
| 2,790 | |
Less: Allowance for current expected credit losses | |
| — | | |
| (1,795 | ) |
| |
| 39,947 | | |
| 419,735 | |
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 segment | | |
Claims Adjusting segment | | |
Total | |
| |
RMB | | |
RMB | | |
RMB | |
Gross as of December 31, 2021 | |
| 131,977 | | |
| 21,137 | | |
| 153,114 | |
Addition in 2022 | |
| 128 | | |
| — | | |
| 128 | |
Accumulated impairment loss as of December 31, 2021 and 2022 | |
| (22,108 | ) | |
| (21,137 | ) | |
| (43,245 | ) |
Net as of December 31, 2021 | |
| 109,869 | | |
| — | | |
| 109,869 | |
Net as of December 31, 2022 | |
| 109,997 | | |
| — | | |
| 109,997 | |
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 | |
| 329,158 | | |
| — | |
Others | |
| 6,650 | | |
| 4,035 | |
Total | |
| 335,808 | | |
| 4,035 | |
Investment in CNFinance
Holdings Limited (“CNFinance”)
The Group invested 18.5%
equity interest of CNFinance after CNFinance’s listing in New York Stock Exchange “NYSE” (symbol: CNF) on November 7,
2018. CNFinance is a leading home equity loan service provider incorporated in the Cayman Islands and based in Guangzhou, PRC. Investment
in CNFinance is accounted for using the equity method as the Group has significant influence by the right to nominate one board member
out of seven.
On May 27, 2022 (the “Declare
Date”), the board of directors authorized and approved the Group’s distribution of 252,995,600 ordinary shares of CNFinance
to its shareholders on a pro rata basis. The distribution was completed on June 28, 2022, after which the Group’s equity stake in CNFinance
decreased from approximately 18.5% to approximately 0.01%. Upon the completion of the distribution, the Company ceased to account for
the remaining equity investment in CNFinance using equity method as the Company no longer has significant influence over this investee.
For the year ended December 31, 2022, due to the continued decline in the share price of CNFinance, the Group recognized an other-than-temporary
impairment of RMB78,277 (for the year ended December 31, 2021 RMB29,316) to reduce the carrying value of the investment to reflect the
market value of the shares held by the Group up to the date of disposal.
The summarized financial
information of equity method investees is illustrated as below:
| |
As of December 31,
2021 | |
| |
RMB | |
Statements of Balance Sheet | |
| |
Total assets | |
| 14,883,038 | |
Total liabilities | |
| 10,783,449 | |
| |
Year Ended December 31, | |
| |
2020 | | |
2021 | |
Results of Operation | |
RMB | | |
RMB | |
Income from operations | |
| 115,656 | | |
| 1,462 | |
Net profit (loss) | |
| 89,820 | | |
| (7,089 | ) |
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.
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 | |
| 225,677 | | |
| 145,086 | |
Current operating lease liability | |
| 87,012 | | |
| 62,304 | |
Non-current operating lease liability | |
| 128,283 | | |
| 74,190 | |
Total operating leased liabilities | |
| 215,295 | | |
| 136,494 | |
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 | |
| 3.37 | | |
| 2.83 | |
Weighted average discount rate: | |
| | | |
| | |
Operating leases | |
| 4.41 | % | |
| 4.28 | % |
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 | |
| 111,197 | | |
| 97,576 | |
Short term lease expense | |
| 3,373 | | |
| 1,227 | |
Total | |
| 114,570 | | |
| 98,803 | |
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 | |
| 99,150 | | |
| 90,438 | |
Supplemental noncash information: | |
| | | |
| | |
Right-of-use assets obtained in exchange for lease obligations net of decrease in right-of-use assets for early determinations | |
| 125,487 | | |
| 4,462 | |
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 | |
| 66,924 | |
2024 | |
| 37,435 | |
2025 | |
| 22,498 | |
2026 | |
| 13,516 | |
2027 | |
| 3,135 | |
Thereafter | |
| 2,162 | |
Total remaining undiscounted lease payments | |
| 145,670 | |
Less: Interest | |
| 9,176 | |
Total present value of lease liabilities | |
| 136,494 | |
Less: Current operating lease liability | |
| 62,304 | |
Non-current operating lease liability | |
| 74,190 | |
(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 49% owned by the Group where the remaining 51% equity interests were transferred
to Mr. Shuangping Jiang at nominal value who holds the interest on behalf of the Group, because Xinbao Investment is, under the new rule,
prohibited to own more than 50% of the equity interests in a value-added telecommunications service provider, i.e., Fanhau RONS.
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.
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
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 ten years, which may be extended only upon written agreement of the parties. If the loan is not extended, then upon its expiration
and subject to then applicable PRC laws, the loan can be repaid only with the proceeds from a transfer of the individual shareholder’s
equity interests in VIEs to relevant PRC entities or another person or entity designated by them. Relevant PRC entities may accelerate
the loan repayment upon certain events, including but not limited to if the individual shareholder resigns or is dismissed from employment
by us or if relevant PRC entities exercise its option to purchase the shareholder’s equity interests in VIEs pursuant to the exclusive
purchase option agreements described below.
