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Financial Report

Notes to the Financial Statements

  • 1. General Information

    CITIC Limited (the “Company”) was incorporated in Hong Kong, the shares of which are listed on the Main Board of the Stock Exchange of Hong Kong Limited. The address of its registered office is 32nd Floor, CITIC Tower, 1 Tim Mei Avenue, Central Hong Kong.

    The Company and its subsidiaries (collectively referred to as the “Group”) are principally engaged in financial services, resources and energy, manufacturing, engineering contracting, real estate and other businesses.

    The parent and the ultimate holding company of the Company is CITIC Group Corporation (“CITIC Group”). As at 31 December 2016, the equity interests held by CITIC Group in the Company through its overseas wholly-owned subsidiaries was 58.13% (31 December 2015: 58.13%).

  • 2. Significant accounting policies

    (a) Basis of preparation

    These financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRS”), which in collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKAS”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and accounting principles generally accepted in Hong Kong. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. A summary of the significant accounting policies adopted by the Group is set out below.

    The HKICPA has issued a number of amendments to HKFRS that are first effective for the current accounting period of the Group. Impacts of the adoption of the amended HKFRS are discussed below:

    (i) Amendments to HKAS 1, Disclosure initiative

    The amendments clarify guidance in HKAS 1 on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies.

    (ii) Amendments to HKAS 16 and HKAS 38, Clarification of acceptable methods of depreciation and amortisation

    The amendments clarify when a method of depreciation or amortisation based on revenue may be appropriate. The amendment to HKAS 16 clarifies that depreciation of an item of property, plant and equipment based on revenue generated by using the asset is not appropriate.

    The amendment to HKAS 38 establishes a rebuttable presumption that amortisation of an intangible asset based on revenue generated by using the asset is inappropriate.

    (iii) Amendment to HKAS 27, Equity method in separate financial statements

    The amendment allows entities to use equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements.

    (iv) Amendments to HKFRS 10, HKFRS 12 and HKAS 28, Investment entities: applying the consolidation exception

    The amendments clarify the application of the consolidation exception for investment entities and their subsidiaries.

    (v) Amendment to HKFRS 11, Accounting for acquisitions of interests in joint operations

    The amendment requires an investor to apply the principles of business combination accounting when it acquires an interest in a joint operation that constitutes a ‘business’ (as defined in HKFRS 3, Business combinations).

    (vi) Annual improvements to HKFRS 2012-2014 cycle

    The amendments include changes from the 2012-2014 cycle of the annual improvements project that affect 4 standards:

    • HKFRS 5, Non-current assets held for sale and discontinued operations
    • HKFRS 7, Financial instruments: Disclosures
    • HKAS 19, Employee benefits
    • HKAS 34, Interim financial reporting

    The adoption of the above amendments has no material impact on the financial statements of the Group. The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period.

    (b) Functional currency and presentation currency

    The functional currency of the Company is Hong Kong dollars (“HK$”). The functional currencies of overseas subsidiaries are determined in accordance with the primary economic environment in which they operate, and are translated into HK$ for the preparation of the consolidated financial statements (see Note 2(h)). The financial statements of the Group are presented in HK$ and, unless otherwise stated, expressed in million of HK$.

    (c) Basis of measurement

    The measurement basis used in the preparation of the consolidated financial statements is the historical cost basis except that the following assets and liabilities are stated at their fair values as explained in the accounting policies set out below:

    – investment properties (see Note 2(l));

    – financial assets and liabilities at fair value through profit or loss (including trading financial assets or trading financial liabilities) (see Note 2(i));

    – available-for-sale financial assets, except for those whose fair value cannot be measured reliably (see Note 2(i)); and

    – fair value hedged items (see Note 2(j)(i)).

    (d) Use of estimates and judgement

    The preparation of these consolidated financial statements 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. The estimates and underlying assumptions are reviewed on an ongoing basis. Actual results may differ from these estimates.

    Judgements made by management that have significant effect on the financial statements and estimates with a significant risk of material adjustment in subsequent period are described in Note 3. Revisions to accounting estimates are recognised in the period which the estimates are revised and in any future periods affected.

    (e) Subsidiaries and non-controlling interests

    (i) Business combinations involving entities under common control

    A business combination involving entities under common control is a business combination in which all of the combining entities are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. The assets acquired and liabilities assumed are measured based on their carrying amounts in the consolidated financial statements of the ultimate controlling party at the combination date. The difference between the carrying amount of the net assets acquired and the consideration paid for the combination (or the total face value of shares issued) is adjusted against the capital reserve. Any cost directly attributable to the combination is recognised in profit or loss when incurred. The combination date is the date on which one combining entity obtains control of other combining entities.

    (ii) Business combinations not involving entities under common control

    A business combination not involving entities under common control is a business combination in which all of the combining entities are not ultimately controlled by the same party or parties both before and after the business combination. Where (1) the aggregate of the acquisition date fair value of assets transferred (including the acquirer’s previously held equity interest in the acquiree), liabilities incurred or assumed, and equity securities issued by the acquirer, in exchange for control of the acquiree, exceeds (2) the acquirer’s interest in the acquisition date fair value of the acquiree’s identifiable net assets, the difference is recognised as goodwill. If (1) is less than (2), the difference is recognised in profit or loss for the current period. The costs of equity or debt securities as a part of the consideration for the acquisition are included in the carrying amounts of these equity or debt securities upon initial recognition. Other acquisition-related costs are expensed when incurred. Any difference between the fair value and the carrying amount of the assets transferred as consideration is recognised in profit or loss. The acquiree’s identifiable assets, liabilities and contingent liabilities, if the recognition criteria are met, are recognised by the Group at their acquisition date fair value. The acquisition date is the date on which the acquirer obtains control of the acquiree.

    The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis. Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation are measured at either fair value or the present ownership interests’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets. All other components of non-controlling interests are measured at their acquisition date fair value, unless another measurement basis is required by HKFRS.

    For a business combination not involving entities under common control and achieved in stages, the Group remeasures its previously-held equity interest in the acquiree to its fair value at the acquisition date. The difference between the fair value and the carrying amount is recognised as investment income for the current period; the amount recognised in other comprehensive income relating to the previously-held equity interest in the acquiree are transferred to investment income in the period in which the acquisition occurs.

    (iii) Consolidated financial statements

    The scope of consolidated financial statements is based on control and the consolidated financial statements comprise the Company and its subsidiaries, as well as structured entities controlled by the Group.

    Subsidiaries are entities over which the Group has control. The Group controls an entity when it is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

    When assessing whether the Group has power, only substantive rights (held by the Group and other parties) are considered.

    An investment in a subsidiary is consolidated into the consolidated financial statements of the Group from the date that control commences until the date that control ceases.

    Where a subsidiary was acquired during the reporting period, through a business combination involving entities under common control, the financial statements of the subsidiary are included in the consolidated financial statements as if the combination had occurred at the date the ultimate controlling party first obtained control. Therefore the opening balances and the comparative figures of the consolidated financial statements are restated. In the preparation of the consolidated financial statements, the subsidiary’s assets, liabilities and results of operations are included in the consolidated balance sheet and the consolidated statement of comprehensive income, respectively, based on their carrying amounts, from the date that common control was established. Net profit earned by the acquiree prior to the date of acquisition is separately disclosed.

    Where a subsidiary was acquired during the reporting period, through a business combination involving entities not under common control, the identifiable assets, liabilities and results of operations of the subsidiaries are consolidated into the consolidated financial statements from the date that control commences, based on the fair value of those identifiable assets and liabilities at the acquisition date.

    Non-controlling interests are presented in the consolidated balance sheet within equity, separately from equity attributable to the ordinary shareholders of the Company. Non-controlling interests in the results of the Group are presented on the face of the consolidated statement of comprehensive income as an allocation of the total profit or loss and total comprehensive income for the year between non-controlling interests and the ordinary shareholders of the Company. Loans from holders of non-controlling interests and other contractual obligations towards these holders are presented as financial liabilities in the consolidated balance sheet in accordance with Note 2(i).

    When the amount of loss for the current period attributable to the non-controlling interest of a subsidiary exceeds the non-controlling interest’s portion of the opening balance of shareholders’ equity of the subsidiary, the excess is allocated against the non-controlling interests.

    When the accounting period or accounting policies of a subsidiary are different from those of the Group, the Group makes necessary adjustments to the financial statements of the subsidiary based on the Group’s own accounting period or accounting policies. Intra-group balances, transactions and cash flows, and any unrealised profit or loss arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are recognised fully in profit or loss when evidence of impairment of assets being provided.

    Where the Group acquires a non-controlling interest from a subsidiary’s non-controlling shareholders or disposes of a portion of an interest in a subsidiary without a change in control, the difference between the amount by which the non-controlling interests are adjusted and the amount of the consideration paid or received is adjusted to the reserve (capital reserve) in the consolidated balance sheet.

    When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss, and the Group derecognises assets, liabilities, non-controlling interests and other related items in shareholders’ equity in relation to that subsidiary. Any interest retained in that former subsidiary at the date when 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 2(i)) or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture (see Note 2(f)).

    (iv) Investment in subsidiaries

    In the Company’s balance sheet, an investment in a subsidiary is stated at cost less impairment losses (see Note 2(t)(ii)).

    The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

    (f) 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 of the Group under the equity method. 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 2(t)(ii)). Any acquisition-date excess of the Group’s share of the fair value of the investee’s identifiable net assets over cost, the Group’s share of the post-acquisition, post-tax results of the investees and any impairment losses for the year are recognised in profit or loss, whereas the Group’s share of the post-acquisition, post-tax items of the investees’ other comprehensive income is recognised in other comprehensive income of the Group. The Group’s interest in associate or joint venture is included in the consolidated financial statements from the date that significant influence or joint control commences until the date that significant influence or joint control ends.

