These notes form an integral part of and should be read in conjunction with the accompanying financial statements. 1. General The Company is a public limited company domiciled and incorporated in Singapore. The address of the Company s registered office and principal place of business is 51 Cuppage Road #09-08, StarHub Centre, Singapore 229469. The Company s immediate and ultimate holding company is Temasek Holdings (Private) Limited, a company incorporated in Singapore. The principal activities of the Company are those of an investment holding company and the provision of engineering and related services. The principal activities of the subsidiaries are set out in Note 13 to the financial statements. The financial statements of Singapore Technologies Engineering Ltd and the consolidated financial statements of Singapore Technologies Engineering Ltd and its subsidiaries (collectively referred to as the Group ) as at and for the year then ended were authorised and approved by the Board of Directors for issuance on 15 February 2011. 2. Basis of financial statements preparation The financial statements are prepared in accordance with Singapore Financial Reporting Standards ( FRS ). The financial statements have been prepared on the historical cost convention, except as disclosed in the accounting policies below. The financial statements are presented in Singapore dollars and all values are rounded to the nearest thousand ($ 000) except when otherwise indicated. Except for changes in accounting policies discussed in Note 3(s) and Note 12(e), the accounting policies set out below have been consistently applied by the Company and the Group and are consistent with those used in the previous year. 3. Summary of significant accounting policies (a) Basis of consolidation (i) Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not re-measured and settlement is accounted for within equity. Otherwise, any subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. 121
3. Summary of significant accounting policies (continued) (a) Basis of consolidation (continued) (ii) Subsidiaries Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Consistent accounting policies are applied to like transactions and events in similar circumstances. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. In the Company s separate financial statements, investments in subsidiaries are accounted for at cost less accumulated impairment losses. (iii) Acquisitions of entities under amalgamation The Company s interests in Singapore Technologies Aerospace Ltd, Singapore Technologies Electronics Limited, Singapore Technologies Kinetics Ltd, and Singapore Technologies Marine Ltd (collectively referred to as the Scheme Companies ) resulted from the amalgamation of the Scheme Companies pursuant to a scheme of arrangement under Section 210 of the Companies Act, Chapter 50 in 1997. As the amalgamation of the Scheme Companies constitutes a uniting of interests, the pooling of interests method has been adopted in the preparation of the consolidated financial statements in connection with the amalgamation. Under the pooling of interests method, the combined assets, liabilities and reserves of the pooled enterprises are recorded at their existing carrying amounts at the date of amalgamation. The excess or deficiency of amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) over the amount recorded for the share capital acquired is recorded as merger reserve. The merger reserve had been utilised in prior years to partially write off the goodwill on acquisition of Founders Industries Pte Ltd and its subsidiaries. Founders Industries Pte Ltd was subsequently liquidated in 2007. (iv) Loss of control Upon the loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently, it is accounted for as an equity-accounted investee or as an available-for-sale financial asset, depending on the level of influence retained. (v) Investments in associates and joint ventures (equity-accounted investees) Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20% and 50% of the voting power of the entity. Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. The Group s investment in joint ventures comprised jointly controlled entities. Investments in associates and jointly controlled entities are accounted for by the Group using the equity method and are recognised initially at cost. 122
3. Summary of significant accounting policies (continued) (a) Basis of consolidation (continued) (v) Investments in associates and joint ventures (equity-accounted investees) (continued) The consolidated financial statements includes the Group s share of the profit or loss and other comprehensive income from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. The reporting dates for the associates and joint ventures and the Group are identical and the accounting policies conform to those used by the Group for like transactions and events in similar circumstances. For this purpose, the audited financial statements of the associates and joint ventures are used. Where audited financial statements are not available, the share of results is arrived at from the last audited financial statements available and unaudited management financial statements to the end of the accounting period. When the Group s share of losses exceeds its interest in an equity-accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to zero, and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. In the Company s separate financial statements, investments in associates and joint ventures are accounted for at cost less accumulated impairment losses. (vi) Acquisition of non-controlling interests Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result of such transactions. The adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary. Any difference between the fair value of the consideration paid and the carrying value of the additional interest acquired will be recognised as Premium paid on acquisition of non-controlling interests within equity. (vii) Transactions eliminated on consolidation All significant inter-company balances and transactions are eliminated on consolidation. (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are measured in the respective functional currencies of the Company and its subsidiary companies and are recorded on initial recognition in the functional currencies at exchange rates approximating those ruling at the transaction dates. The major functional currencies of the Group entities are Singapore dollar, United States dollar and Euro. Monetary assets and liabilities denominated in foreign currencies are translated at the closing rate of exchange ruling at the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Exchange differences arising on the settlement of monetary items or on translating monetary items at the balance sheet date are recognised in income statement except for exchange differences arising on monetary items that form part of the Group s net investment in foreign subsidiary companies, which are recognised initially in other comprehensive income and accumulated under foreign currency translation reserve in equity and recognised in the consolidated income statement on disposal of the subsidiary. In the Company s separate financial statements, such exchange differences are recognised in the income statement. 123