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.
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 ten
years.
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.
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 one year and can be renewed each year upon mutual agreement.
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. 10%
of the subscription price is paid by the Participant on or around the grant date, while the remaining 90% of the subscription prices is
financed through interest-bearing loans from the Group. The vesting of the awards is contingent on performance conditions being met during
the requisite service periods.
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 10% of the subscription price and executed a loan agreement with the Group for a loan representing 90% of the subscription price
of the ordinary shares under the 521 Plan. Participants executed an entrusted share purchase agreement with one of the 521 Employee Companies
whereby the 521 Plan Employee Company will legally hold the ordinary shares on behalf of the Participants. As of December 31, 2018 and
2019, the loan agreements provide a total of US$184,815 and US$344,988, respectively, in loans to the VIEs and Participants of the 521
Plan with the sole purpose of providing funds necessary for the purchase of the Group’s ordinary shares under the 521 Plan. All
the ordinary shares are pledged as collateral to the Group for the loans and are not yet vested, the Participants cannot direct the sale
of the ordinary shares without the consent of the Group until the ordinary shares are fully vested in accordance with the 521 Plan’s
agreed target performance. The loan agreement and the entrusted share purchase agreement shall terminate after five years or upon termination
of agency relationship and employment relationship or the settlement of the loan, whichever comes first.
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 280,000,000 ordinary shares to the Group, and as a condition, the Group refunded all
share rights deposits back to the Participants, and terminated the Participants’ obligation to repay the Group the non-recourse
loan principal and interest, and all the relevant original contractual agreements including the loan agreements, entrusted share purchase
agreements and letters of undertaking described above were agreed to be terminated and lapsed. As a result, the Group no longer has power
to direct the significant activities of the 521 Plan Employee Companies, and no longer bears potentially significant economic exposure
through its indirect interests to the 521 Plan Employee Companies, and stopped consolidating the 521 Plan Employee Companies upon the
cancellation of the 521 Plan.
In December 2020, upon the
cancellation of the 521 Plan, the Group refunded all share rights deposits amounted to RMB266,901 back to the Participants which was presented
as cash outflows from financing activities.
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.
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 | |
| 69,792 | | |
| 102,965 | |
Total current liabilities | |
| (40,100 | ) | |
| (50,457 | ) |
Total liabilities | |
| (40,653 | ) | |
| (77,990 | ) |
| |
Year Ended December 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
RMB | | |
RMB | |
Net revenues | |
| — | | |
| 16,267 | | |
| 141,086 | |
Operating costs and expenses | |
| — | | |
| 1,814 | | |
| 67,788 | |
Net income (loss) | |
| — | | |
| 14,431 | | |
| (4,136 | ) |
Net cash generated from operating activities | |
| — | | |
| 48,923 | | |
| 98,715 | |
Net cash used in financing activities | |
| (266,901 | ) | |
| — | | |
| — | |
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). In
the year ended December 31, 2022, aggregate revenues derived from these VIEs contributed 5.1% of the total consolidated net revenues,
based on the corporate structure as of the end of 2022. As of December 31, 2022, the VIEs accounted for an aggregate of 3.3% of the consolidated
total assets. The creditors of the VIEs’ third-party liabilities did not have recourse to the general credit of the Company in normal
course of business. The Company has not provided any financial support that it was not previously contractually required to provide to
the VIEs.
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 | |
| 65,228 | | |
| 77,502 | |
Refundable deposits from employees and agents | |
| 21,284 | | |
| 19,789 | |
Professional fees | |
| 8,998 | | |
| 3,586 | |
Accrued expenses to third parties | |
| 23,719 | | |
| 29,861 | |
Contributions from members of eHuzhu mutual aid program (Note 2(c)) | |
| 51,144 | | |
| 43,140 | |
Others | |
| 7,784 | | |
| 448 | |
Total | |
| 178,157 | | |
| 174,326 | |
(12) Short-term loan
Short-term loans and total
outstanding balance as of December 31, 2021 and 2022 amounted to nil and RMB35,679, respectively, which is RMB-denominated borrowing made
by the Company’s subsidiaries from financial institutions in mainland China. In 2022, insurance agency segment borrowed RMB35,679
one-year loan for its general working capital purposes.
As of December 31, 2021 and
2022, the weighted average interest rates for the outstanding borrowings were approximately nil and 4.50%, respectively, and the aggregate
amounts of unused lines of credit for short-term loans were nil and RMB164,321, respectively.
(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 RMB52,942, RMB118,837 and RMB131,385, respectively.
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 16.5%, and foreign-derived income is exempted from income tax. Under the two-tiered
profits tax rates regime, the provision for current income taxes of the subsidiaries operating in Hong Kong has been calculated by
applying the current rate of taxation of 8.25% for the years ended December 31, 2020, 2021 and 2022.