    When the Group’s share of losses exceeds its interest in the associate or the joint venture, 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 associate and joint venture 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 cost on initial recognition of a financial asset (see Note 2(i)).

    In the Company’s balance sheet, investments in associates and joint ventures are stated at cost less impairment losses (see Note 2(t)(ii)).

    (g) Goodwill

    Goodwill represents the excess of the consideration transferred, including the amount of assets transferred (including the acquirer’s previously held equity interest in the acquiree), liabilities incurred or assumed, and the equity securities issued by the acquirer at the date of acquisition, over the fair value of the Group’s share of the identifiable net assets acquired, when the excess is positive, otherwise it’s recognised directly in profit or loss.

    Positive goodwill will be stated in the consolidated balance sheet as a separate asset or included within joint ventures and associates at cost less accumulated impairment losses and is subject to impairment testing at least annually. Impairment losses on goodwill are not reversed. Negative goodwill is recognised in profit or loss immediately on acquisition.

    (h) Translation of foreign currencies

    Foreign currency transactions are, on initial recognition, translated by applying the foreign exchange rates ruling at the transaction dates. Monetary items denominated in foreign currencies are translated at the foreign exchange rates ruling at the reporting date, the resulting exchange differences are recognised in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates ruling at the transaction dates. Non-monetary items that are measured at fair value in a foreign currency are translated using the foreign exchange rates ruling at the dates the fair value was determined. The exchange differences are recognised in profit or loss, except for the differences arising from the translation of available-for-sale equity investments, which is recognised in other comprehensive income.

    The financial statements of the Group’s subsidiaries with a foreign functional currency are translated into HK$ for the preparation of the Group’s consolidated financial statements. The assets and liabilities in these financial statements are translated into HK$ at the foreign exchange rates ruling at the reporting date. The equity items, except for “retained earnings”, are translated to HK$ at the foreign exchange rates at the dates on which such items arose.

    Income and expenses in the profit or loss are translated into HK$ at the foreign exchange rates or the rates that approximate the foreign exchange rates at the transaction dates. The resulting exchange differences are presented as “Reserves” (exchange reserve) in the consolidated balance sheet within the shareholder’s equity.

    Upon disposal of a foreign operation, the cumulative amount of the translation differences recognised in shareholders’ equity which relates to that foreign operation is transferred to profit or loss in the period in which the disposal occurs.

    (i) Financial instruments

    (i) Initial recognition

    The Group classifies its financial instruments into different categories at inception, depending on the purpose for which the assets were acquired or the liabilities were incurred, and on the contractual terms of the financial instruments. The categories are: financial assets or financial liabilities at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets and other financial liabilities.

    Financial instruments are measured initially at fair value, which normally will be equal to the transaction price plus, in case of a financial asset or financial liability not held at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset or issue of the financial liability. Transaction costs on financial assets and financial liabilities at fair value through profit or loss are expensed immediately.

    The Group recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instrument. A regular way purchase or sale of financial assets and financial liabilities at fair value through profit or loss is recognised using trade date accounting. Other financial assets and financial liabilities are recognised using settlement date accounting. From these dates, any gains and losses arising from changes in fair value of the financial assets or financial liabilities at fair value through profit or loss are recorded.

    (ii) Categorisation

    Financial assets at fair value through profit or loss
    This category comprises financial assets held for trading, and those designated at fair value through profit or loss upon initial recognition, but excludes those investments in equity instruments that do not have a quoted market price and whose fair value cannot be reliably measured.

    A financial asset is classified as held for trading if it is: (i) acquired principally for the purpose of selling it in the near term; (ii) part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or (iii) a derivative. Derivatives that do not qualify for hedge accounting (Note 2(j)) are accounted for as trading instruments.

    Financial instruments are designated at fair value through profit or loss upon initial recognition when:

    – the assets are managed, evaluated and reported internally on a fair value basis;

    – the designation eliminates or significantly reduces an accounting mismatch in the gain and loss recognition arising from the difference in measurement bases of the financial assets which would otherwise arise;

    – the asset contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract; or

    – the separation of the embedded derivative(s) from the financial instrument is not prohibited.

    Financial assets under this category are carried at fair value. Changes in the fair value are included in profit or loss in the period in which they arise. Upon disposal, the difference between the net sale proceeds and the carrying value is included in profit or loss.

    Loans and receivables
    Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than (a) those that the Group intends to sell immediately or in the near term, which will be classified as held for trading; (b) those that the Group, upon initial recognition, designates as at fair value through profit or loss or as available-for-sale; or (c) those where the Group may not recover substantially all of its initial investment, other than because of credit deterioration, which will be classified as available-for-sale.

    Loans and receivables mainly comprise and other parties, deposits and placements with banks and non-bank financial institutions, financial assets held under resale agreements, investments classified as receivables, and trade and other receivables.

    Loans and receivables are carried at amortised cost using the effective interest method, less impairment losses, if any (see Note 2(t)(i)). Where the receivables are interest-free loans made to related parties without any fixed repayment term or the effect of discounting would be immaterial, the receivables are stated at cost less allowance for impairment of doubtful debts.

    Held-to-maturity investments
    Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity for which the Group has the positive intention and ability to hold to maturity, other than (a) those that the Group, upon initial recognition, designates as at fair value through profit or loss or as available-for-sale; and (b) those that meet the definition of loans and receivables.

    Held-to-maturity investments are carried at amortised cost using the effective interest method less impairment losses, if any (see Note 2(t)(i)).

    If, as a result of a change in intention or ability, it is no longer appropriate to classify an investment as held-to-maturity, it shall be reclassified as available-for-sale and remeasured at fair value.

    Available-for-sale financial assets
    Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the other three categories above. They include financial assets intended to be held for an indefinite period of time, but which may be sold in response to needs for liquidity or changes in the market environment.

    Available-for-sale financial assets are carried at fair value. Unrealised gains and losses arising from changes in the fair value are recognised in other comprehensive income and accumulated separately in equity, except for impairment losses and foreign exchange gains and losses on monetary items such as debt securities which are recognised in profit or loss. Dividend income from equity securities and interest income from debt securities calculated using the effective interest method are recognised in profit or loss in accordance with the policies set out in Note 2(w)(vii) and 2(w)(i) respectively.

    Investments in equity securities that do not have a quoted market price in an active market and whose fair value cannot be measured reliably, and derivatives that are linked to and must be settled by delivery of such unquoted equity securities are carried at cost less impairment losses, if any (see Note 2(t)(i)).

    When the available-for-sale financial assets are sold, gains or losses on disposal include the difference between the net sale proceeds and the carrying value, and the accumulated fair value adjustments which are previously recognised in other comprehensive income shall be reclassified from equity to profit or loss.

    Financial liabilities at fair value through profit or loss
    Financial liabilities at fair value through the profit or loss include those classified as held for trading, and those designated by the Group upon recognition as at fair value through the profit or loss.

    A financial liability is classified as held for trading if it is: (i) acquired or incurred principally for the purpose of repurchasing it in the near term; (ii) part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or (iii) a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).

    Financial liabilities are designated at fair value through the profit or loss upon initial recognition when: (i) the financial liabilities or are managed, evaluated and reported internally on a fair value basis; (ii) the designation eliminates or significantly reduces an accounting mismatch in the gain and loss recognition arising from the difference in measurement bases of the financial liabilities; or (iii) a contract contains one or more embedded derivatives, i.e. an entire hybrid (combined) contract, unless: (i) the embedded derivative does not significantly modify the cash flows that otherwise would be required by the hybrid (combined) contract; or (ii) it is clear with little or no analysis when a similar hybrid (combined) instrument is first considered that separation of the embedded derivative is prohibited.

    Other financial liabilities
    Financial liabilities, other than trading liabilities and those designated at fair value through profit or loss, are measured at amortised cost using the effective interest method.

    Other financial liabilities mainly comprise borrowing from central banks, deposits from banks and non-bank financial institutions, placements from banks and non-bank financial institutions, trade and other payables, financial assets sold under repurchase agreements, banks and other loans, and debt instruments issued.

    (iii) Fair value measurement principles

    Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.

    If there is no publicly available latest traded price nor a quoted market price on a recognised stock exchange or a price from a broker/dealer for non-exchange-traded financial instruments, or if the market for it is not active, the fair value of the instrument is estimated using valuation techniques that provide a reliable estimate of prices which could be obtained in actual market transactions.

    Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is based on the relevant government yield curve as at the balance sheet date plus an adequate constant credit spread. Where other pricing models are used, inputs are based on market data at the balance sheet date.

    (iv) De-recognition

    A financial asset is derecognised when the contractual rights to receive the cash flows from the financial asset expire, or where the financial asset together with substantially all the risks and rewards of ownership, have been transferred.

    The Group derecognises a financial asset, if the part being considered for de-recognition meets one of the following conditions: (a) the contractual rights to receive the cash flows from the financial asset expire; or (b) the contractual rights to receive the cash flows of the financial asset have been transferred, and the Group transfers substantially all the risks and rewards of ownership of the financial asset; or (c) the Group retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to the eventual recipient in an agreement that meets all the conditions of de-recognition of transfer of cash flows (“pass through requirements”) and transfers substantially all the risks and rewards of ownership of the financial asset.

