Optics Valley Union Holding Company Limited 光 谷 聯 合 控 股 有 限 公 司

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1 Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement. Optics Valley Union Holding Company Limited 光 谷 聯 合 控 股 有 限 公 司 (Incorporated in the Cayman Islands with limited liability) (Stock Code: 798) CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP FOR THE SIX MONTHS ENDED 30 JUNE 2015 Reference is made to the joint announcement (the Joint Announcement ) dated 14 December 2015 issued by Optics Valley Union Holding Company Limited (the Company ) and China Electronics Corporation Holdings Company Limited ( CECH ) in respect of, inter alia, the acquisition of the entire equity interest in China Electronics Technology Development Co., Ltd by the Company from CECH, the issue of new shares of the Company to CECH and the placing of new shares of the Company under a specific mandate, and the application for whitewash waiver by CECH (collectively, the Whitewash Transaction ). As the Whitewash Transaction constitutes an acquisition on the part of CECH, CECH has requested the Company to provide CECH with the consolidated financial statements of the Company and its subsidiaries (collectively, the Group ) for the six months ended 30 June

2 For the purpose of facilitating equal dissemination of information to shareholders and potential investors of the Company, the board of directors of the Company is pleased to announce, by attaching as an appendix to this announcement, the consolidated financial statements of the Group for the six months ended 30 June 2015 together with the auditor s report thereon. For the avoidance of doubt, the Group s profit for the six months ended 30 June 2015 and the Group s net assets as at 30 June 2015 as disclosed in the consolidated financial statements of the Group set out in the appendix is the same as the respective profit for the same period and net assets as at 30 June 2015 as disclosed in the Company s interim results announcement dated 26 August Wuhan, Hubei, the People s Republic of China 14 December 2015 By order of the Board Optics Valley Union Holding Company Limited Huang Liping Chairman As at the date of this announcement, the Directors of the Company are Mr. HUANG Liping, Mr. HU Bin, and Ms. CHEN Huifen as executive Directors; Mr. LU Jun, Ms. SHU Chunping and Mr. ZHANG Jie as non-executive Directors; Mr. QI Min, Mr. LEUNG Man Kit and Ms. ZHANG Shuqin as independent non-executive Directors. 2

3 Independent auditor s report to the board of directors of Optics Valley Union Holding Company Limited (Incorporated in the Cayman Islands with limited liability) We have audited the consolidated financial statements of Optics Valley Union Holding Company Limited ( the Company ) and its subsidiaries (together the Group ) set out on page 5 to 77, which comprise the consolidated statement of financial position as at 30 June 2015, the consolidated statement of profit or loss, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the six month period then ended, and a summary of significant accounting policies and other explanatory information. DIRECTORS RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS The directors of the Company are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. AUDITOR S RESPONSIBILITY Our responsibility is to express an opinion on these consolidated financial statements based on our audit. This report is made solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation of the consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the consolidated financial statements. 3

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as at 30 June 2015, and of the Group s financial performance and cash flows for the six month period then ended in accordance with International Financial Reporting Standards. OTHER MATTERS APPENDIX Without modifying our opinion, we draw attention to the fact that the comparative consolidated statement of profit or loss, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the six month period then ended 30 June 2014 are derived from the Group s unaudited interim financial report for that period. We expressed an unmodified review conclusion on that interim financial report in accordance with Hong Kong Standard on Review Engagements 2410, Review of interim financial information performed by the Independent Auditor of the Entity in our report dated 27 August However, a review is substantially less in scope than an audit and does not enable the auditor to obtain assurance that the auditor would become aware of all significant matters that might be identified in an audit. Accordingly, we did not express an audit opinion on the interim financial report, nor was this information otherwise subject to audit by any other auditor. KPMG Certified Public Accountants 8th Floor, Prince s Building 10 Chater Road Central, Hong Kong 7 December