The Group’s subsidiaries
and VIEs incorporated in the PRC are subject to the PRC Enterprise Income Tax and a unified 25% enterprise income tax rate,
except for certain entities that are entitled to preferential tax treatments.
Preferential EIT rates at
15% is available for qualified enterprises located in the western China regions in an industry sector encouraged by the PRC government.
Fanhua Lianxing Insurance Sales Co., Ltd., the Group’s wholly-owned subsidiary, which is the holding entity of the Group’s
life insurance operations, was entitled to a preferential tax rate of 15% for the years ended December 31, 2020, 2021 and 2022, respectively. Tibet
Zhuli Investment Co. Ltd. (“Tibet Zhuli”), the Group’s wholly-owned subsidiary, was entitled to a preferential tax rate
of 15% for the year ended December 31, 2020. Tibet Zhuli no longer enjoys such a preferential rate from 2021 to 2022.
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 50% reduction for the next three years. For Shenzhen Huazhong, year 2017 was the first profit-making year and accordingly
it has made a 12.5% tax provision for its profits for the years ended December 31, 2020 and 2021, Shenzhen Huazhong no longer enjoys such
a preferential rate from 2022.
The Group’s subsidiaries
that are the PRC tax resident are required to withhold the PRC withholding tax of 10% on dividend payment to their non-PRC resident immediate
holding company, unless such dividend payment is qualified for the 5% reduced tax rate under the Arrangement between Mainland China and
Hong Kong for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the “PRC-HK
DTA”).
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 5%
for the dividends paid by PRC subsidiaries for the years ended December 31, 2020, 2021 and 2022 under Bulletin [2018] No. 9 (e.g. beneficial
ownership, shareholding percentage and holding period).
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.
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 | |
| 70,350 | |
Change in unrecognized tax benefits | |
| — | |
Decrease in tax positions | |
| (3,131 | ) |
Balance as of December 31, 2020 | |
| 67,219 | |
Change in unrecognized tax benefits | |
| — | |
Increase in tax positions | |
| 5,994 | |
Balance as of December 31, 2021 | |
| 73,213 | |
Change in unrecognized tax benefits | |
| — | |
Decrease in tax positions | |
| (36,566 | ) |
Balance as of December 31, 2022 | |
| 36,647 | |
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 | |
| 67,609 | | |
| 66,665 | | |
| 13,169 | |
Deferred tax expense | |
| 15,778 | | |
| 23,909 | | |
| 27,847 | |
Income tax expense | |
| 83,387 | | |
| 90,574 | | |
| 41,016 | |
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 | |
| 53,179 | | |
| 96,173 | |
Intangible assets, net | |
| 3,675 | | |
| 2,856 | |
Less: valuation allowances | |
| (38,126 | ) | |
| (78,627 | ) |
Total | |
| 18,728 | | |
| 20,402 | |
Deferred tax liabilities: | |
| | | |
| | |
Fair value adjustments in relation to short-term investments | |
| 14,734 | | |
| 13,954 | |
Estimated profit arising from future renewal commissions | |
| 29,752 | | |
| 59,271 | |
PRC dividend withholding taxes | |
| 29,230 | | |
| 29,230 | |
Total | |
| 73,716 | | |
| 102,455 | |
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 RMB38,126 and RMB78,627 valuation allowance for the years ended December 31, 2021 and 2022,
respectively.
The Group had total operating
loss carry-forwards of RMB213,184 and RMB385,155 as of December 31, 2021 and 2022, respectively. As of December 31, 2022, all of the operating
loss carry-forwards will expire in the years from 2023 to 2027. During the years ended December 31, 2020, 2021 and 2022, RMB5,321, RMB8,314
and RMB18,349, respectively, of tax loss carried forward has been expired and canceled.