3. Summary of significant accounting policies (continued) (b) Foreign currency (continued) (i) Foreign currency transactions (continued) Differences on foreign currency borrowings that provide a hedge against a net investment in a foreign operation are also taken directly to other comprehensive income until the disposal of the net investment, at which time they are recognised in the income statement. Tax charges and credits attributable to exchange differences on those borrowings are also dealt with in other comprehensive income. (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Singapore dollars at exchange rates at the reporting date. The income and expenses of foreign operation are translated to Singapore dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income and presented in the foreign currency translation reserve in equity. However, if the foreign operation is a non wholly-owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the foreign currency translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is re-attributed to non-controlling interests. When the Group disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains or losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and presented in the foreign currency translation reserve in equity. (c) Financial instruments (i) Non-derivative financial assets Financial assets are recognised on the balance sheet when, and only when, the Group becomes a party to the contractual provisions of the financial instrument. All regular way purchases and sales of financial assets are recognised on the trade date i.e., the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace concerned. 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 on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in 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 balance sheet when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. 124
3. Summary of significant accounting policies (continued) (c) Financial instruments (continued) (i) Non-derivative financial assets (continued) The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity financial assets and available-for-sale financial assets. The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year-end. Financial assets at fair value through profit or loss Financial assets held for trading are classified as financial assets at fair value through profit or loss. Financial assets held for trading are financial assets acquired principally for the purpose of selling in the near term. Financial assets at fair value through profit or loss are measured at fair value and gains or losses arising from change in the fair values are recognised in profit or loss. Attributable transaction costs are recognised in profit or loss as incurred. 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. Gains or losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Loans and receivables comprise cash and cash equivalents and trade and other debtors. Cash consists of cash on hand and cash with banks or financial institutions, including fixed deposits. Cash equivalents are short-term and highly liquid investments that are readily convertible to known amounts of cash and that are subject to insignificant risk of changes in value. For the purpose of the statement of cash flows, cash and cash equivalents also include bank overdrafts that are repayable on demand and form an integral part of the Group s cash management. Held-to-maturity financial assets Financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold the financial assets 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. Gains or losses are recognised in the income statement when the held-to-maturity investments are derecognised or impaired, and through the amortisation process. 125
3. Summary of significant accounting policies (continued) (c) Financial instruments (continued) (i) Non-derivative financial assets (continued) Available-for-sale financial assets Available-for-sale financial assets are those financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. Available-for-sale financial assets are recognised initially at fair value plus any directly attributable transaction costs. After initial recognition, an available-for-sale financial asset is measured at fair value, with gains or losses being recognised in other comprehensive income and presented in the fair value reserve in equity, except for impairment losses and foreign exchange differences on available-for-sale debt instruments, until the financial asset is derecognised. Upon derecognition, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to income statement as a reclassification adjustment. The fair value of available-for-sale financial assets that are actively traded in organised financial markets is determined by reference to quoted market prices at the close of business on the balance sheet date. For those financial assets where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm s length market transactions; reference to the current market value of another instrument, which is substantially the same; discounted cash flow analysis and option pricing models. For those financial assets where there is no active market and where fair value cannot be reliably measured, they are measured at cost. Available-for-sale financial assets comprise equity securities. (ii) Non-derivative financial liabilities Financial liabilities are recognised on the balance sheet when, and only when, the Group becomes a party to the contractual provisions of the financial instrument. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Non-derivative financial liabilities are recognised initially at fair value plus directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. The Group s financial liabilities comprise bank overdrafts, trade and other creditors and borrowings. Bank overdrafts that are repayable on demand and form an integral part of the Group s cash and cash equivalents are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. 126