    Where a transfer of a financial asset in its entirety meets the criteria for de-recognition, the difference between the two amounts below is recognised in profit or loss:

    – the carrying amount of the financial asset transferred;

    – the sum of the consideration received from the transfer and any cumulative gain or loss that has been recognised directly in equity.

    If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group continues to recognise the asset to the extent of its continuing involvement and recognises an associated liability.

    As part of its operations, the Group securitises financial assets, generally through the sale of these assets to structured entities which issue securities to investors. Further details on prerequisites for de-recognition of financial assets are set out above. When the securitisation of financial assets that do qualify for de-recognition, the relevant financial assets are derecognised in their entirety and a new financial asset or liabilities is recognised regarding the interest in unconsolidated securitisation vehicles that the Group receives as part of the transfer. When the securitisation of financial assets that do not qualify for de-recognition, the relevant financial assets are not derecognised, and the consideration paid by third parties are recorded as a financial liability; when the securitisation of financial assets that partially qualify for de-recognition, the book value of the transferred asset should be recognised between the derecognised portion and the retained portion based on their respective relative fair values, and the difference between the book value of the derecognised portion and the total consideration paid for the derecognised portion shall be recorded in profit or loss.

    The de-recognition of financial assets sold on condition of repurchase is determined by the economic substance of the transaction. If a financial asset is sold under an agreement to repurchase the same or substantially the same asset at a fixed price or at the sale price plus a reasonable return, the Group will not derecognise the asset. If a financial asset is sold together with an option to repurchase the financial asset at its fair value at the time of repurchase (in case of transferor sells such financial asset), the Group will derecognise the financial asset.

    The financial liability is derecognised only when: (a) the underlying present obligation specified in the contracts is discharged/cancelled, or (b) an agreement between the Group and an existing lender to exchange the original financial liability with a new financial liability with substantially different terms, or a substantial modification of the terms of an existing financial liability is accounted for as an extinguishment of the original financial liability and recognition of a new financial liability. The difference between the carrying amount of the financial liability derecognised and the consideration paid is recognised in profit or loss.

    (v) Offsetting

    Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet where there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

    (vi) Derivatives

    The Group uses derivatives to hedge its exposure on risks. The Group adopts hedge accounting in accordance with Note 2(j) for derivatives designated as hedging instruments if the hedge is effective. Other derivatives are accounted for as trading financial assets or financial liabilities. Derivatives are recognised at fair value upon initial recognition. The positive fair value is recognised as assets while the negative fair value is recognised as liabilities. The gain or loss on re-measurement to fair value is recognised immediately in profit or loss.

    (vii) Embedded derivatives

    An embedded derivative is a component of a hybrid (combined) instrument that includes both the derivative and a host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. The embedded derivatives are separated from the host contract and accounted for as a derivative when (a) the economic characteristics and risks of the embedded derivative are not closely related to the host contract; and (b) the hybrid (combined) instrument is not measured at fair value with changes in fair value recognised in profit or loss.

    When the embedded derivative is separated, the host contract is accounted for in accordance with Note 2(i)(ii) above.

    (j) Hedging

    Hedge accounting recognises the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and the hedged item. The Group assesses and documents whether the financial instruments that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risks both at hedge inception and on an ongoing basis. The Group discontinues prospectively hedge accounting when (a) the hedging instrument expires or is sold, terminated or exercised; (b) the hedge no longer meets the criteria for hedge accounting; or (c) the Group revokes the designation.

    (i) Fair value hedge

    A fair value hedge seeks to offset risks of changes in the fair value of recognised asset or liability that will give rise to a gain or loss being recognised in profit or loss. The hedging instrument is measured at fair value, with fair value changes recognised in profit or loss. The carrying amount of the hedged item is adjusted by the amount of the changes in fair value of the hedging instrument attributable to the risk being hedged. This adjustment is recognised in profit or loss to offset the effect of the gain or loss on the hedging instrument.

    When a hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting, or the Group revokes designation of the hedge relationship, any adjustment up to that point, to a hedged item for which the effective interest method is used, is amortised to profit or loss as part of the recalculated effective interest rate of the item over its remaining life.

    (ii) Cash flow hedge

    Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, or the foreign currency risk of a committed future transaction, the effective part of any gain or loss on remeasurement of the derivative financial instrument to fair value is recognised in other comprehensive income and accumulated separately in equity in the hedging reserve. The ineffective portion of any gain or loss is recognised immediately in profit or loss.

    If the hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated gain or loss is reclassified from equity to be included in the initial cost or other carrying amount of the non-financial asset or liability.

    If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gain or loss is reclassified from equity to the profit or loss in the same period or periods during which the asset acquired or liability assumed affects the profit or loss (such as when interest income or expense is recognised).

    For cash flow hedges, other than those covered by the preceding two policy statements, the associated gain or loss is reclassified from equity to profit or loss in the same period or periods during which the hedged forecast transaction affects profit or loss.

    When a hedging instrument expires or is sold, terminated or exercised, or the Group revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity until the transaction occurs and is recognised in accordance with the above policy. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss is reclassified from equity to profit or loss immediately.

    (iii) Hedge effectiveness testing

    In order to qualify for hedge accounting, the Group carries out prospective effectiveness testing to demonstrate that it expects the hedge to be highly effective at the inception of the hedge and throughout its life. Actual effectiveness (retrospective effectiveness) is also demonstrated on an ongoing basis.

    The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The method which the Group adopts for assessing hedge effectiveness will depend on its risk management strategy.

    For fair value hedge relationships, the Group utilises the cumulative dollar offset method or regression analysis as effectiveness testing methodologies. For cash flow hedge relationships, the Group utilises the change in variable cash flow method or the cumulative dollar offset method using the hypothetical derivative approach.

    For prospective effectiveness, the hedging instrument must be expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated. For actual effectiveness, the changes in fair value or cash flows must offset each other in the range of 80 per cent to 125 per cent for the hedge to be deemed effective.

    (k) Financial assets held/sold under resale/repurchase agreements

    Financial assets held under resale agreements are transactions that the Group acquires financial assets which will be resold at a predetermined price in the future date under resale agreements. Financial assets sold under repurchase agreements are transactions that the Group sells financial assets which will be repurchased at a predetermined price in the future date under repurchase agreements.

    The cash advanced or received is recognised as amounts held under the resale and repurchase agreements in the balance sheet. Assets held under resale agreements are recorded in memorandum accounts as off-balance sheet items. Assets sold under repurchase agreements continue to be recognised in the balance sheet.

    The difference between the resale and repurchase consideration, and that between the purchase and sale consideration, are amortised over the period of the respective transaction using the effective interest method and are included in interest income and interest expense respectively.

    (l) Investment properties

    Investment properties are interests in land and/or buildings which are held to earn rentals or for capital appreciation or both. These include land held for a currently undetermined future use. Land held under operating leases is classified and accounted for as investment property when the rest of the definition of investment property is met.

    Investment properties are stated in the balance sheet at fair values which are reviewed annually. 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.

    (m) Property, plant and equipment

    Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses (Note 2(t)(ii)).

    Assets in the course of construction for production, rental or administrative purposes are carried at cost, less any impairment losses. Cost includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of overheads.

    Construction-in-progress represents property, plant and equipment under construction and is transferred to fixed assets when ready for its intended use.

    No depreciation is provided in respect of construction in progress. Upon completion and commissioning for operation, depreciation will be provided at the appropriate rate specified below.

    Property, plant and equipment are depreciated at rates sufficient to write off their cost, less impairment losses, if any, to their estimated residual values, over their estimated useful lives on a straight line basis as follows:

    – Plant and buildings 5–70 years
    – Machinery and equipment 3–33 years
    – Office and other equipment, vehicles and vessels and others 2–33 years

    Freehold land within the category of plant and buildings are not depreciated.

    Assets’ useful lives and residual values are reviewed, and adjusted if appropriate, at each balance sheet date.

    An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

    The recoverable amount of an asset is the greater of its fair value less costs of disposal and value in use.

    Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in profit or loss.

    (n) Land use rights

    Land use rights are stated at cost less accumulated amortisation and accumulated impairment losses (if any). Land use rights are amortised on a straight-line basis over the respective periods of grant, usually within 10 to 50 years.

    Impairment losses on land use rights are accounted for in accordance with the accounting policies as set out in Note 2(t)(ii).

    (o) Intangible assets (other than goodwill)

    Intangible assets acquired by the Group are stated at cost less accumulated amortisation (where the estimated useful life is finite) and impairment losses (see Note 2(t)(ii)).

    Amortisation of intangible assets with finite useful lives is charged to profit or loss over the assets’ estimated useful lives. The following intangible assets are amortised from the date they are available for use as follows:

    – Roads and tunnels operating rights Over the estimated useful lives of 30 years
    – Mining assets Over the estimated useful lives of the mines in accordance
    with the production plan of the entities concerned and the
    proven probable reserves of the mines using the unit-of-
    production method.

    Both the period and method of amortisation are reviewed annually.

    Intangible assets are not amortised while their useful lives are assessed to be indefinite. Any conclusion that the useful life of an intangible asset is indefinite is reviewed annually to determine whether events and circumstances continue to support the indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite is accounted for prospectively from the date of change and in accordance with the policy for amortisation of intangible assets with finite lives as set out above.

    (p) Inventories

    (i) Manufacturing, resources and energy segments

    Inventories of the manufacturing, and resources and energy segments are carried at the lower of cost and net realisable value.

    Cost is calculated using the first-in first-out, specific identification or weighted average cost formula as appropriate, and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

    Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

    When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognised in profit or loss in the period in which the reversal occurs.