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 25% to net income before income taxes and income of
affiliates, and the actual provision for income taxes is as follows:
| |
Year Ended December 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
RMB | | |
RMB | |
Income from continuing operations before income taxes, share of income of affiliates, net | |
| 362,302 | | |
| 371,088 | | |
| 196,335 | |
PRC statutory tax rate | |
| 25 | % | |
| 25 | % | |
| 25 | % |
Income tax at statutory tax rate | |
| 90,576 | | |
| 92,772 | | |
| 49,084 | |
Expenses not deductible for tax purposes: | |
| | | |
| | | |
| | |
—Entertainment | |
| 2,428 | | |
| 2,950 | | |
| 2,099 | |
—Other | |
| 202 | | |
| 81 | | |
| 479 | |
Effect of tax holidays on concessionary rates granted to PRC entities | |
| (18,114 | ) | |
| (13,523 | ) | |
| (12,671 | ) |
Effect of different tax rates of subsidiaries operating in other jurisdictions | |
| 2,732 | | |
| 2,070 | | |
| 2,342 | |
Change in valuation allowance | |
| (3,355 | ) | |
| 2,999 | | |
| 40,501 | |
Deferred income tax for dividend distribution | |
| 18,483 | | |
| 10,349 | | |
| — | |
Effect of non-taxable income* | |
| (13,648 | ) | |
| (13,777 | ) | |
| (4,620 | ) |
Unrecognized tax benefits arising from certain transfer pricing arrangements | |
| — | | |
| 5,994 | | |
| (36,566 | ) |
Other | |
| 4,083 | | |
| 659 | | |
| 368 | |
Income tax expense | |
| 83,387 | | |
| 90,574 | | |
| 41,016 | |
| * | The effect of non-taxable
income represents an income tax exemption according to the Notice (Cai Shui [2002] No. 128) promulgated by the State Administration of
Taxation and Ministry of Finance in China on dividend income derived from a purchased open-end securities investment fund product that
the Group recorded as short term investment. |
Additional PRC income taxes
that would have been payable without the tax exemption amounted to approximately RMB18,114, RMB13,523 and RMB12,671 for the years ended
December 31, 2020, 2021 and 2022, respectively. Without such exemption, the Group’s basic net profit per share for the years ended
December 31, 2020, 2021 and 2022 would have been decreased by RMB0.02, RMB0.01and RMB0.01, and diluted net profit per share for the years
ended December 31, 2020, 2021 and 2022 would have been decreased by RMB0.02, RMB0.01and RMB0.01, respectively.
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 RMB1,283,166 and
RMB1,399,701 as of December 31, 2021 and 2022 respectively, are considered to be indefinitely reinvested. If those earnings were to be
distributed or they were determined to be no longer permanently reinvested, the Group would have to record a deferred tax liability in
respect of those undistributed earnings of approximately RMB64,158 and RMB69,985, respectively.
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 RMB18,483, RMB10,349
and nil, respectively, deferred income tax for the declared dividend distribution based on a 5% withholding tax rate.
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, the Company
repurchased an aggregate of 72,465 ADSs from the open market, representing 0.1% of the total shares outstanding as of December 31, 2022,
at an average price of US$7.85 per ADS for a total amount of approximately RMB3,984, under its share buyback program to repurchase up
to US$20 million ADSs, as previously announced by its board of directors in December 2022. The Group accounts for repurchased ordinary
shares under the par value method and includes such treasury stock as a component of the shareholders’ equity.
(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 | |
| 276,177 | | |
| 259,941 | | |
| 85,723 | |
Less: Net income (loss) attributable to the noncontrolling interests | |
| 7,923 | | |
| 8,952 | | |
| (14,549 | ) |
Net income attributable to the Company’s shareholders | |
| 268,254 | | |
| 250,989 | | |
| 100,272 | |
Weighted average number of ordinary shares outstanding | |
| 1,073,891,784 | | |
| 1,073,891,784 | | |
| 1,074,196,310 | |
Basic net income per ordinary share | |
| 0.25 | | |
| 0.23 | | |
| 0.09 | |
Basic net income per ADS | |
| 5.00 | | |
| 4.67 | | |
| 1.87 | |
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 | |
| 276,177 | | |
| 259,941 | | |
| 85,723 | |
Less: Net income (loss) attributable to the noncontrolling interests | |
| 7,923 | | |
| 8,952 | | |
| (14,549 | ) |
Net income attributable to the Company’s shareholders | |
| 268,254 | | |
| 250,989 | | |
| 100,272 | |
Weighted average number of ordinary shares outstanding | |
| 1,073,891,784 | | |
| 1,073,891,784 | | |
| 1,074,196,310 | |
Weighted average number of dilutive potential ordinary shares from share options | |
| 399,576 | | |
| 399,410 | | |
| 261,511 | |
Total | |
| 1,074,291,360 | | |
| 1,074,291,194 | | |
| 1,074,457,821 | |
Diluted net income per ordinary share | |
| 0.25 | | |
| 0.23 | | |
| 0.09 | |
Diluted net income per ADS | |
| 4.99 | | |
| 4.67 | | |
| 1.87 | |
(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 10% of individual company’s net profit as reported in
the PRC statutory financial statements of the Company’s subsidiaries and VIEs. The appropriations to statutory surplus reserve are
required until the balance reaches 50% of the registered capital of respective subsidiaries and VIEs.
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 RMB557,221 and RMB559,520 as of December 31, 2021
and 2022, respectively.
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 RMB1,458,915
and RMB1,461,214 as of December 31, 2021 and 2022, respectively, which were not eligible to be distributed.