3. Summary of significant accounting policies (continued) (c) Financial instruments (continued) (iii) Derivative financial instruments and hedge accounting The Group uses derivative financial instruments such as forward currency contracts, interest rate swaps and cross currency swaps to hedge its risks associated with foreign currency and interest rate fluctuations. From time to time, the Group also uses monetary assets and liabilities and embedded derivatives as hedging instruments to hedge its risks associated with foreign currency fluctuations. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivatives are not closely related, a separate instrument with the same terms as the embedded derivatives would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. On initial designation of the derivative as the hedging instrument, the Group formally documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and the methods used in assessing the hedging instrument s effectiveness in offsetting the exposure to changes in the hedged item s fair value or cash flows attributable to the hedged risk. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, of whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items attributable to the hedged risk, and whether the actual results of each hedge are within a range of 80% to 125%. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect profit or loss. Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into. Attributable transaction costs are recognised in profit or loss as incurred. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Subsequent to initial recognition, derivatives are measured at fair value, changes therein are accounted for as described below. Fair value hedges The gain or loss from re-measuring the hedging instrument at fair value (for a derivative hedging instrument) or the foreign currency component of its carrying amount measured in accordance with Note 3(b)(i) (for a non-derivative hedging instrument) is recognised in profit or loss. The gain or loss on the hedged item attributable to the hedged risk is recognised in profit or loss. For fair value hedges relating to items carried at amortised cost, the adjustment to carrying value is amortised through profit or loss over the remaining term to maturity. Any adjustment to the carrying amount of a hedging instrument for which the effective interest method is used is amortised in the income statement. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in profit or loss. The changes in the fair value of the hedging instrument are also recognised in profit or loss. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation. Any adjustment to the carrying amount of a hedging instrument for which the effective interest method is used is amortised in the income statement. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. 127
3. Summary of significant accounting policies (continued) (c) Financial instruments (continued) (iii) Derivative financial instruments and hedge accounting (continued) Cash flow hedges The portion of the gain or loss on a derivative designated as the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income and presented in the fair value reserve in equity, while the ineffective portion is recognised immediately in profit or loss. Amounts taken to equity are transferred to profit or loss when the hedged transaction affects profit or loss, such as when hedged financial income or financial expense is recognised or when a forecast sale or purchase occurs. When the hedged item is a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated, or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is then transferred to profit or loss. Hedge of net investment in foreign operations The Group has foreign currency differences arising from the translation of financial liabilities that are designated as net investment hedges of foreign operations. These hedging instruments are accounted for similarly to cash flow hedges. The currency translation differences on the financial liabilities relating to the effective portion of the hedge are recognised in other comprehensive income and presented in the foreign currency translation reserve in equity, while the ineffective portion of the hedge are recognised immediately in profit or loss. On the disposal or partial disposal of the foreign operation, the amounts previously recognised in equity are transferred to profit or loss as part of the gain or loss on disposal. Separable embedded derivatives and other derivatives Any gains or losses arising from changes in fair value on derivatives that are not designated in hedging relationships are recognised immediately in profit or loss. (d) Property, plant and equipment and depreciation (i) Recognition and measurement All items of property, plant and equipment are initially recorded at cost. The cost of an item of property, plant and equipment is recognised as an asset if, and only if, it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Cost includes expenditure that is directly attributable to the acquisition of the asset and capitalised borrowing costs. The cost of self-constructed assets also includes the cost of material and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use and the costs of dismantling and removing the items and restoring the site on which they are located. Cost may also include transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Significant components of individual assets are assessed and if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately. 128
