The financial statements are presented in Hong Kong Dollars (dollars) and rounded to the nearest dollars.

Transcription

1 Notes on the Financial Statements 1 Background Hang Seng Index ETF ( the Fund ) is authorised by the Hong Kong Securities and Futures Commission under Section 104(1) of the Hong Kong Securities and Futures Ordinance, and is governed by the Hong Kong Code on Unit Trusts and Mutual Funds. The Fund was constituted by a Trust Deed dated 10 September 2004, as amended from time to time under the laws of Hong Kong, and registered on 13 September 2004 as a unit trust under the laws of Hong Kong. 2 Significant accounting policies (a) Statement of compliance The financial statements of the Fund have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards ( HKFRSs ), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards ( HKASs ) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants ( HKICPA ), accounting principles generally accepted in Hong Kong, the relevant disclosure provisions of the Trust Deed, as amended, and the relevant disclosure provisions of the Hong Kong Code on Unit Trusts and Mutual Funds issued by the Hong Kong Securities and Futures Commission. A summary of the significant accounting policies adopted by the Fund is set out below. The HKICPA has issued a number of new and revised HKFRSs that are effective or available for early adoption for accounting periods beginning on or after 1 January Information on the changes in accounting policies resulting from initial application of these new and revised HKFRSs for the current and prior accounting periods reflected in these financial statements is provided in note 3. (b) Basis of preparation of the financial statements The financial statements are presented in Hong Kong Dollars (dollars) and rounded to the nearest dollars. The measurement basis used in the preparation of the financial statements is the historical cost basis except that investments are stated at their fair value as explained in the accounting policies set out below. The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of HKFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 15. (c) Security transactions Security transactions are accounted for on a trade date basis. (d) Revenue recognition Interest income is recognised as it accrues using the effective interest rate method. Distribution income is recognised when the underlying securities are quoted ex-distribution. Interest and distribution income is stated after deduction of withholding tax where applicable. 21

2 (e) Translation of foreign currency Foreign currency transactions during the year/period are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date. Exchange gains and losses are recognised in the revenue statement. (f) Financial instruments (i) Classification At 1 January 2005, the Fund designated all its investments at fair value through profit or loss upon initial recognition and classified all its investments as trading instruments. Trading instruments are those that the Fund has acquired principally for the purpose of short-term profit-taking. These include investments in the constituent stocks of Hang Seng Index. (ii) Recognition The Fund recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instruments. A regular way purchase of financial assets is recognised using trade date accounting. From this date any gains and losses arising from changes in fair value of the financial assets or financial liabilities are recorded. Financial liabilities are not recognised unless one of the parties has performed or the contract is a derivative contract not exempted from the scope of HKAS 39. (iii) Measurement Financial instruments are measured initially at fair value (transaction price). Transaction costs on financial assets and financial liabilities at fair value through profit or loss are expensed immediately. Subsequent to initial recognition, all trading instruments are measured at fair value. (iv) Fair value measurement principles The fair value of financial instruments is generally based on their quoted market prices at the balance sheet date without any deduction for estimated future selling costs. Financial assets are priced at current bid prices while financial liabilities are priced at current asking prices. Gains and losses on investments are included in the revenue statement. Realised and unrealised gains and losses on investments are provided in note 7. Realised gains or losses include net gains or losses on contracts which have been entered into. (v) Gains and loss on subsequent measurement Gains and losses arising from a change in fair value of trading instruments are recognised in the revenue statement. (vi) Derecognition The Fund derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire or they transfer the financial asset and the transfer qualifies for derecognition in accordance with HKAS 39. Assets held for trading that are sold are derecognised and corresponding receivables from the brokers are recognised as of the date the Fund commits to sell the assets. The Fund uses the weighted average method to determine realised gains and losses on derecognition. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. (g) Related parties For the purposes of these financial statements, parties are considered to be related to the Fund if they have the ability, directly or indirectly, to control or exercise significant influence over the Fund in making financial and operating decisions, or vice versa, or where the Fund is subject to common control or common significant influence. Related parties may be individuals or other entities and include entities which are under the significant influence of related parties of the Fund where those parties are individuals. 22