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 RMB5,386 commission cost to Puyi Consulting and the balance
of accounts payable as of December 31, 2021 was RMB2,894. For the year ended December 31, 2022, the Group incurred RMB13,548 commission
cost to Puyi Consulting and the balance of account payable as of December 31, 2022 was RMB4,987. In order to diversify the Group’s
services and product offerings, the Group provided referral services of publicly-raised and privately-raised fund products provided by
Puyi’s clients, the Group referred Puyi’s financial advisors to their clients and Puyi’s financial advisors will be
responsible for providing product information and handling purchasing procedures. For the year ended December 31, 2022, the Group incurred
RMB1,166 referral service fee from Puyi and the balance of account receivable as of December 31, 2022 was RMB1. |
| (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 RMB7,017 services expense to Puyi Consulting and the balance of other payable
as of December 31, 2022 was RMB4,177. |
(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
10% or more of total net revenues excluding estimated renewal commissions are as follows:
| |
Year ended December 31, | |
| |
2020 | | |
%
of sales | | |
2021 | | |
% of sales | | |
2022 | | |
% of sales | |
| |
RMB | | |
| | |
RMB | | |
| | |
RMB | | |
| |
Sinatay Life Insurance Co., Ltd. (“Sinatay”) | |
| 504,489 | | |
| 15.4 | % | |
| 451,840 | | |
| 15.0 | % | |
| 497,143 | | |
| 19.6 | % |
Aeon Life Insurance Co., Ltd. (“Aeon”). | |
| 560,341 | | |
| 17.1 | % | |
| 437,132 | | |
| 14.5 | % | |
| * | | |
| * | |
Huaxia Life Insurance Company Limited (“Huaxia”) | |
| 606,581 | | |
| 18.6 | % | |
| 323,800 | | |
| 10.7 | % | |
| * | | |
| * | |
Evergrande Life Insurance Co., Ltd. (“Evergrande”) | |
| 339,567 | | |
| 10.4 | % | |
| * | | |
| * | | |
| * | | |
| * | |
Subtotal | |
| 2,010,978 | | |
| 61.5 | % | |
| 1,212,772 | | |
| 40.2 | % | |
| 497,143 | | |
| 19.6 | % |
* | represented
less than 10% of total net revenues for the year. |
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 10% or more of gross accounts receivable excluding estimated renewal commissions are as follows:
| |
As of December 31, | |
| |
2021 | | |
% | | |
2022 | | |
% | |
| |
RMB | | |
| | |
RMB | | |
| |
Sinatay | |
| 186,289 | | |
| 31.1 | % | |
| 124,847 | | |
| 23.4 | % |
Greatwall Life Insurance Co., Ltd | |
| * | | |
| * | | |
| 85,616 | | |
| 16.0 | % |
Subtotal | |
| 186,289 | | |
| 31.1 | % | |
| 210,463 | | |
| 39.4 | % |
| * | represented less than 10% of
accounts receivable as of the year end. |
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 92,845,000 ordinary shares of the Company.
Pursuant to the option agreements entered into between the Company and the option grantees, the options shall vest over a five-year service
period from 2012 to 2016. The expiration date of the 2012 Options is March 12, 2022. The 2012 Options G had an exercise price of US$0.30
(RMB1.90) and an intrinsic value of US$0.04 (RMB0.26) per ordinary share, except for the 3,200,000 options granted to the two independent
directors which had an exercise price of US$0.31 (RMB1.98) and an intrinsic value of US$0.03(RMB0.17) per ordinary share. The exercise
price for Option G was later modified to US$0.001 (RMB0.006) and the number of shares are reduced by half with no incremental cost as
a result of such option modification in November 2014. The fair value of the options was determined by using the Black-Scholes option
pricing model.
For the years ended December
31, 2021 and 2022, share-based compensation expenses of nil were recognized in connection with the 2012 Options G, respectively.
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 | |
| 400,000 | | |
| 0.25 | | |
| 0.01 | | |
| 924 | |
Exercised | |
| (400,000 | ) | |
| — | | |
| — | | |
| — | |
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. Upon a modification
of the settlement terms of the 521 Plan from cash settlement to net share settlement of vested ADS options in November 2019, the
Group will settle the vested ADS option with shares of the Group at a value equal to the excess of the settlement date fair value of the
ADS over the loan principal plus interest. The modification resulted in a change of awards’ classification from liability to equity. At
the modification date, the Group reclassified the amounts previously recorded as a share-based compensation liability as a component of
equity in the form of a credit to additional paid-in capital.
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 280,000,000 subscribed ordinary shares to the Group, and as a condition, the Group refunded all share rights deposits amounting
RMB250,312 back to the Participants, and terminated the Participants’ obligation to repay the Group the non-recourse loan principal
and accumulated interest. By the end of 2020, the transaction was completed and the returned shares were all cancelled.
For the year ended December
31, 2019, the Group recognized RMB393 share-based compensation expense related to the 521 plan, while for the year ended December 31,
2020, the Group reversed RMB393 as the stock options related to the 521 Plan were estimated to be improbable to vest. As of December 31,
2021 and 2022, there was no unrecognized share-based compensation expense related to the 521 Plan.
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 4,000,000 ordinary shares of the Company.