3. Summary of significant accounting policies (continued) (d) Property, plant and equipment and depreciation (continued) (i) Recognition and measurement (continued) Subsequent to initial measurement, except for certain property, plant and equipment which were subject to a one-time revaluation in 1972 ( 1972 assets ), property, plant and equipment are measured at cost, net of depreciation and any impairment loss. The 1972 assets stated at valuation are exempted from conducting a regular frequency of revaluation but are measured net of depreciation, and any impairment loss. The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and is recognised net within other income in profit or loss. The cost of replacing a component of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the component will flow to the Group, and its cost can be measured reliably. The carrying amount of the replaced component is derecognised. (ii) Depreciation Depreciation is based on the cost of an asset less its residual value. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each item of property, plant and equipment. 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. Property, plant and equipment purchased specifically for projects are depreciated over the useful life of the class of property, plant and equipment or the duration of the project, whichever is shorter. Construction-in-progress is not depreciated until each stage of development is completed and becomes operational. Freehold land is not depreciated. The estimated useful lives for the current period are as follows: Buildings 15 to 50 years Leasehold land Over the period of the lease of between 5 to 50 years Improvements to premises 3 to 30 years Wharves and slipways 20 years Syncrolift and floating docks 15 years Boats and barges 10 years Plant and machinery 5 to 25 years Production tools and equipment 3 to 15 years Furniture, fittings, office equipment and computers 2 to 5 years Transportation equipment and vehicles 5 years Aircraft and aircraft engines 15 to 30 years The residual value, useful life and depreciation method are reviewed at each financial year-end to ensure that the amount, method and period of depreciation are consistent with previous estimates and the expected pattern of consumption of the future economic benefits embodied in the items of property, plant and equipment. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the depreciation period or method, as appropriate, and treated as changes in accounting estimates. 129
3. Summary of significant accounting policies (continued) (e) Intangible assets (i) Goodwill Goodwill represents the excess of: the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree, over the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. Goodwill is initially measured at cost. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. In respect of equity-accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the equity-accounted investee. (ii) Research and development expenditure Research expenditure is recognised in profit or loss as and when incurred. Development expenditure on an individual project are recognised as an intangible asset when the Group can demonstrate the technical feasibility of completing the development so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete and the ability to measure reliably the expenditure during the development. Other development costs are recognised in profit or loss as incurred. Development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses. (iii) Film cost inventory Film cost inventory comprise film production costs which are recognised as an intangible asset when the Group can demonstrate the technical feasibility of completing the film so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete and the ability to measure reliably the expenditure during the film production. Other film production costs are recognised in profit or loss as incurred. Film cost inventory is measured at cost less accumulated amortisation and accumulated impairment losses. (iv) Other intangible assets Other intangible assets that are acquired by the Group are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. (v) 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 intangible assets, is recognised in profit or loss as incurred. 130
3. Summary of significant accounting policies (continued) (e) Intangible assets (continued) (vi) Amortisation Amortisation is calculated based on the cost of the asset less its residual value. Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill and film cost inventory, from the date that they are available for use. Film cost inventory is amortised using the individual-film-forecast computation method which amortises the film costs in the same ratio that current gross revenue bear to anticipated total gross income for the film. Amortisation commences when each film begins to earn revenue. The estimated useful lives for the current and comparative periods are as follows: Dealer network 7 years Development expenditure 5 years Commercial and intellectual property rights 2 to 16 years Brands 20 to 70 years Film cost inventory 20 years The useful lives and amortisation methods are reviewed at the end of each financial year-end to ensure that the amount, method and period of amortisation are consistent with previous estimates and the expected pattern of consumption of the future economic benefits embodied in the intangible assets. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense is recognised in the expense category consistent with the function of the intangible asset. (f) Investment properties Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at cost, net of depreciation and any impairment loss. Depreciation is recognised in profit or loss on a straight-line basis so as to write-off the cost of the investment property over its estimated useful life of 30 years. Investment property is derecognised when either it has been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in profit or loss in the year of retirement or disposal. Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to owneroccupied property, the carrying value at the date of change in use becomes the cost for subsequent accounting. For a transfer from owner-occupied property to investment property, the property is accounted for in accordance with the accounting policy for property, plant and equipment set out in Note 3(d) up to the date of change in use. 131