5 CONSOLIDATED STATEMENT OF PROFIT OR LOSS Six months ended 30 June Note (unaudited) Turnover 2 427, ,622 Cost of sales (247,967) (341,908) Gross profit 180, ,714 Other income 3 1,798 1,148 Selling and distribution expenses (30,742) (28,917) Administrative expenses (83,378) (64,329) Other expenses 3 (5,301) (264) Results from operating activities before changes in fair value of investment properties 62, ,352 Increase in fair value of investment properties ,996 76,590 Results from operating activities after changes in fair value of investment properties 190, ,942 Finance income 18,314 6,402 Finance costs (1,202) (11,169) Net finance income/(costs) 4(a) 17,112 (4,767) Share of losses of associates (1) (190) Share of (losses)/profits of joint ventures (6,789) 2,738 Profit before taxation 200, ,723 Income tax 5 (78,414) (60,223) Profit for the period 122, ,500 tributable to: Equity shareholders of the Company 117, ,676 Non-controlling interests 4,346 2,824 Profit for the period 122, ,500 Basic earnings per share (RMB cents) Details of dividends payable to equity shareholders of the Company attributable to the profit for the period are set out in Note 27(b). The notes on pages 12 to 77 form part of these financial statements. 5

6 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Six months ended 30 June Note (unaudited) Profit for the period 122, ,500 Other comprehensive income for the period (after tax and reclassification adjustments): Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of financial statements of subsidiaries in other jurisdictions, net of nil tax 9 (347) (15) Other comprehensive income for the period (347) (15) Total comprehensive income for the period 121, ,485 tributable to: Equity shareholders of the Company 117, ,661 Non-controlling interests 4,346 2,824 Total comprehensive income for the period 121, ,485 The notes on pages 12 to 77 form part of these financial statements. 6

7 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 30 June 31 December Note Non-current assets Property, plant and equipment , ,784 Investment properties , ,510 Intangible assets 12 4,220 4,354 Interest in associates 3, Interest in joint ventures 14 37, ,249 Other investments 15 11,000 10,000 Deferred tax assets 25(b) 62,935 67,963 1,091,773 1,054,621 Current assets Properties under development 16 3,101,657 2,545,744 Completed properties held for sale 17 1,988,653 1,993,088 Inventories and contracting work-in-progress , ,855 Trade and other receivables 19 1,132,544 1,215,158 Current tax assets 25(a) 14,282 3,800 Restricted cash , ,798 Cash and cash equivalents 21(a) 658, ,977 7,460,642 7,078,420 Current liabilities Trade and other payables 22 2,144,264 1,964,900 Loans and borrowings 23 1,427,246 1,170,800 Corporate bonds payable , ,627 Current tax liabilities 25(a) 68, ,743 Current portion of deferred income 26 4,167 4,006 3,924,812 3,659,076 Net current assets 3,535,830 3,419,344 Total assets less current liabilities 4,627,603 4,473,965 7

8 30 June 31 December Note Non-current liabilities Loans and borrowings 23 1,067, ,046 Corporate bonds payable , ,637 Deferred tax liabilities 25(b) 109,714 82,187 Non-current portion of deferred income 26 37,503 36,056 2,021,564 1,888,926 Net assets 2,606,039 2,585,039 Capital and reserves Share capital , ,800 Reserves 27 2,048,315 2,032,420 Total equity attributable to equity shareholders of the Company 2,365,115 2,349,220 Non-controlling interests , ,819 Total equity 2,606,039 2,585,039 Approved and authorised for issue by the board of directors on 7 December ) ) ) Directors ) ) The notes on pages 12 to 77 form part of these financial statements. 8

9 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY tributable to equity shareholders of the Company Share capital Share premium Other reserves Exchange reserve Statutory reserve Retained profits Total Noncontrolling interests Total equity Note RMB 000 Note 27(a) APPENDIX Note 27(f) 1 January , , , , ,027 2,349, ,819 2,585,039 Changes in equity for the six months ended 30 June 2015: Profit for the period 117, ,942 4, ,288 Other comprehensive income (347) (347) (347) Total comprehensive income for the period (347) 117, ,595 4, ,941 Acquisition of equity interests from a non-controlling equity holder (759) (759) 759 Dividends approved in respect of previous year 27(b) (100,941) (100,941) (100,941) 30 June , , , , ,028 2,365, ,924 2,606,039 Note 27(e) Note 27(d) Note 27(g) (Unaudited) 1 January , , ,459 1,434, ,691 1,665,116 Changes in equity for the six months ended 30 June 2014: Profit for the period 130, ,676 2, ,500 Other comprehensive income (15) (15) (15) Total comprehensive income for the period (15) 130, ,661 2, ,485 Capital injection from non-controlling equity holders Dividends approved in respect of previous year 27(b) (101,376) (101,376) (101,376) Issue of new shares under initial public offering ( IPO ), net of listing expenses 79, , , ,055 Capitalisation issue 27(c) 237,592 (237,592) 30 June , , , , ,759 2,066, ,711 2,300,476 The notes on pages 12 to 77 form part of these financial statements. 9