    (ii) Real estate segment

    Inventories in respect of property development activities under the real estate segment are carried at the lower of cost and net realisable value. Cost and net realisable values are determined as follows:

    Property under development
    The cost of properties under development comprises specifically identified cost, including the acquisition cost of land, aggregate cost of development, materials and supplies, wages and other direct expenses, an appropriate proportion of overheads and borrowing costs capitalised (see Note 2(bb)). Net realisable value represents the estimated selling price less estimated costs of completion and costs to be incurred in selling the property.

    Completed property 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.

    (q) Construction contracts

    Construction contracts are contracts specifically negotiated with a customer for the construction of an asset or a group of assets, where the customer is able to specify the major structural elements of the design. The accounting policy for contract revenue is set out in Note 2(w)(v). When the outcome of a construction contract can be estimated reliably, contract costs are recognised as an expense by reference to the stage of completion of the contract at the balance sheet date. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as an expense in the period in which they are incurred.

    Construction contracts in progress at the balance sheet date are recorded at the net amount of costs incurred plus recognised profit less recognised losses and progress billings, and are presented in the balance sheet as “amount due from customers for contract work” or “amount due to customers for contract work”.

    (r) Operating leases

    Leases which do not transfer substantially all the risks and rewards of ownership to the lessee are classified as operating leases.

    Where the Group leases out assets under operating leases, the assets are included in the balance sheet according to their nature and, where applicable, are depreciated in accordance with the Group’s depreciation policies, as set out in Note 2(m) except where the asset is classified as an investment property. Impairment losses are accounted for in accordance with the accounting policy as set out in Note 2(t)(ii). Revenue arising from operating leases is recognised in accordance with the Group’s revenue recognition policies, as set out in Note 2(w)(vi).

    Where the Group has the use of assets held 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 held 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 2(l)).

    (s) Repossessed assets

    In the recovery of impaired loans and advances, the Group may take possession of assets held as collateral through court proceedings or voluntary delivery of possession by the borrowers. Where it is intended to achieve an orderly realisation of the impaired assets and the Group is no longer seeking repayment from the borrower, repossessed assets are reported in “other assets”.

    When the Group seizes assets to compensate for the losses of loans and advances and interest receivables, the repossessed assets are initially recognised at fair value, plus any taxes paid for the seizure of the assets, litigation fees and other expenses incurred for collecting the repossessed assets are included in the carrying value of repossessed assets. Repossessed assets are recognised at the carrying value, net of allowances for impairment losses.

    Impairment losses on initial recognision and on subsequent remeasurement are recognised in profit or loss.

    (t) Impairment of assets

    (i) Financial assets

    The carrying amounts of the Group’s financial assets other than those measured at fair value through profit and loss are reviewed at balance sheet date to determine whether there is objective evidence of impairment. Objective evidence that financial assets are impaired includes but not limited to one or more of the following loss events that occurred after the initial recognision of the asset and has an impact on the future cash flows on the assets that can be estimated reliably:

    – significant financial difficulty of the issuer or borrower;

    – a breach of contract, such as a default or delinquency in interest or principal payments;

    – the Group, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the Group would not otherwise consider;

    – it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

    – disappearance of an active market for financial assets because of financial difficulties;

    – observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the Group, including: adverse changes in the payment status of borrowers in the Group, an increase in the unemployment rate in the geographical area of the borrowers, a decrease in property prices for mortgages in the relevant area, or adverse changes in industry conditions that affect the borrowers in the Group;

    – significant changes in the technological, market, economic or legal environment that have an adverse effect on the issuer;

    – a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost; and

    – other objective evidence indicating there is an impairment of a financial asset.

    If any such evidence exists, the carrying amount is reduced to the estimated recoverable amount by means of a charge to profit or loss.

    Impairment losses are written off against the corresponding assets directly, except for impairment losses recognised in respect of loans and receivables and held-to-maturity investments, which are measured at amortised cost, whose recovery is considered doubtful but not remote. In this case, the impairment losses are recorded using an allowance account. When the Group is satisfied that recovery is remote after all the necessary legal or other proceedings are completed, the amount considered irrecoverable is written off against loans and receivables or held-to-maturity investments directly and any amounts held in the allowance account relating to that borrower/investment are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in profit or loss.

    Loans and receivables
    Impairment losses on loans and receivables are measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets). Receivables with a short duration are not discounted if the effect of discounting is immaterial.

    The total allowance for credit losses consists of two components: individual impairment allowances, and collective impairment allowances.

    The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. 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.

    The individual impairment allowance is based upon management’s best estimate of the present value of the cash flows which are expected to be received, discounted at the original effective interest rate. In estimating these cash flows, management makes judgements about the borrower’s financial situation and the net realisable value of any underlying collateral or guarantees in favour of the Group. Each impaired asset is assessed on its own merits.

    In assessing the need for collective loan loss allowances, management uses statistical modelling and considers historical trends of factors such as credit quality, portfolio size, concentrations, and economic factors. In order to estimate the required allowance, the Group makes assumptions both to define the way the Group models inherent losses and to determine the required input parameters, based on historical experience and current economic conditions.

    The accuracy of the impairment allowances the Group makes depends on how well the Group can estimate future cash flows for individually assessed impairment allowances and the model assumptions and parameters used in determining collective impairment allowances. While this necessarily involves judgement, the Group believes that the impairment allowances on loans and advances to customers and other parties are reasonable and supportable.

    Any subsequent changes to the amounts and timing of the expected future cash flows compared to the prior estimates that can be linked objectively to an event occurring after the write-down, will result in a change in the impairment allowances on loans and receivables and be charged or credited to the income statement. A reversal of impairment losses is limited to the loans and receivables’ carrying amount that would have been determined had no impairment loss been recognised in prior years.

    When there is no reasonable prospect of recovery, the loan and the related interest receivables are written off.

    Loans and receivables with renegotiated terms are loans that have been restructured due to deterioration in the borrower’s financial position and where the Group has made concessions that it would not otherwise consider. Renegotiated loans and receivables are subject to ongoing monitoring to determine whether they remain impaired or past due.

    Held-to-maturity investments
    Impairment on held-to-maturity investments is considered at both an individual and collective level. The individual impairment allowance is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the asset’s original effective interest rate, where the effect of discounting is material.

    All significant assets found not to be individually impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are then collectively assessed for impairment by grouping together financial assets with similar risk characteristics.

    If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through the income statement. A reversal of impairment losses shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years.

    Available-for-sale financial assets
    When there is objective evidence that an available-for-sale financial asset is impaired, the cumulative loss that had been recognised in the fair value reserve is reclassified to profit or loss. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that asset previously recognised in profit or loss.

    For unquoted available-for-sale equity securities that are carried at cost, the impairment loss is measured as the difference between the carrying amount of the equity securities and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Such impairment losses are not reversed.

    Impairment losses recognised in profit or loss in respect of available-for-sale equity securities are not reversed through profit or loss. Any subsequent increase in the fair value of such assets is recognised in other comprehensive income.

    Impairment losses in respect of available-for-sale debt securities are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss was recognised. Reversals of impairment losses in such circumstances are recognised in profit or loss.

    (ii) Non-financial assets

    Internal and external sources of information are reviewed at balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognised no longer exists or may have decreased:

    – property, plant and equipment (other than properties carried at revalued amounts);

    – land use rights;

    – investments in subsidiaries, associates and joint ventures;

    – goodwill; and

    – intangible assets.

    If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill and intangible assets that are not yet available for use and intangible assets that have indefinite useful lives, the recoverable amount is estimated annually whether or not there is any indication of impairment.

    Calculation of recoverable amount
    The recoverable amount of an asset is the greater of its fair value less costs of disposal and 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 time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

    Recognition of impairment losses
    An impairment loss is recognised in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs of disposal (if measurable) or value in use (if determinable).

    Reversals of impairment losses
    If, in a subsequent period, the amount of impairment loss of the non-financial asset except for goodwill decreases and the decrease can be linked objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the profit or loss. A reversal of impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior periods.

    An impairment loss in respect of goodwill is not reversable.

    (u) Employee benefits

    (i) Short-term employee benefits

    During the accounting period when an employee has rendered service to the Group, the Group recognises the undiscounted amount of short-term employee benefits as a liability and as an expense, unless another HKFRS requires or permits the inclusion of the benefits in the cost of an asset. Short-term employee benefits include wages, bonuses and social security contributions such as medical insurance, work-related injury insurance and maternity insurance, as well as housing provident funds, which are all calculated based on the regulated benchmark and ratio. Where the payment of liability is expected not to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related services, and the effect would be material, these liabilities are stated at their present values in the balance sheet.

    (ii) Defined contribution retirement schemes

    Employees of the Group’s subsidiaries in Hong Kong are offered the option to enroll in one of the Mandatory Provident Fund (“MPF”) Master Trust Schemes under the CITIC Group MPF Scheme. The MPF Master Trust Schemes are defined contribution schemes and are administered in accordance with the terms and provisions of the respective trust deeds and are subject to the Mandatory Provident Fund Schemes Ordinance.

    Employees of the Group’s subsidiaries in the People’s Republic of China (the “PRC”) subsidiaries are required to participate in defined contribution retirement schemes and make contributions according to the respective regulations. Employees of the Group’s subsidiaries in the PRC are also eligible to participate in the enterprise annuity plan established by the Group according to the relevant requirements.

    Employees of the Group’s overseas subsidiaries are required to make contributions subject to the relevant regulations in the countries/jurisdiction in which the overseas subsidiaries operate.

    The contributions are charged to profit and loss for the current period on an accrual basis.