3. Summary of significant accounting policies (continued) (g) Inventories and work-in-progress Inventories are measured at the lower of cost and net realisable value. Cost is calculated on a first-in, first-out basis or by weighted average cost depending on the nature and use of the inventories. Cost includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. Cost may also include transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of inventories. Allowance is made for deteriorated, damaged, obsolete and slow-moving inventories. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Work-in-progress is measured at cost plus profits recognised to date less progress billings and recognised losses. Cost includes all direct material and labour costs, equipment and sub-contracting services, together with appropriate overhead expenses and may also includes transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases. Provision for foreseeable losses on uncompleted contracts is made in the year in which such losses are determined. Work-in-progress is included in current assets in the balance sheet for all contracts in which costs incurred plus recognised profits exceed progress billings. If progress billings exceed costs incurred plus recognised profits, then the difference is presented as progress billings in excess of work-in-progress and is included in current liabilities in the balance sheet. (h) Impairment (i) Non-derivative financial assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset not carried at fair value through profit or loss is impaired. To determine whether there is objective evidence that financial assets (including equity securities) are impaired, the Group considers factors such as the probability of insolvency or significant financial difficulties of the debtor/issuer, default or significant delay in payments, significant adverse changes in the business environment where the debtor/issuer operates and 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 carried at amortised cost The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. 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 less than suggested by historical trends. 132
3. Summary of significant accounting policies (continued) (h) Impairment (continued) (i) Non-derivative financial assets (continued) Financial assets carried at amortised cost (continued) If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognised in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in profit or loss, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Financial assets carried at cost If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. The loss recognised is not reversed in future periods. Available-for-sale financial assets If an available-for-sale financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the income statement, is transferred from equity to profit or loss. Reversals in respect of impairment losses on equity instruments classified as available-for-sale are recognised in other comprehensive income. Reversals of impairment losses on debt instruments are reversed through profit or loss, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in profit or loss. (ii) Other non-financial assets The Group assesses at each reporting date whether there is an indication that its non-financial assets, other than goodwill, investment properties, inventories and deferred tax assets, may be impaired. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. If any such indication exists, the Group makes an estimate of the asset s recoverable amount. An impairment loss is recognised if the carrying amount of an asset or its related cash-generating unit ( CGU ) exceeds its estimated recoverable amount. 133
3. Summary of significant accounting policies (continued) (h) Impairment (continued) (ii) Other non-financial assets (continued) The recoverable amount of an asset or CGU is the higher of its fair value less costs to sell and its value in use. 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 the purpose of impairment testing, assets that cannot be tested individually 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 CGU. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, 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 or group of CGUs, and then to reduce the carrying amounts of other assets in the CGU or group of CGUs on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount since the last impairment loss was recognised. If that is the case, the 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 in prior years. Such reversal is recognised in profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation or amortisation charged is adjusted in future periods to allocate the asset s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Goodwill that forms part of the carrying amount of an investment in an associate is not recognised separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired. (i) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. (i) Warranties The warranty provision represents the best estimate of the Group s contractual obligations at the balance sheet date. The provision is based on past experience and industry averages for defective products. The majority of the costs is expected to be incurred over the applicable warranty periods. (ii) Liquidated damages Provision for liquidated damages is made in respect of anticipated claims from customers on contracts of which deadlines are overdue or not expected to be completed on time in accordance with contractual obligations. The utilisation of provisions is dependent on the timing of claims. 134
3. Summary of significant accounting policies (continued) (j) Employee benefits (i) Employee equity compensation benefits The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. (ii) Defined contribution plans The Group participates in the national pension schemes as defined by the laws of the countries in which it has operations. In particular, the Singapore companies in the Group make contributions to the Central Provident Fund scheme in Singapore, a defined contribution pension scheme. Contributions to national pension schemes are recognised as an expense in the period in which the related service is performed. (iii) Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under cash bonus plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. (k) Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and revenue can be reliably measured. Revenue is measured at the fair value of consideration received or receivable, net of any returns, trade discounts and volume rebates. Revenue is recognised using the following methods: (i) Revenue from sale of goods and services rendered is recognised when persuasive evidence exists that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. The timing of the transfer of risks and rewards usually occurs upon delivery of goods/services and acceptance by customers. (ii) Revenue from long-term contracts is recognised by reference to stage of completion, which is measured by either: (a) (b) (c) a combination of different cost components or a single cost component that would provide the most reliable indication of the stage of completion of a contract; or when goods and services, representing part of a contract, are delivered; or upon completion of designated phases of a contract. Provision for foreseeable losses on uncompleted contracts is recognised in profit or loss as soon as such losses are determinable. 135