10 CONSOLIDATED STATEMENT OF CASH FLOWS Six months ended 30 June Note (unaudited) Operating activities Cash generated from/(used in) operations 21(b) 50,084 (576,795) Income tax paid (122,646) (87,081) Net cash used in operating activities (72,562) (663,876) Investing activities Interest received 18,654 5,503 Investment income received Proceeds from disposal of property, plant and equipment Proceeds from sales of other investments 122,220 Payment for the purchase of property, plant and equipment and construction in progress (16,634) (14,156) Payment for the acquisition of interest in associates (3,000) Acquisition of intangible assets (8) (101) Acquisition of joint ventures (3,800) Proceed from capital reduction in a joint venture 60,000 Acquisition of other investments (1,000) Net cash generated from investing activities 55, ,558 10

11 Note (unaudited) Financing activities Net (repayment of)/proceeds from corporate bonds (101,000) 592,200 Proceeds from initial public offering 591,073 Proceeds from loans and borrowings 1,259,000 1,294,594 Repayment of bank and other loans (902,950) (1,212,418) Repayment of loans from a related party (88,623) (165,028) Increase in restricted cash (145,075) (15,001) Interest and other borrowing costs paid (181,824) (93,685) Dividend paid to equity shareholders of the Company (100,941) (93,945) Capital injection from non-controlling equity holders in connection with reorganisation 196 Net cash (used in)/generated from financing activities (261,413) 897,986 Net (decrease)/increase in cash and cash equivalents (278,590) 348,668 Cash and cash equivalents at 1 January 936,977 1,163,239 Effect of foreign exchange rate changes 4 (635) Cash and cash equivalents at 30 June ,391 1,511,272 The notes on pages 12 to 77 form part of these financial statements. 11

12 NOTES TO THE FINANCIAL STATEMENTS (Expressed in thousand of Renminbi unless otherwise indicated) 1 SIGNIFICANT ACCOUNTING POLICIES APPENDIX (a) Reporting entity Optics Valley Union Holding Company Limited (the Company ) was incorporated in the Cayman Islands which shares were listed on the Main Board of The Stock Exchange of Hong Kong Limited (the Stock Exchange ) on 28 March The consolidated financial statements for the six months ended 30 June 2015 comprise the Company and its subsidiaries (together referred to as the Group ) and the Group s interest in associates and joint ventures. They were authorised for issue by the Company s board of directors on 7 December (b) Basis of preparation and statement of compliance These consolidated financial statements are non-statutory financial statements of the Company and they have been prepared for the use of the management of the Company only. These consolidated financial statements have been prepared in accordance with all applicable International Financial Reporting Standards ( IFRSs ), which collective term includes all applicable individual International Financial Reporting Standards, International Accounting Standards ( IASs ) and Interpretations issued by the International Accounting Standards Board ( IASB ). The IASB has issued certain new and revised IFRSs that are first effective in the current period. Note 1(c) provides information on any changes in accounting policies resulting from initial application of these developments to the extent that they are relevant to the Group. (c) Changes in accounting policies The IASB has issued the following amendments to IFRSs that are first effective for the current accounting period of the Group: Annual Improvements to IFRSs Cycle Annual Improvements to IFRSs Cycle The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period. Impacts of the adoption of the amendments to IFRSs are discussed below: Annual Improvements to IFRSs Cycle and Cycle These two cycles of annual improvements contain amendments to nine standards with consequential amendments to other standards. Among them, IAS 24, Related party disclosures has been amended to expand the definition of a related party to include a management entity that provides key management personnel services to the reporting entity, and to require the disclosure of the amounts incurred for obtaining the key management personnel services provided by the management entity. These amendments do not have an impact on the Group s related party disclosures as the Group does not obtain key management personnel services from management entities. 12