Pursuant to the option agreements entered into between the Company and the option grantees, the options vest over a four-year service
period starting from the date of grant, with 30% (“Option D1”), 30% (“Option D2”), 20% (“Option D3”)
and the remaining 20% (“Option D4”) of the options being vested on August 31 of each of the years starting from 2023 to 2026,
respectively, subject to the continuous service of the option grantees. The 2022 Options expire no later than August 1, 2032, subject
to earlier termination upon an optionee’s cessation of service. The 2022 Options had an exercise price of US$0.2305 (RMB1.59) and
an intrinsic value of US$0.0020 (RMB0.01) per ordinary share on the date of grant.
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) | |
3.69% |
Risk-free interest rates (Note ii) | |
2.92% ~ 2.96% |
Expected volatility (Note iii) | |
119.9% ~ 131.9% |
Expected life in years (Note iv) | |
5.54 ~ 7.04 |
Fair value of options on grant date | |
US$0.1590 ~ US$0.1646 |
| (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.
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 161,143,768 ordinary
shares available to be granted as options under the 2022 Options. No actual forfeitures occurred for the independent directors for the
year ended December 31, 2022.
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 | |
| 4,000,000 | | |
| 0.2305 | | |
| 6.19 | | |
| | |
Exercised | |
| - | | |
| - | | |
| - | | |
| | |
Forfeited | |
| - | | |
| - | | |
| - | | |
| | |
Outstanding as of December 31, 2022 | |
| 4,000,000 | | |
| 0.2305 | | |
| 6.19 | | |
| 558 | |
For the year ended December
31, 2022, share-based compensation expenses of RMB461 were recognized in connection with the 2022 Options. As of December 31, 2022, unrecognized
share-based compensation expense related to unvested share options granted to the independent directors totaled US$572 (RMB3,942), which
is expected to be recognized over a weighted-average period of 3.6 years. The aggregate intrinsic value of the share options as of December
31, 2022 was US$558 (RMB3,849).
(22) Segment Reporting
As of December 31, 2021 and
2022, the Group operated two segments: (1) the insurance agency segment, which mainly consists of providing agency services for distributing
life and P&C insurance products on behalf of insurance companies, and (2) the claims adjusting segment, which consists of providing
pre-underwriting survey services, claim adjusting services, disposal of residual value services, loading and unloading supervision services,
and consulting services. Operating segments are defined as components of an enterprise about which separate financial information is available
and evaluated regularly by the Group’s chief operating decision maker (“CODM”) in deciding how to allocate resources and
in assessing performance. The Group’s CODM is the Chief Executive Officer.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(22) Segment Reporting (Continued)
The following table shows the Group’s operations
by business segment for the years ended December 31, 2020, 2021 and 2022. Other represents revenue and expenses that are not allocated
to reportable segments and corporate related items.
| |
Year ended December 31, | |
| |
2020 | | |
2021 | | |
2022 | | |
2022 | |
| |
RMB | | |
RMB | | |
RMB | | |
US$ | |
Net revenues | |
| | |
| | |
| | |
| |
Agency | |
| 2,834,997 | | |
| 2,811,936 | | |
| 2,376,851 | | |
| 344,611 | |
Claims Adjusting | |
| 433,148 | | |
| 459,178 | | |
| 404,763 | | |
| 58,685 | |
Total net revenues | |
| 3,268,145 | | |
| 3,271,114 | | |
| 2,781,614 | | |
| 403,296 | |
Operating costs and expenses | |
| | | |
| | | |
| | | |
| | |
Agency | |
| (2,481,219 | ) | |
| (2,418,444 | ) | |
| (2,068,194 | ) | |
| (299,860 | ) |
Claims Adjusting | |
| (416,241 | ) | |
| (442,349 | ) | |
| (416,619 | ) | |
| (60,405 | ) |
Other | |
| (68,499 | ) | |
| (108,416 | ) | |
| (128,126 | ) | |
| (18,576 | ) |
Total operating costs and expenses | |
| (2,965,959 | ) | |
| (2,969,209 | ) | |
| (2,612,939 | ) | |
| (378,841 | ) |
Income (loss) from operations | |
| | | |
| | | |
| | | |
| | |
Agency | |
| 353,778 | | |
| 393,492 | | |
| 308,657 | | |
| 44,751 | |
Claims Adjusting | |
| 16,907 | | |
| 16,829 | | |
| (11,856 | ) | |
| (1,720 | ) |
Other | |
| (68,499 | ) | |
| (108,416 | ) | |
| (128,126 | ) | |
| (18,576 | ) |
Income from operations | |
| 302,186 | | |
| 301,905 | | |
| 168,675 | | |
| 24,455 | |
| |
As of December 31, | |
| |
2021 | | |
2022 | | |
2022 | |
| |
RMB | | |
RMB | | |
US$ | |
Segment assets | |
| | |
| | |
| |
Agency | |
| 1,259,973 | | |
| 1,513,449 | | |
| 219,429 | |
Claims Adjusting | |
| 302,592 | | |
| 252,130 | | |
| 36,555 | |
Other | |
| 1,679,553 | | |
| 1,323,937 | | |
| 191,954 | |
Total assets | |
| 3,242,118 | | |
| 3,089,516 | | |
| 447,938 | |
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.