    (v) Financial guarantees issued, provisions and contingent liabilities

    (i) Financial guarantees issued

    Financial guarantees are contracts that require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary of the guarantee (the “holder”) for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.

    Where the Group issues a financial guarantee, the fair value of the guarantee is initially recognised as deferred income within “other liabilities”. The fair value of financial guarantees issued at the time of issuance is determined by reference to fees charged in an arm’s length transaction for similar services, when such information is obtainable, or is otherwise estimated by reference to interest rate differentials, by comparing the actual rates charged by lenders when the guarantee is made available with the estimated rates that lenders would have charged, had the guarantees not been available, where reliable estimates of such information can be made. Where consideration is received or receivable for the issuance of the guarantee, the consideration is recognised in accordance with the Group’s policies applicable to that category of asset. Where no such consideration is received or receivable, an immediate expense is recognised in profit or loss on initial recognition of any deferred income.

    The amount of the guarantee initially recognised as deferred income is amortised in profit or loss over the term of the guarantee as income from financial guarantees issued. In addition, provisions are recognised in accordance with Note 2(v)(iii) if and when: (1) it becomes probable that the holder of the guarantee will call upon the Group under the guarantee; and (2) the amount of that claim on the Group is expected to exceed the amount currently carried in other liabilities in respect of that guarantee i.e. the amount initially recognised, less accumulated amortisation.

    (ii) Contingent liabilities assumed in business combinations

    Contingent liabilities assumed in a business combination which are present obligations at the date of acquisition are initially recognised at fair value, provided the fair value can be reliably measured. After their initial recognition at fair value, such contingent liabilities are recognised at the higher of the amount initially recognised, less accumulated amortisation where appropriate, and the amount that would be determined in accordance with Note 2(v)(iii). Contingent liabilities assumed in a business combination that cannot be reliably fair valued or were not present obligations at the date of acquisition are disclosed in accordance with Note 2(v)(iii).

    (iii) Other provisions and contingent liabilities

    Provisions are recognised for other liabilities of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. A provision is initially measured at the best estimate of the expenditure required to settle the related present obligation. Factors pertaining to a contingency such as the risks, uncertainties and time value of money are taken into account as a whole in reaching the best estimate. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

    Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

    (w) Revenue recognition

    Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in profit or loss as follows:

    (i) Interest income

    Interest income arising from the use of entity assets by others is recognised in profit or loss based on the duration and the effective interest rate. Interest income includes the amortisation of any discount or premium or other differences between the initial carrying amount of an interest bearing instrument and its amount at maturity calculated on an effective interest rate basis.

    The effective interest method is a method of calculating the amortised cost of financial assets and liabilities and of allocating the interest income and interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial instrument. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, call and similar options) but does not consider future credit losses. The calculation includes all fees and interests paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

    Interest on the impaired financial assets is recognised using the rate of interest used to discount future cash flows (“unwinding of discount”) for the purpose of measuring the related impairment loss.

    (ii) Fee and commission income

    Fee and commission income is recognised when the corresponding service is provided.

    Origination or commitment fees received/paid by the Group which result in the creation or acquisition of a financial asset are deferred and recognised as an adjustment to the effective interest rate. When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognised.

    (iii) Sales of goods and services

    Revenue is recognised when goods are delivered at the customers’ premises which is taken to be the point in time when the customer has accepted the goods and the related risks and rewards of ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.

    Service fee income is recognised when the services are rendered.

    (iv) Sales of properties

    Revenue from sales of properties is only recognised when the significant risks and rewards of ownership have been transferred to the buyer. The Group considers that the significant risks and rewards of ownership are transferred when the buildings contracted for sale are completed and the relevant permits essential for the delivery of the properties have been issued by the authorities.

    (v) Contract revenue

    When the outcome of a construction contract can be estimated reliably, revenue from a fixed price contract is recognised using the percentage of completion method.

    The Group measured the stage of completion by reference to the percentage of contract costs incurred to date to estimated total contract costs for the contract.

    When the outcome of a construction contract cannot be estimated reliably, revenue is recognised only to the extent of contract costs incurred that it is probable will be recoverable.

    (vi) Rental income from operating leases

    Rental income receivable under operating leases is recognised in profit or loss in equal instalments over the periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the use of the leased asset. Lease incentives granted are recognised in profit or loss as an integral part of the aggregate net lease payments receivable. Contingent rentals are recognised as income in the accounting period in which they are earned.

    (vii) Dividend income

    Dividend income from unlisted investments is recognised when the shareholder’s right to receive payment is established. Dividend income from listed investments is recognised when the share price of the investment goes ex-dividend.

    (viii) Government grants

    Government grants are recognised in the balance sheet initially when there is reasonable assurance that they will be received and that the Group will comply with the conditions attaching to them. Grants that compensate the Group for expenses incurred are recognised as income in profit or loss on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are deducted from the carrying amount of the asset and consequently are effectively recognised in profit or loss over the useful life of the asset by way of reduced depreciation expense.

    (x) Income tax

    Income tax for the year comprises current tax and deferred tax.

    The balance sheet liability method is adopted whereby deferred tax is recognised in respect of temporary differences between the tax bases of assets and liabilities and their carrying amounts. However, the deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; or in respect of those temporary differences which arise either from goodwill not deductible for tax purposes, or relating to investments in subsidiaries to the extent that the Group controls the timing of the reversal and it is probable that the temporary differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

    Provision for withholding tax that will arise on the remittance of retained earnings is only made where there is a current intention to remit such earnings.

    Deferred tax assets are recognised to the extent that their future utilisation is probable. Deferred tax arising from revaluation of investment properties is recognised on the rebuttable presumption that the recovery of the carrying amount of the properties would be through sale and calculated at the applicable tax rates.

    Current tax assets and liabilities are offset, and deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

    (y) Cash and cash equivalents

    Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the cash flow statement.

    (z) Related parties

    (a) A person, or a close member of that person’s family, is related to the Group if that person:

    • has control or joint control over the Group;
    • has significant influence over the Group; or
    • is a member of the key management personnel of the Group or the Group’s parent.

    (b) An entity is related to the Group if any of the following conditions applies:

    • The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
    • One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
    • Both entities are joint ventures of the same third party.
    • One entity is a joint venture of a third entity and the other entity is an associate of the third entity (one entity is an associate of a third entity and the Group is a joint venture of the third party).
    • The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group.
    • The entity is controlled or jointly controlled by a person identified in (a).
    • A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

    Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.

    (aa) Segment reporting

    Reportable segments are identified based on operating segments which are determined based on the structure of the Group’s internal organisation, management requirements and internal reporting system. An operating segment is a component of the Group that meets the following respective conditions:

    – engages in business activities from which it may earn revenues and incur expenses;

    – whose operating results are regularly reviewed by the Group’s management to make decisions about resource to be allocated to the segment and assess its performance; and

    – for which financial information regarding financial position, results of operations and cash flows are available.

    Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of:

    – the nature of products and services;

    – the nature of production processes;

    – the type or class of customers;

    – the methods used to distribute the products or provide the services; and

    – the nature of the regulatory environment.

    Inter-segment revenues are measured on the basis of actual transaction price for such transactions for segment reporting, and segment accounting policies are consistent with those for the consolidated financial statements.

    (bb) Borrowing costs

    Borrowing costs that are directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset. Other borrowing costs are expensed in the period in which they are incurred.

    The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.

    (cc) Disposal groups held for sale and discontinued operations

    Disposal groups are classified as held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. Disposal groups (except for certain assets as explained below) are stated at the lower of carrying amount and fair value less costs to sell. Deferred tax assets, financial assets (other than investments in subsidiaries and associates) and investment properties, which are classified as held for sale, would continue to be measured in accordance with the policies set out else in Note 2.

    A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which represents a separate major line of business or geographic area of operations. Intra-group balances, transactions and cash flows between discontinued and continuing operations are eliminated in preparing these financial statements.

    When an operation is classified as discontinued, a single amount is presented in the income statement, which comprises the post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognised on the measurement to fair value less costs to sell, or on the disposal, of the assets or disposal group(s) constituting the discontinued operation.

  • 3. Critical accounting estimates and judgements

    Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

    The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the actual results. The estimates and associated key assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

    (a) Impairment losses on loans and advances and investments classified as receivables

    Loans and advances to customers and other parties
    The Group reviews its loans and advances to customers and other parties to assess impairment on a periodic basis during the year. In determining whether an impairment loss should be recognised in the consolidated income statement, the Group makes estimates and judgements as to whether there is any observable data indicating that there is objective evidence of impairment and the extent, if any, to which it will have a measurable decrease in the estimated future cash flows related to individually assessed loans and advances or pools of loans and advances to customers and other parties with similar risk characteristics, as described in Note 2(t)(i) impairment of financial assets carried at amortised cost.

    Significant judgements are made in the determination of whether objective evidence of impairment exists in individually assessed loans and advances to customers and other parties or pools of loans and advances to customers and other parties with similar risk characteristics. Among other things, objective evidence of impairment includes deterioration in the financial condition of specific borrowers (or specific pools of borrowers) affecting their ability to meet their loan payment obligations, overdue status, financial position of guarantors, latest collateral valuations, concession the Group that would not otherwise be granted to borrowers for economic or legal reasons relating to their financial difficulties, as well as increasing industry sector over-capacity or obsolescence, or deterioration in national or regional economic conditions that are correlated to increasing loans and advances to customers and other parties defaults. These judgements are made both during management’s regular assessments of credit quality of loans and advances to customers and other parties and when other circumstances indicate the possibility that objective evidence of impairment may exist.