13 (d) Basis of measurement The consolidated financial statements are presented in Renminbi ( RMB ), rounded to the nearest thousand except for per share data, as the Group s principal activities were carried out in the People s Republic of China (the PRC ). They are prepared on the historical cost basis except for investment properties (See Note 1(l)) and certain financial assets (See Note 1(h)), which are stated at their fair value. (e) Use of estimates and judgements The preparation of the consolidated financial statements in conformity with IFRSs 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 IFRSs that have significant effect on the consolidated financial statements and major sources of estimation uncertainty are discussed in Note 31. (f) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. (ii) Non-controlling interests ( NCI ) NCI are measured at their proportionate share of the acquiree s identifiable net assets at the date of acquisition. Changes in the Group s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. (iii) Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. 13

14 (iv) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that is no evidence of impairment. (g) Associates and joint ventures An associate is an entity in which the Group has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions. A joint venture is an arrangement whereby the Group and other parties contractually agree to share control of the arrangement, and have rights to the net assets of the arrangement. An investment in an associate or a joint venture is accounted for in the consolidated financial statements under the equity method, unless it is classified as held for sale (or included in a disposal group that is classified as held for sale). Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Group s share of the acquisition-date fair values of the investee s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post acquisition change in the Group s share of the investee s net assets and any impairment loss relating to the investment (see Note 1(m)). Any acquisition-date excess over cost, the Group s share of the post-acquisition, post-tax results of the investees and any impairment losses for the period are recognised in the consolidated statement of profit or loss, whereas the Group s share of the post-acquisition post-tax items of the investees other comprehensive income is recognised in the consolidated statement of profit or loss and other comprehensive income. When the Group s share of losses exceeds its interest in the associates or the joint ventures, the Group s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee. For this purpose, the Group s interest is the carrying amount of the investment under the equity method together with the Group s long-term interests that in substance form part of the Group s net investment in the associate or the joint venture. Unrealised profits and losses resulting from transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group s interest in the investee, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are recognised immediately in profit or loss. If an investment in an associate becomes an investment in a joint venture or vice versa, retained interest is not remeasured. Instead, the investment continues to be accounted for under the equity method. In all other cases, when the Group ceases to have significant influence over an associate or joint control over a joint venture, it is accounted for as a disposal of the entire interest in that investee, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former investee at the date when significant influence or joint control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (see Note 1(h)). 14

15 (h) Financial instruments (i) Derivative financial assets Derivative financial assets are recognised initially at fair value. the end of each reporting period the fair value is remeasured. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. (ii) Non-derivative financial assets The Group initially recognises loans and receivables on the date that they are originated. All other financial assets (including assets designated as at fair value through profit or loss) are recognised initially on the trade date, which is the date that the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in such transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets. Financial assets at fair value through profit or loss A financial asset is classified as at fair value through profit or loss if it is classified as held-for-trading or is designated as such on initial recognition. Financial assets are designated as at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group s documented risk management or investment strategy. tributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein, which takes into account any dividend income, are recognised in profit or loss. Financial assets classified as held-for-trading comprise short-term sovereign debt securities actively managed by the Group s treasury department to address short-term liquidity needs. Financial assets designated as at fair value through profit or loss comprise equity securities that otherwise would have been classified as available-for-sale. Held-to-maturity financial assets If the Group has the positive intent and ability to hold debt securities to maturity, then such financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortised cost using the effective interest method, less any impairment losses (see Note 1(m)). 15