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 57.73% of the equity interests of Zhongrong. As of March 31, 2023, the Group has acquired
53.44% of the equity interests of Zhongrong with a capital contribution of RMB122.7 million to Zhongrong. Zhongrong is currently in
the process of repurchasing its shares from certain of its existing shareholders which will result in its shareholding in
Zhongrong ultimately increasing to 57.73%. In connection with the acquisition, 61,853,580 ordinary shares of the Company have been
issued to the existing shareholders of Zhongrong as of March 31, 2023. The consideration, adjustable based on the achievement of
certain performance targets in the next three years by Zhongrong, is subject to a lock-up period of three years and will be released
from lock-up in two batches after 2025.
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 51% of the equity interests of Zhongji. In connection with the acquisition, 13,660,720 ordinary shares of the Company have
been issued to the existing shareholders of Zhongji as of March 31, 2023. The consideration, adjustable based on the achievement of certain
performance targets in the next three years by Zhongji, is subject to a lock-up period of three years and will be released from lock-up
in two batches after 2025.
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 51% of the equity interests of Taiping. In connection with the acquisition, 9,107,140 ordinary shares of the Company have been
issued to the existing shareholders of Taiping as of March 31, 2023. The consideration, adjustable based on the achievement of certain
performance targets in the next three years by Taiping, is subject to a lock-up period of three years and will be released from lock-up
in two batches after 2025.
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 13,680,000 ordinary shares to
certain top agents who have met the requirements for Million Dollar Round Table (the “MDRT”) Membership. Pursuant to the MDRT
share incentive program, the exercise price of these options is US$0.05 per ordinary share. The options are scheduled to vest over a two-year
period starting from March 31, 2024, subject to the achievement of certain key performance indicators by the option holders and their
continued service with the Group. The Group is in the process of assessing the accounting treatment of the above mentioned share incentive
program.
FANHUA INC.
SCHEDULE I—CONDENSED FINANCIAL INFORMATION
OF THE COMPANY
Balance Sheets
(In thousands, except for shares and per
share data)
| |
As of December 31, | |
| |
2021 | | |
2022 | | |
2022 | |
| |
RMB | | |
RMB | | |
US$ | |
ASSETS: | |
| | |
| | |
Note2(u) | |
Current assets: | |
| | |
| | |
| |
Cash and cash equivalents | |
| 14,507 | | |
| 38,512 | | |
| 5,584 | |
Short term investments | |
| 34,705 | | |
| 27,619 | | |
| 4,004 | |
Other receivables and amounts due from subsidiaries and affiliates | |
| 635,953 | | |
| 417,613 | | |
| 60,549 | |
Total current assets | |
| 685,165 | | |
| 483,744 | | |
| 70,137 | |
Non-current assets: | |
| | | |
| | | |
| | |
Investment in subsidiaries | |
| 3,328,864 | | |
| 2,520,667 | | |
| 365,463 | |
Investment in an affiliate | |
| 6,378 | | |
| 4,035 | | |
| 585 | |
Total assets | |
| 4,020,407 | | |
| 3,008,446 | | |
| 436,185 | |
| |
| | | |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY: | |
| | | |
| | | |
| | |
Current liabilities: | |
| | | |
| | | |
| | |
Other payables and accrued expenses and amounts due to subsidiaries | |
| 2,182,522 | | |
| 1,385,043 | | |
| 200,813 | |
Total liabilities | |
| 2,182,522 | | |
| 1,385,043 | | |
| 200,813 | |
Ordinary shares (Authorized shares:10,000,000,000 at US$0.001 each; issued 1,073,891,784 and 1,074,291,784 shares, of which 1,073,891,784 and 1,072,842,484 shares were outstanding as of December 31, 2021 and 2022, respectively) | |
| 8,089 | | |
| 8,091 | | |
| 1,173 | |
Treasury Stock | |
| — | | |
| (10 | ) | |
| (1 | ) |
Additional paid-in capital | |
| — | | |
| 461 | | |
| 67 | |
Retained earnings | |
| 1,868,936 | | |
| 1,647,504 | | |
| 238,866 | |
Accumulated other comprehensive loss | |
| (39,140 | ) | |
| (32,643 | ) | |
| (4,733 | ) |
Total equity | |
| 1,837,885 | | |
| 1,623,403 | | |
| 235,372 | |
Total liabilities and shareholders’ equity | |
| 4,020,407 | | |
| 3,008,446 | | |
| 436,185 | |
FANHUA INC.