    Where it is determined that objective evidence of impairment exists, significant judgements and estimates are made in estimating the adverse impact on future cash flows related to individually assessed impaired loans and advances to customers and other parties. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Factors affecting these estimates include the availability and granularity of information related to specific borrowers; the results of regulatory reviews and the related portfolio analysis, and the clarity of the correlation between qualitative factors, such as industry sector performance or changes in regional economic conditions and loans and advances to customer’s defaults of related borrowers.

    Corporate loans and advances to customers and other parties not identified as impaired from individually assessments, together with all personal loans and advances to customers and other parties are included in homogenous groups with similar credit risks characteristics for performance of impairment assessments on a collective basis. Migration model is used for corporate loans and roll rate models are used for personal loans considering the similarity of credit risks and applying key assumptions. Significant judgements are applied to the calculation of assessed impairment using these models. Critical factors affecting these judgements include modelling assumptions (e.g., loss given default) and levels of correlation between qualitative factors and loans and advances to customers and other parties default. The collective impairment loss is assessed after taking into account: (i) historical loss experience in portfolios of similar credit risk characteristics; (ii) the emergence period between a loss occurring and that loss being identified; (iii) high risk products and geographic locations; and (iv) the current economic and credit environments and whether in management’s experience these indicate that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience. The Group considers the impact of the changes and uncertainty in the macro-economic environment, in which the Group operates when assessing the methodologies and assumptions used for loss estimation, makes adjustments where appropriate.

    Investments classified as receivables
    In determining whether an impairment loss should be recognised in the consolidated income statement, the Group makes significant estimates and judgements as to whether there is any observable data indicating that there is objective evidence of impairment and the extent, if any, to which it will have a measurable decrease in the estimated future cash flows related to investments classified as receivables by underlying assets or groups of underlying assets with similar risk characteristics, as described in Note 2(t)(i) Impairment of financial assets.

    Where it is determined that objective evidence of impairment exists, significant judgements and estimates are made in estimating the adverse impact on future cash flows based on the underlying assets related to individually significant impaired investment classified as receivables.

    Investments classified as receivables not identified as impaired from the individual assessment are included in groups with similar credit risk characteristics by underlying assets with the consideration of risk factors specific to different industries and different type of underlying assets, and assessed for impairment collectively. Significant judgements are applied to the calculation of collectively assessed impairment.

    (b) Impairment of available-for-sale equity investments

    For available-for-sale equity investments, a significant or prolonged decline in fair value below cost is considered to be objective evidence of impairment. Judgement is required when determining whether a decline in fair value has been significant or prolonged. In making this judgement, the Group considers historical data of market volatility and historical share price of the specific equity investment as well as other factors, such as sector performance, financial information regarding the investee and industry practice.

    (c) Provision for inventories

    The Group reviews the carrying amounts of inventories at each balance sheet date to determine whether the inventories are carried at lower of cost and net realisable value. The Group estimates the net realisable value, based on the current market situation and historical experience on similar inventories. Any change in the assumptions would increase or decrease the amount of inventories write-down or the related reversals of write-down. The change in the write-down would affect the Group’s profit or loss during the year.

    (d) Impairment of non-financial assets

    As described in Note 2(t)(ii), assets such as fixed assets and intangible assets are reviewed at each balance sheet date to determine whether the carrying amount exceeds the recoverable amount of the assets. If any such indication exists, an impairment loss is recognised.

    The recoverable amount of an asset (asset group) is the greater of its fair value less costs to sell and its present value of expected future cash flows. Since a market price of the asset (the asset group) cannot be obtained reliably, the fair value of the asset cannot be estimated reliably. In assessing value in use, significant judgements are exercised over the asset’s production, selling price, related operating expenses and discount rate to calculate the present value. All relevant materials which can be obtained are used for estimation of the recoverable amount, including the estimation of the production, selling price and related operating expenses based on reasonable and supportable assumptions.

    (e) Fair value of financial instruments

    For financial instruments without active market, the Group determines fair values using valuation techniques which include discounted cash flow models, as well as other types of valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and foreign currency exchange rates. Where discounted cash flow techniques are used, estimated cash flows are based on management’s best estimates and the discount rate used is a market rate at the end of each reporting period applicable for an instrument with similar terms and conditions. Where other pricing models are used, inputs are based on observable market data at the end of each reporting period. However, where market data are not available, management needs to make estimates on such unobservable market inputs based on assumptions. Changes in assumptions about these factors could affect the estimated fair value of financial instruments.

    (f) Depreciation

    Depreciation of operating assets constitutes a substantial operating cost for the Group. The cost of fixed assets is charged as depreciation expense over the estimated useful life of the respective assets using the straight-line method. Management periodically reviews changes in technology and industry conditions, asset retirement activity and residual values to determine adjustments to estimated remaining useful lives and depreciation rates.

    (g) Income taxes

    Significant judgement is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

    Deferred tax assets, which principally relate to tax losses and deductible temporary differences, are recognised when the future taxable profit will be available against such deferred tax assets. Hence, it requires formal assessment by management regarding the future profitability to utilise the deferred tax assets. The outcome of their actual utilisation may be different.

    (h) Assets acquired/liabilities assumed in business combination

    Assets acquired/liabilities assumed in business combination are recognised at fair value in connection with the Group’s acquisition of an entity. The fair values of the acquired assets/assumed liabilities are determined based on valuation methodologies and techniques that involved the use of a third-party valuation firm’s expertise. The judgements and assumptions used in that valuation of assets and liabilities along with the assumptions on the useful lives of acquired assets have an effect on the consolidated financial statements.

    (i) De-recognition of financial assets

    In its normal course of business, the Group transfers financial assets through various types of transactions including regular way sales and transfers, securitisation, financial assets sold under repurchase agreements and etc.. The Group applies significant judgement in assessing whether it has transferred these financial assets which qualify for a full or partial de-recognition.

    Where the Group enters into structured transactions by which it transferred financial asset to structured entities, the Group analyses whether the substance of the relationship between the Group and these structured entities indicates that it controls these structured entities to determine whether the Group needs to consolidate these structured entities. This will determine whether the following de-recognition analysis should be conducted at the consolidated level or at the entity level from which the financial assets was transferred.

    The Group analyses the contractual rights and obligations in connection with such transfers to determine whether the de-recognition criteria are met based on the following considerations:

    whether it has transferred the rights to receive contractual cash flows from the financial assets or the transfer qualified for the “pass through” of those cash flows to independent third parties;
    the extent to which the associated risks and rewards of ownership of the financial assets are transferred by using appropriate models. Significant judgement is applied in the Group’s assessment with regard to the parameters and assumptions applied in the models, estimated cash flows before and after the transfers, the discount rates used based on current market interest rates, variability factors considered and the allocation of weightings in different scenarios;
    where the Group neither retained nor transferred substantially all of the risks and rewards associated with their ownership, the Group analyses whether the Group has relinquished its controls over these financial assets, and if the Group has continuing involvement in these transferred financial assets.

    (j) Consolidation of structured entities

    The Group makes significant judgement to assess whether or not to consolidate structured entities. When performing this assessment, the Group:

    assesses its contractual rights and obligations in light of the transaction structures, and evaluates the Group’s power over the structured entities;
    performs independent analyses and tests on the variable returns from the structured entities, including but not limited to commission income and asset management fees earned, retention of residual income, and, if any, liquidity and other support provided to the structured entities; and
    assesses its ability to exercise its power to influence the variable returns assessed whether the Group acts as a principal or an agent through analysis of the scope of the Group’s decision-making authority, remuneration entitled, other interests the Group holds, and the rights held by other parties.

    (k) Metallurgical Corporation of China (“MCC”) claim

    MCC were appointed as the EPC (engineering, procurement and construction) contractor for the processing area and related facilities at the Group’s Sino Iron project in Western Australia (“Sino Iron Project”). The fixed price contract amount was US$3.4 billion.

    On 30 January 2013, MCC announced that it had incurred costs over the value of the contract and had provided additional funding of US$858 million to MCC Mining (Western Australia) Pty Ltd. (“MCC WA”), its wholly owned subsidiary company responsible for delivering MCC’s obligations under the contract.

    As at the date of issuance of the consolidated financial statements MCC has not claimed any additional costs from Sino Iron Pty Ltd. (“Sino Iron”) or its subsidiary companies, other than minor contract variations in the normal course of operations, and the Group believes it has satisfied all of its obligations under the contract.

    Under the contract, the Group has a right to claim liquidated damages from MCC WA for certain delays in the completion of their project scope at a daily amount of 0.15% of the value of the main contract (approximately US$5 million per day, with a cap of approximately US$530 million in total). As at balance sheet date the cumulative days delay that has been incurred has resulted in the contractual cap to the liquidated damages being reached.

    As set out in the Company’s announcement dated 24 December 2013, Sino Iron and MCC WA entered into a supplemental contract pursuant to which Sino Iron will take over the management of the construction and commissioning of the remaining four production lines of the Sino Iron Project. An independent audit will opine on various matters including the contract price for the hand over pursuant to the supplemental contract and related fees and expenses, the value of the supporting services provided by Sino Iron to MCC WA in carrying out its responsibilities under the contract, the extent of the works completed by MCC WA in respect of the first two production lines, and the liability of MCC WA in respect of the extensive delays on completion of the works under the contract. By reference to such findings of the independent audit, Sino Iron and MCC WA expect to enter into further negotiations to determine the amount of liabilities to be borne between the parties. Outcomes are not yet known as at 31 December 2016.