3 (h) Formation costs Formation costs of the Fund are charged to the revenue statement as incurred. (i) Cash and cash equivalents Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of the Fund s cash management and are included as a component of cash and cash equivalents for the purpose of the cash flow statement. (j) Units in issue All units issued by the Fund provide their respective unitholders with the right to require redemption for cash at the value proportionate to the unitholder's share in the Fund's net assets at the redemption date. In accordance with HKAS 32, such rights give rise to a financial liability to the Fund which is shown as "net assets attributable to unitholders" in the statement of assets and liabilities and distributions paid to unitholders thereon are recognised on an accrual basis in revenue statement as part of finance costs. (k) Finance costs (distributions to unitholders) Distributions to unitholders are recognised in the revenue statement as finance costs. 3 Changes in accounting policies The HKICPA has issued a number of new and revised HKFRSs that are effective for accounting periods beginning on or after 1 January The Manager and the Trustee have determined the accounting policies to be adopted in the preparation of the financial statements for the year ended 31 December 2005, on the basis of HKFRSs currently in issue. The accounting policies of the Fund after the adoption of these new and revised HKFRSs have been summarised in note 2. The following sets out information on the significant changes in accounting policies for the current and prior accounting periods reflected in these financial statements. The Fund has not applied any new standards or interpretations that are not yet effective for the current accounting period (see note 15). (a) Financial instruments (HKAS 32, Financial instruments: Disclosure and presentation and HKAS 39, Financial instruments: Recognition and measurement) With effect from 1 January 2005, in order to comply with HKAS 32 and HKAS 39, the Fund has changed its accounting policies relating to financial instruments and units in issue to those as set out in notes 2(f) and 2(j). Further details of the changes are as follows. (i) Investments in listed securities In prior years, listed securities were priced at closing prices. With effect from 1 January 2005, and in accordance with HKAS 39, listed securities are priced at current bid prices. This change was adopted by way of opening balance adjustments to net assets attributable to unitholders as at 1 January As at that date, these investment securities were restated to their fair value using bid prices instead of closing prices. Comparative amounts have not been restated nor has the opening balance of investments been restated as this is prohibited by the transitional arrangements in HKAS 39. As a result of this new policy, the Fund s net assets attributable to unitholders as at 31 December 2005 have been decreased as shown in note

4 (ii) Transaction costs on financial assets and financial liabilities In prior years, transaction costs on financial assets and financial liabilities at fair value through profit or loss were capitalised. With effect from 1 January 2005, and in accordance with HKAS 39, such transaction costs are expensed immediately. This change was adopted by expensing such transaction costs in the revenue statement. Comparative amounts have not been restated nor has the opening balance of investments been restated as this is prohibited by the transitional arrangements in HKAS 39. (iii) Units in issue In prior years, net assets attributable to unitholders were classified as equity based on their legal form. Distributions paid to unitholders were presented as distributions. With effect from 1 January 2005, in accordance with HKAS 32, the classification of net assets attributable to unitholders is based on the substance of the contractual arrangement. Consequently, the net assets attributable to unitholders have been classified as liabilities and distributions to unitholders are recognised as an expense in the revenue statement. Distributions to unitholders were presented as finance costs as shown in note 2(k). The change in accounting policy has been adopted retrospectively by reclassifying the capital account and net assets as net assets attributable to unitholders in the statement of assets and liabilities. As a result of this new policy, all units issued by the Fund give rise to a financial liability. Further details of the new policy are set out in note 2(j). (b) Definition of related parties (HKAS 24, Related party disclosures) As a result of the adoption of HKAS 24, Related party disclosures, the definition of related parties as disclosed in note 2(g) has been expanded to clarify that related parties include entities that are under the significant influence of a related party that is an individual (i.e. key management personnel, significant unitholders and/or their close family members). The clarification of the definition of related parties has not resulted in any material changes to the previously reported disclosures of related party transactions nor has it had any material effect on the disclosures made in the current period, as compared to those that would have been reported had SSAP 20, Related party disclosures, still been in effect. 4 Taxation No provision for Hong Kong Profits Tax has been made in the financial statements as the income of the Fund is exempt from taxation under S26A(1A) of the Inland Revenue Ordinance. 5 Financial instruments and associated risks The Fund maintains investment portfolio in the constituent stocks of Hang Seng Index as dictated by its investment management strategy, but is not limited to equity instruments. Details of such investments held as at 31 December 2005 are shown in the investment portfolio. The Fund s investing activities expose it to various types of risks that are associated with the financial instruments and markets in which it invests. To comply with HKAS 32, the Manager and the Trustee have set out below the most important types of financial risks inherent in equity instruments. The Manager and the Trustee would like to highlight that the following list of associated risks only set out some of the risks but does not purport to constitute an exhaustive list of all the risks inherent in an investment of the Fund. Investors should note that additional information in respect of risks associated with investment in the Fund can be found in the offering document of the Fund. During the year/period, the Manager invested for the fund in financial instruments which the Manager considered are commensurate with the risk level of the fund according to its investment objective. 24