SCHEDULE I—CONDENSED FINANCIAL INFORMATION
OF THE COMPANY—(Continued)
Statements of Income and Comprehensive Income
(In thousands)
| |
Year Ended December 31, | |
| |
2020 | | |
2021 | | |
2022 | | |
2022 | |
| |
RMB | | |
RMB | | |
RMB | | |
US$ | |
General and administrative expenses | |
| (4,204 | ) | |
| (331 | ) | |
| (11,318 | ) | |
| (1,641 | ) |
Selling expenses | |
| 281 | | |
| — | | |
| — | | |
| — | |
Interest income | |
| 1,044 | | |
| 2 | | |
| 5 | | |
| 1 | |
Others, net | |
| — | | |
| — | | |
| 17,495 | | |
| 2,536 | |
Equity in earnings of subsidiaries and an affiliate | |
| 271,133 | | |
| 251,318 | | |
| 94,090 | | |
| 13,642 | |
Net Income attributable to the Company’s shareholders | |
| 268,254 | | |
| 250,989 | | |
| 100,272 | | |
| 14,538 | |
Other comprehensive income (loss): | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustments | |
| 9,639 | | |
| (9,116 | ) | |
| 3,728 | | |
| 541 | |
Unrealized net gains on available-for-sale investments | |
| 23,811 | | |
| 6,252 | | |
| (1,919 | ) | |
| (278 | ) |
Share of other comprehensive (loss) gain of affiliates | |
| (3,016 | ) | |
| (1,281 | ) | |
| 4,688 | | |
| 680 | |
Comprehensive income attributable to the Company’s shareholders | |
| 298,688 | | |
| 246,844 | | |
| 106,769 | | |
| 15,481 | |
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 | |
| 268,254 | | |
| 250,989 | | |
| 100,272 | | |
| 14,538 | |
Adjustments to reconcile net income to net cash used in operating activities: | |
| | | |
| | | |
| | | |
| | |
Equity in earnings of subsidiaries and an affiliate | |
| (271,133 | ) | |
| (251,318 | ) | |
| (94,090 | ) | |
| (13,642 | ) |
Compensation expenses associated with stock options | |
| (393 | ) | |
| — | | |
| 461 | | |
| 67 | |
Changes in operating assets and liabilities: | |
| | | |
| | | |
| | | |
| | |
Other receivables | |
| 26 | | |
| 392 | | |
| — | | |
| — | |
Other payables | |
| (7,707 | ) | |
| (847 | ) | |
| 696 | | |
| 102 | |
Net cash (used in) from operating activities | |
| (10,953 | ) | |
| (784 | ) | |
| 7,339 | | |
| 1,065 | |
Cash flows (used in) generated from investing activities | |
| | | |
| | | |
| | | |
| | |
Purchase of short-term investments | |
| (71,382 | ) | |
| — | | |
| | | |
| | |
Changes in investment in subsidiaries and an affiliate | |
| 26,195 | | |
| 43,757 | | |
| 907,006 | | |
| 131,504 | |
Advances to subsidiaries and affiliates | |
| 660,004 | | |
| 157,582 | | |
| (689,780 | ) | |
| (100,009 | ) |
Proceeds from disposal of short-term investments | |
| 73,310 | | |
| — | | |
| 10,095 | | |
| 1,464 | |
Net cash generated from investing activities | |
| 688,127 | | |
| 201,339 | | |
| 227,321 | | |
| 32,959 | |
Cash flows generated from (used in) financing activities: | |
| | | |
| | | |
| | | |
| | |
Proceeds on exercise of stock options | |
| — | | |
| — | | |
| 2 | | |
| — | |
Dividends paid | |
| (388,499 | ) | |
| (242,518 | ) | |
| (317,730 | ) | |
| (46,067 | ) |
Repurchase of ordinary shares from open market | |
| — | | |
| — | | |
| (3,984 | ) | |
| (578 | ) |
Repayment of subscription from the 521 Plan participants | |
| (250,312 | ) | |
| — | | |
| — | | |
| — | |
Net cash generated used in financing activities | |
| (638,811 | ) | |
| (242,518 | ) | |
| (321,712 | ) | |
| (46,645 | ) |
Net increase (decrease) in cash and cash equivalents | |
| 38,363 | | |
| (41,963 | ) | |
| (87,052 | ) | |
| (12,621 | ) |
Cash and cash equivalents and restricted cash at beginning of year | |
| 32,314 | | |
| 66,345 | | |
| 14,507 | | |
| 2,103 | |
Effect of exchange rate changes on cash and cash equivalents | |
| (4,332 | ) | |
| (9,875 | ) | |
| 111,057 | | |
| 16,102 | |
Cash and cash equivalents and restricted cash at end of the year | |
| 66,345 | | |
| 14,507 | | |
| 38,512 | | |
| 5,584 | |
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 25 percent of consolidated net assets as of the end of the most recently
completed fiscal year.
As of December 31, 2022,
RMB1,461,214 of the restricted capital and reserves are not available for distribution, and as such, the condensed financial information
of the Company has been presented for the years ended December 31, 2020, 2021 and 2022.
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
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