    (l) Mineralogy Pty Ltd (“Mineralogy”) disputes

    Each of Sino Iron and Korean Steel Pty Ltd. (“Korean Steel”), subsidiary companies of the Company, is a party to a Mining Right and Site Lease Agreement (“MRSLA”) with Mineralogy. Among other things, those agreements, together with other project agreements, provide Sino Iron and Korean Steel the right to construct and operate the Sino Iron Project and take two billion tonnes of magnetite ore.

    A number of disputes have arisen in relation to the MRSLAs and associated agreements, a number of which are described below. The Group intends to contest all claims vigorously.

    Option Agreement Dispute
    The Company is a party to an Option Agreement with Mineralogy and Mr Clive Palmer, pursuant to which it has options to acquire up to four further companies, each holding the right to mine one billion tonnes of magnetite ore in the vicinity of the Sino Iron Project. The Company exercised the first option under the Option Agreement on 13 April 2012. Following the exercise of the first option, Mineralogy alleged that the Option Agreement had been repudiated by the Company, purported to accept that repudiation and stated that the Option Agreement was at an end.

    The Company (and its affected subsidiaries, Sino Iron and Korean Steel) commenced legal proceedings in relation to the dispute in the Supreme Court of Western Australia. On 30 September 2015, the Court made the declarations sought by the Company, including that the Company had not repudiated the Option Agreement as initially asserted by Mineralogy and Mr Palmer.

    Notwithstanding the making of these declarations, Mineralogy has not taken the action necessary to permit completion of the transaction resulting from the Company’s exercise of the first option under the Option Agreement. On 31 March 2016, the Company, Sino Iron and Korean Steel commenced a proceeding in the Supreme Court of Western Australia to seek orders compelling Mineralogy to take the steps necessary to complete the transfer of a further company having the right to mine one billion tonnes of magnetite ore. No trial date has been set for this proceeding.

    Royalties Disputes
    The MRSLAs provide that Sino Iron and Korean Steel must pay a royalty to Mineralogy, a component of which (“Royalty Component B”) is payable on products produced and calculated by reference to prevailing annual published FOB prices for certain iron ore products (“annual benchmark prices”). Annual benchmark prices no longer exist, and Sino Iron and Korean Steel’s position is that this means that Royalty Component B is no longer able to be calculated using the formula in the MRSLAs. Mineralogy denied that this was the case, and pursued proceedings in the Supreme Court of Western Australia seeking declarations (among other things) that Royalty Component B can be calculated.

    Mineralogy’s latest amended statement of claim was filed on 25 January 2017. In its current statement of claim, Mineralogy seeks payment of sums for Royalty Component B, damages for breach of the MRSLAs or a declaration that the MRSLAs be rectified, among other things. Mineralogy has withdrawn all claims that the MRSLAs have been terminated.

    The current defence and counterclaim of Korean Steel, Sino Iron and the Company, which was filed on 6 February 2017, pleads that the provisions concerning Royalty Component B can be severed from the remainder of the MRSLAs (which otherwise remain in force according to their terms). If Royalty Component B cannot be severed, then, in addition to other arguments, they contend that the parties to the MRSLAs must negotiate a new Royalty Component B formula in good faith, or alternatively, Korean Steel and Sino Iron must pay a fair and reasonable royalty to Mineralogy, such royalty to be determined by the Court having regard to the relevant circumstances.

    In November 2015, Mineralogy filed an application for an urgent interlocutory mandatory injunction requiring Sino Iron, Korean Steel and the Company (together, for the purpose of this application, the “CITIC Parties”) to pay to Mineralogy royalties under the MRSLAs. The application was heard in December 2015 by Justice Tottle, who dismissed the application. Mineralogy appealed Justice Tottle’s decision at first instance and on 27 June 2016 the appeal was unanimously allowed and orders made for the injunction application to be remitted for rehearing.

    The remitted injunction application was heard in October 2016 by Justice Kenneth Martin and judgement was delivered in Mineralogy’s favour in December 2016. Pursuant to Justice Martin’s judgement, his Honour made injunction orders to the effect that Sino Iron and Korean Steel were to pay on an interlocutory basis pending final judgement (a) by 30 January 2017, into Court the sum of US$10,690,270.50 (or the Australian dollar equivalent) to abide further orders of the Court, and to Mineralogy, the same sum; (b) subject to Mineralogy demonstrating it is ready, willing and able to perform its obligations under the MRSLAs and amending its Statement of Claim to withdraw claims the MRSLAs had been terminated, by 28 February 2017, into Court the sum of US$29,801,812.50, and to Mineralogy, the same sum; and (c) in respect of each quarter from 30 June 2016 in arrears, into Court, amounts assessed as a payment of US$6 per DMT of iron ore concentrate shipped, the payments in respect of the quarters ended September 2016 and December 2016 to be paid by 31 March 2017.

    The CITIC Parties have appealed the injunction orders made by Justice Martin for Korean Steel and Sino Iron to pay monies to Mineralogy and into Court. The appeals were heard on 8 March 2017 and judgement was reserved. The orders to pay amounts to Mineralogy have been stayed until after the delivery of such judgement.

    The trial in this proceeding is provisionally listed to commence on 14 June 2017 and to run for 15 sitting days.

    The MRSLAs contain a clause stating that, unless certain exceptions apply, each of Korean Steel and Sino Iron is required to pay an amount to Mineralogy if either of them produced less than six million tonnes of saleable product by March 2013 (the “Minimum Production Royalty”). In August 2015, Queensland Nickel Pty Ltd. (“Queensland Nickel”) commenced a proceeding in the Supreme Court of Queensland alleging that the non-payment of the Minimum Production Royalty to Mineralogy amounted to unconscionable conduct by the Company, Sino Iron and Korean Steel, and that the Company, Sino Iron Holdings Pty Ltd. and individual officers of the Company and its subsidiaries (together, for the purpose of this proceeding, the “CITIC Parties”) were knowingly concerned in the alleged contraventions. Queensland Nickel sought damages for losses suffered as a consequence of Mineralogy being unable to advance funds to it due to such non-payment. In September 2015, the CITIC Parties filed a strike out application in the proceeding. At a hearing on 16 March 2016, the Court ordered that Queensland Nickel be removed as plaintiff and QNI Resources Pty Ltd. and QNI Metals Pty Ltd. be substituted as plaintiffs in the proceeding. On 23 March 2016, the Court upheld the strike out application brought by the CITIC Parties and dismissed the proceeding. QNI Resources Pty Ltd. and QNI Metals Pty Ltd. appealed the decision. However, they subsequently withdrew their appeal and, on 1 September 2016, the appeal was discontinued.

    Port Dispute
    Sino Iron and Korean Steel have developed port infrastructure at the Port of Cape Preston to be used to export product from the Sino Iron Project. Mineralogy commenced legal proceedings in the Federal Court of Australia seeking declarations that the port infrastructure has vested in it, that it is entitled to possession, control and ownership of that infrastructure and that the Facilities Deeds between the parties which regulate usage of the port infrastructure have been terminated by it.

    The matter was heard by the Federal Court of Australia in June 2015. The Court’s reasons for decision were handed down in August 2015. The Court refused to grant any of the relief sought by Mineralogy. The effect of the decision was to preserve the status quo in relation to the operation of the port facilities which continue to be operated by or on behalf of Sino Iron and Korean Steel. Mineralogy appealed the decision at first instance. The appeal was heard from 9 to 12 May 2016. Judgement was reserved.

  • 4. Taxation

    The statutory income tax rate of the Company and its subsidiaries located in Hong Kong for the year ended 31 December 2016 is 16.5% (2015: 16.5%).

    Except for the preferential tax treatments, the income tax rate applicable to the Group’s other subsidiaries in Mainland China for the year ended 31 December 2016 is 25% (2015: 25%).

    Taxation for other overseas subsidiaries is charged at the rates of taxation prevailing in the countries/jurisdiction in which the overseas subsidiaries operate.

  • 5. Revenue

    As a multi-industry conglomerate, the Group is principally engaging in financial services, resources and energy, manufacturing, engineering contracting, real estate and other businesses.

    For financial services segment, revenue mainly comprises net interest income, net fee and commission income and net trading gain (Notes 5(a), 5(b) and 5(d)). For non-financial services segment, revenue mainly comprises total invoiced value of sales of goods, services rendered to customers and revenue from construction contracts (Note 5(c)).

    The Group’s customer base is diversified and there is no single customer with which transactions have exceeded 10% of the Group’s revenue.