16 Held-to-maturity financial assets comprise debt securities. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses (see Note 1(m)). Loans and receivables comprise cash and cash equivalents, and trade and other receivables. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. Available-for-sale financial assets APPENDIX Available-for-sale financial assets are non-derivative financial assets that are designated as available-forsale or are not classified in any of the above categories of financial assets. Available-for-sale financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses (see Note 1(m)) and foreign exchange differences on available-for-sale debt instruments (see Note 1(v)), are recognised in other comprehensive income and presented in the fair value reserve in equity. When an investment is derecognised, the gain or loss accumulated in equity is reclassified to profit or loss. Available-for-sale financial assets comprise equity securities and debt securities. (iii) Non-derivative financial liabilities The Group initially recognises debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities are recognised initially on the trade date, which is the date that the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. The Group classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. Other financial liabilities comprise loans and borrowings, debt securities issued, bank overdrafts, and trade and other payables. Bank overdrafts that are repayable on demand and form an integral part of the Group s cash management are included as a component of cash and cash equivalents for the statement of cash flows. 16

17 (iv) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. (i) Property, plant and equipment (i) Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of selfconstructed assets includes the following: the cost of materials and direct labour; any other costs directly attributable to bringing the assets to a working condition for their intended use; when the Group has an obligation to remove the asset or restore the site, an estimate of the costs of dismantling and removing the items and restoring the site on which they are located; and capitalised borrowing costs. Cost also includes transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Any gain or loss on disposal of an item of property, plant and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in profit or loss. (ii) Reclassification to investment property When the use of a property changes from owner-occupied to investment property, the property is remeasured to fair value and reclassified as investment property. Any gain arising on this remeasurement is recognised in profit or loss to the extent that it reverses a previous impairment loss on the specific property, with any remaining gain recognised in other comprehensive income and presented in the revaluation reserve in equity. Any loss is recognised immediately in profit or loss. (iii) Subsequent costs Subsequent expenditure is capitalised only when it is probable that the future economic benefits associated with the expenditure will flow to the Group. Ongoing repairs and maintenance are expensed as incurred. 17

18 (iv) Depreciation Items of property, plant and equipment are depreciated from the date they are available for use or, in respect of self-constructed assets, from the date that the asset is completed and ready for use. Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight-line basis over their estimated useful lives. Depreciation is generally recognised in profit or loss, unless the amount is included in the carrying amount of another asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. The estimated useful lives for the current period of significant items of property, plant and equipment are as follows: Years Estimated residual value as a percentage of costs Buildings % 5% Machines % 5% Motor vehicles % 10% Furniture, office equipment and others % 10% Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (j) Leased assets An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease. (i) Classification of assets leased to the Group Assets that are held by the Group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases, with the following exceptions: property held under operating leases that would otherwise meet the definition of an investment property is classified as investment property on a property-by-property basis and, if classified as investment property, is accounted for as if held under a finance lease (see Note 1(l)); and land held for own use under an operating lease, the fair value of which cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease. For these purposes, the inception of the lease is the time that the lease was first entered into by the Group, or taken over from the previous lessee. 18

19 (ii) Operating lease charges Where the Group has the use of assets under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred. The cost of acquiring land under an operating lease is amortised on a straight-line basis over the period of the lease term except where the property is classified as an investment property (see Note 1(l)) or is held for development for sale (see Note 1(n)). (k) Intangible assets (i) Intangible assets Intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses (see Note 1(m)). (ii) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. (iii) Amortisation Intangible assets are amortised on a straight-line basis in profit or loss over their estimated useful lives, from the date that they are available for use. The estimated useful lives for the current period are as follows: Computer software with finite useful lives is amortised from the date it is available for use and its estimated useful lives is 3 to 10 years. Amortisation methods and useful lives are reviewed at each reporting date and adjusted if appropriate. (l) Investment property Investment properties are land and/or buildings which are owned or held under a leasehold interest (see Note 1(j)) to earn rental income and/or for capital appreciation. These include land held for a currently undetermined future use and properties that are being constructed or developed for future use as investment properties. Investment properties are stated in the statement of financial position at fair value, unless they are still in the course of construction or development at the end of the reporting period and their fair value cannot be reliably determined at that time. Any gain or loss arising from a change in fair value or from the retirement or disposal of an investment property is recognised in profit or loss. Rental income from investment properties is accounted for asdescribedinnote1(t)(ii). 19