5 Equity instruments The Fund invests in equity instruments and therefore is exposed to price risk, liquidity risk and currency risk. i) Price risk arises from value of equity instruments which may be subject to both normal market fluctuations and other specific risks affecting the value of an individual equity instrument. ii) iii) Liquidity risk arises where the fund invests in equity instruments traded over-the-counter and may not be able to liquidate quickly at an amount close to its fair value. Currency risk arises where the fund invests in equity instruments denominated in currencies different from the fund s reporting currencies. 6 Interest income During the year/period, the Fund earned all its interest income from cash and cash equivalents. 7 Gains and losses on investments During the year/period, the Fund disposed of equities and earned or incurred realised and unrealised gains and losses as shown in the table on page Transactions with related parties The following is a summary of transactions with related parties during the year/period which were entered into in the ordinary course of business and on normal commercial terms: (a) Hang Seng Investment Management Limited ( HSIM ), a wholly-owned subsidiary of Hang Seng Bank Limited, which is a member of The Hongkong and Shanghai Banking Corporation Limited ( HSBC ) Group, is the Manager of the Fund. HSIM earns management fees at a maximum rate of 1% of net asset vaule per annum. HSIM received less than the full management fees to which it was entitled from the Fund during the year/period and waived its right to the difference. Management fees are calculated as at each dealing date and payable monthly. Management fees payable to the Manager at the year/period end date is HKD 388,686 (2004: 314,320). (b) HSBC Provident Fund Trustee (Hong Kong) Limited, a member of the HSBC Group, is the Administrator and Registrar appointed by the Trustee of the Fund and earns Administrator s fee at a maximum rate of 0.15% of net asset value per annum. The Administrator received less than the full custodian fee to which it was entitled from the Fund during the year/period and waived its right to the difference. Administrator s fee is calculated as at each dealing date and payable monthly. Administrator s fee payable at the year/period end is HKD 370,257 (2004: 297,309). The Administrator and Registrar also earn fees for providing various other services to the Fund during the year/period as shown in the table on page 17. (c) The Fund utilises the services of Hang Seng Securities Limited ( HSSL ), a wholly-owned subsidiary of HSB in its purchase and sale of investments and HSBC in its depository of securities. Details of such transactions executed during the year/period are shown in the table on page 18. (d) The Fund has been licensed by HSI Services Limited ( HSI ) and Hang Seng Data Services Limited ( HSDS ) to use the Hang Seng Index to create, offer, market and sell the Hang Seng Index ETF during the year/period. License and issue share data services fees paid to HSI and HSDS are described on page 18. (e) Certain bank accounts are maintained with HSBC and HSB. The respective bank balances at 31 December 2005 were HKD 157,902,627 (2004: 85,113) and HKD 18,421 (2004: 6,967). The interest income earned from the HSBC bank account during the year/period is HKD 1,491,449 (2004: 140). (f) During the year/period, the Fund made investments in the stocks of HSBC Holdings Plc and Hang Seng Bank Ltd. Details of such investments held as at 31 December 2005 are shown in the investment portfolio. Distribution income earned from these investments during the year/period and distribution receivable as at 31 December 2005 are shown in the table on page

6 9 Units in issue For the movement of units in issue, please refer to page Bank overdraft Bank overdrafts were unsecured and repayable on demand. 11 Reconciliation of Net Asset Values The Trustee and the Manager would like to highlight that the principles for calculating the published unit price as set out in the Trust Deed of the Fund are different from that required for calculating the net assets attributable to unitholders and hence the corresponding net asset value per unit for financial reporting purposes under HKFRSs. The net assets attributable to unitholders as reported in the financial statements are therefore different from the adjusted total net assets for valuation purposes at the reporting dates. The reconciliation between the net assets attributable to unitholders as reported in the financial statements and the adjusted total net assets for valuation purposes is shown in the table on page Soft dollar commission As regards the Fund, the Manager has not entered into any soft dollar commission arrangements with brokers. 13 Fair value information The Fund s financial instruments are measured at fair value on the balance sheet. Fair value estimates are made at a specified point in time, based on market conditions and information about the financial instruments. Usually, fair values can be reliably determined within a reasonable range of estimates. For certain other financial instruments, including distributions receivable, amounts receivable on subscription of units, cash and cash equivalents, amounts payable on purchase of investments, amounts payable on redemption of units, accrued expenses and other payables and distributions payable, the carrying amounts approximate fair value due to the immediate or short-term nature of these financial instruments. 14 Comparative figures Certain comparative figures have been adjusted or re-classified as a result of the changes in accounting policies. Further details are disclosed in note 3. 26

7 15 Possible impact of amendments, new standards and interpretations issued but not yet effective for the annual accounting period ended 31 December 2005 Up to the date of issue of these financial statements, the HKICPA has issued the following amendments, new standards and interpretations which are not yet effective for the accounting period ending 31 December 2005 and which have not been adopted in these financial statements: Effective for accounting periods beginning on or after Amendments to HKAS 39, Financial instruments: Recognition and measurement: - The fair value option 1 January 2006 Amendments, as a consequence of the Hong Kong Companies (Amendment) Ordinance 2005, to: - HKAS 1, Presentation of financial statements 1 January 2006 HKFRS 7, Financial instruments: disclosures 1 January 2007 Amendment to HKAS 1, Presentation of financial statements: capital disclosures 1 January 2007 The Fund has not early adopted these amendments, new standards and interpretations in the financial statements for the year ended 31 December The Fund has already commenced an assessment of the impacts of these amendments, new standards and interpretations but is not yet in a position to whether these amendments, new standards and interpretations would have a significant impact on their results of operations and financial positions. 27