20 (m) Impairment (i) Non-derivative financial assets A financial asset not classified as at fair value through profit or loss, including an interest in an equityaccounted investee, is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that loss event(s) had an impact on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired includes default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers or issuers, economic conditions that correlate with defaults or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. Financial assets measured at amortised cost The Group considers evidence of impairment for financial assets measured at amortised cost (loans and receivables and held-to-maturity financial assets) at both a specific asset and collective level. All individually significant assets are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and receivables or held-to-maturity investment securities. Interest on the impaired asset continues to be recognised. When an event occurring after the impairment was recognised causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Available-for-sale financial assets Impairment losses on available-for-sale financial assets are recognised by reclassifying the losses accumulated in the fair value reserve in equity to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss recognised previously in profit or loss. Changes in cumulative impairment losses attributable to application of the effective interest method are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. 20

21 An impairment loss in respect of an equity-accounted investee is measured by comparing the recoverable amount of the investment with its carrying amount in accordance with Note 1(m)(ii). An impairment loss is recognised in profit or loss. An impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. (ii) Non-financial assets The carrying amounts of the Group s non-financial assets, other than biological assets, investment property, inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. Goodwill and indefinite-lived intangible assets are tested annually for impairment. An impairment loss is recognised if the carrying amount of an asset or cash-generating unit (CGU) exceeds its recoverable amount. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Subject to an operating segment ceiling test, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (n) Property development Inventories in respect of property development activities are carried at the lower of cost and net realisable value. Cost and net realisable values are determined as follows: Properties held for development for sale The cost of leasehold land, which is held for development for sale, represents the cost of acquisition. Net realizable value is determined by reference to management estimates based on prevailing market conditions. Properties under development for sale The cost of properties under development for sale comprises specifically identified cost, including: land use right (see Note 1(j)), aggregate cost of development, materials and supplies, wages and other direct expenses, an appropriate proportion of overheads and borrowing costs capitalised (see Note 1(u)). Net realisable value represents the estimated selling price less estimated costs of completion and costs to be incurred in selling the property. 21

22 Completed properties held for sale In the case of completed properties developed by the Group, cost is determined by apportionment of the total development costs for that development project, attributable to the unsold properties. Net realisable value represents the estimated selling price less costs to be incurred in selling the property. The cost of completed properties held for sale comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. (o) Inventories Inventories mainly include construction materials, pesticide products and low value consumables. Inventories are stated at cost and comprise all costs of purchase. They are computed on a weighted average basis, less provision for obsolescence. When inventories are consumed, the carrying amount of inventories is recognised as an expense in the period in which the consumption occurs. Any obsolete and damaged inventories are written off to the profit or loss. (p) Construction contracts in progress Construction contracts in progress represents the gross amount expected to be collected from customers for contract work performed to date. It is measured at costs incurred plus profits recognised to date (see Note 1(t)(v)) less progress billings and recognised losses. In the statement of financial position, construction contracts in progress for which costs incurred plus recognised profits exceed progress billings and recognised losses are presented as trade and other receivables. Contracts for which progress billings and recognised losses exceed costs incurred plus recognised profits are presented as deferred income/revenue. Advances received from customers are presented as deferred income/revenue. (q) Employee benefits Salaries, annual bonuses, paid annual leave, contributions to defined contribution retirement plans and the cost of non-monetary benefits are accrued in the period in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values. The employees of the Group participate in retirement plans (defined contribution retirement plans) managed by respective local governments of the municipalities in which the Group operates in the PRC. The contribution to the retirement plan is calculated based on fixed rates of the employees salaries cost and charged to profit or loss as and when incurred, except to the extent that they are included in the cost of inventories not yet recognised as an expense. The Group has no other obligation for the payment of retirement and other post-retirement benefits of staff other than the contributions described above. (r) Tax Tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. 22

23 (i) Current tax Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends. (ii) Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; temporary differences related to investments in subsidiaries, associates and joint ventures to the extent that the Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future; and taxable temporary differences arising on the initial recognition of goodwill. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. For investment property that is measured at fair value, the presumption that the carrying amount of the investment property will be recovered through sale has not been rebutted. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (iii) Tax exposures In determining the amount of current and deferred tax, the Group takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes the Company to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. 23