    (a) Net interest income

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    Interest income arising from:    
    Deposits with central banks, banks and non-bank financial institutions 11,179 11,323
    Placements with banks and non-bank financial institutions 4,363 3,561
    Financial assets held under resale agreements 1,078 4,979
    Investments classified as receivables 54,275 57,400
    Loans and advances to customers and other parties 155,252 170,211
    Investments in debt securities 25,274 22,654
    Others 6 23
    251,427 270,151
    Interest expenses arising from:
    Borrowing from central banks (3,143) (1,238)
    Deposits from banks and non-bank financial institutions (38,172) (44,613)
    Placements from banks and non-bank financial institutions (1,721) (928)
    Financial assets sold under repurchase agreements (1,007) (699)
    Deposits from customers (64,577) (80,259)
    Debt instruments issued (16,438) (10,439)
    Others (446) (92)
    (125,504) (138,268)
    Net interest income 125,923 131,883

    (b) Net fee and commission income

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    Consultancy and advisory fees 6,821 8,685
    Bank card fees 22,561 16,708
    Settlement and clearing fees 1,633 2,174
    Commission for wealth management services 8,323 7,287
    Agency fees and commission 7,197 4,634
    Guarantee fees 2,790 3,940
    Trustee commission and fees 7,997 7,131
    Others 874 846
    58,196 51,405
    Fee and commission expenses (3,618) (2,506)
    Net fee and commission income 54,578 48,899

    (c) Sales of goods and services

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    (Restated)
    Sales of goods 156,528 149,628
    Services rendered to customers 26,895 27,370
    Revenue from construction contracts 9,869 12,882
    193,292 189,880

    (d) Other revenue

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    Net trading gain (note (i)) 4,153 4,622
    Net gain on investment assets under financial services segment 2,022 19,557
    Others 854 469
    7,029 24,648
    (i) Net trading gain
      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    Trading profit/(loss):
    – debt securities and certificates of deposits 1,358 2,300
    – foreign currencies 2,705 2,865
    – derivatives 90 (543)
    4,153 4,622
  • 6. Costs of sales and services

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    (Restated)
    Costs of goods sold 139,137 129,884
    Costs of services rendered 18,172 18,179
    Costs of construction contracts 8,311 10,283
    165,620 158,346
  • 7. Other net income

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    (Restated)
    Net gain on disposal of subsidiaries, associates and joint ventures 2,483 1,513
    Net gain on financial assets under non-financial services segment 1,889 5,856
    Commissions income, net foreign exchange gain and others 2,919 726
    7,291 8,095
  • 8. Impairment losses

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    (Restated)
    Impairment losses charged on/(reversed from):
    – deposits and placements with banks and non-bank financial institutions 40
    – trade and other receivables 6,706 4,098
    – amounts due from customers for contract work (795)
    – inventories 587 593
    – loans and advances to customers and other parties (Note 25(d)) 53,603 47,827
    – available-for-sale financial assets 416 (5)
    – held-to-maturity investments 2 (4)
    – investments classified as receivables 1,068 4,647
    – interests in associates 2 476
    – interests in joint ventures 11
    – fixed assets (note) 10,255 17,445
    – intangible assets (note) 742 2,233
    – others 953 1,878
    73,590 79,188

    Note:
    Iron Ore Project

    The Group’s Iron Ore Project comprises the Sino Iron Project in Australia and its associated marketing operation in Singapore. Whenever events or circumstances indicate impairment may have occurred, the Group tests whether assets attributable to the Group’s Iron Ore Projects have suffered any impairment.

    The recoverable amount of the Sino Iron Project is based on the fair value less costs of disposal methodology which is based on cash flow projections that incorporate best estimates of selling prices, ore grades, exchange rates, production rates, future capital expenditure and production costs over the life of the mine. In line with normal practice in the mining industry, the cash flow projections are based on long term mine plans covering the expected life of the operation. Therefore, the projections cover periods well in excess of five years. Assumptions about selling prices, operating and capital costs, exchange rates, quantity of resources and discount rates are particularly important; the determination of the recoverable amount is relatively sensitive to changes in these important assumptions.

    In accordance with the Group’s accounting policy, management has identified one CGU, the Sino Iron Project that had indicators of impairment at 31 December 2016, including the reduction in the iron ore price outlook. As a result the Group assessed the recoverable amount of the Sino Iron Project. For the purposes of testing for impairment, the carrying amount of the Sino Iron Project is compared with its recoverable amount. In accordance with the Group’s accounting policy, recoverable amount is assessed as the higher of fair value less costs of disposal and value in use. The Group has adopted fair value less costs of disposal methodology in its assessment, using a nominal discounted cash flow model based on the mine life of the Sino Iron Project.

    In the model a discount rate of 9.5% is used. Iron ore price (including base price, premium on product grade and adjustment on freight) and AU$:US$ exchange rate assumptions are estimated by management with reference to external market forecasts sourced from a range of industry experts. The operating expenditure and capital expenditure for years 2017 to 2019 are forecast based on management’s best estimates of costs and expenditures. Beyond the above three-year forecast period, operating expenditure and capital expenditure are forecast to remain relatively stable increasing primarily with inflation.

    The impairment testing carried out at 31 December 2016 resulted in a total impairment charge of US$1,302 million (approximately HK$10,152 million) (2015: US$2,213 million (approximately HK$17,261 million)) being recognised in the consolidated income statement, reflecting a softening in forecast iron ore prices. The impairment charge was allocated as follows:

    • Property, plant & equipment US$1,208 million (approximately HK$9,417 million) (2015: US$1,979 million (approximately HK$15,436 million))
    • Intangible assets US$94 million (approximately HK$735 million) (2015: US$234 million (approximately HK$1,825 million))
    The fair value of CGU must be estimated for recognition and measurement or for disclosure purposes.

    The disclosure is based on the following fair value measurement hierarchy:
    • Quoted prices (unadjusted) in active markets for identical or similar CGU (level 1);
    • Inputs other than quoted prices included within level that are observable for the CGU, either directly (as prices) or indirectly (derived from prices) (level 2); and
    • Inputs for the CGU that are not based on observable market data (unobservable inputs)(level 3 inputs).
    The CGU’s fair value hierarchy is Level 3.
  • 9. Net finance charges

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    (Restated)
    Finance costs
    – Interest on bank loans and other loans 3,486 4,533
    – Interest on debt instruments issued and
    other interest expenses
    5,718 5,592
    9,204 10,125
    Less: interest expense capitalised* (576) (2,138)
    8,628 7,987
    Other finance charges 60 1,252
    8,688 9,239
    Finance income (1,552) (2,358)
    7,136 6,881

    * Capitalisation rates applied to funds borrowed are 1.30% – 5.70% per annum for the year ended 31 December 2016 (2015: capitalisation rate of 2.12% – 6.86%).

  • 10. Profit before taxation

    Profit before taxation is arrived at after charging below costs and expenses in cost of sales and services and other operating expenses:

    (a) Staff costs

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    (Restated)
    Salaries and bonuses 33,993 32,385
    Contributions to defined contribution retirement schemes 4,326 4,204
    Others 7,753 7,838
    46,072 44,427

    (b) Other items

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    (Restated)
    Amortisation 2,690 2,466
    Depreciation 9,547 9,308
    Operating lease charges: minimum lease payments 5,424 5,798
    Tax and surcharges 5,929 14,225
    Property management fees 1,290 1,050
    Non-operating expenses 1,363 1,238
    Professional fees (other than auditors’ remuneration) 997 885
    Auditors’ remuneration
    – Audit services 156 155
    – Non-audit services 56 23
    27,452 35,148
  • 11. Income tax expense

    (a) Income tax expense in the income statement

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    (Restated)
    Current tax – Mainland China
    Provision for enterprise income tax 22,337 23,716
    Land appreciation tax 328 218
    22,665 23,934
    Current tax – Hong Kong
    Provision for Hong Kong profits tax 1,524 959
    Current tax – Overseas
    Provision for the year 310 791
    24,499 25,684
    Deferred tax
    Origination and reversal of temporary differences (6,106) (6,260)
    18,393 19,424

    The particulars of the applicable income tax rates are disclosed in Note 4.

    (b) Reconciliation between tax expense and accounting profit at applicable tax rates

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    (Restated)
    Profit before taxation 70,723 78,645
    Less: Share of (profits)/loss of
    – associates (2,323) (4,741)
    – joint ventures (2,876) 155
      65,524 74,059
    Notional tax on profit before taxation calculated at statutory tax rate of 16.5% 10,811 12,220
    Effect of different tax rates in other jurisdictions 4,485 5,596
    Tax effect of unused tax losses not recognised 397 428
    Tax effect of non-deductible expenses 3,054 2,121
    Tax effect of non-taxable income (1,688) (1,675)
    Others 1,334 734
    Actual tax expense 18,393 19,424
  • 12. Benefits and interests of directors

    (a) Directors’ emoluments

    Emoluments paid or receivable in respect of a person’s services as a director, whether of the Company or its subsidiary undertaking for the year ended 31 December 2016 are set out as follows:

    Notes:
    • The emoluments for the year ended 31 December 2016 in respect of Mr Chang Zhenming, Mr Wang Jiong, Ms Li Qingping and Mr Pu Jian have not been finalised in accordance with the regulations of the relevant local authorities. Further disclosure of which will be made as and when the relevant approval is obtained.
    • Changes in directors during the year ended 31 December 2016:
      • Ms Cao Pu retired from the position as non-executive director in March 2016.
      • Mr Song Kangle and Mr Li Rucheng were appointed as non-executive directors, and Mr Paul Chou Man Yiu was appointed as an independent non-executive director in March 2016.
      • Ms Yan Shuqin was appointed as a non-executive director, and Mr Yu Zhensheng resigned from the position as non-executive director in April 2016.
      • Mr Li Rucheng resigned from the position as non-executive director in December 2016.
    • Emoluments of newly appointed and former directors were paid by the Company for the period in which they served as directors.

    Emoluments paid or receivable in respect of a person’s services as a director, whether of the Company or its subsidiary undertaking for the year ended 31 December 2015 are set out as follows:

    Notes:
    • The emoluments for the year ended 31 December 2015 in respect of Mr Chang Zhenming, Mr Wang Jiong, Ms Li Qingping and Mr Pu Jian were finalised in accordance with the regulations of the relevant local authorities.
    • Changes in directors during the year ended 31 December 2015:
      • Mr Dou Jianzhong resigned from the position as executive director in May 2015.
      • Mr Alexander Reid Hamilton retired from the position as independent non-executive director in June 2015.
      • Mr Yang Xiaoping was appointed as a non-executive director, and Mr Noriharu Fujita was appointed as an independent non- executive director in August 2015.
      • Ms Li Qingping and Mr Pu Jian were appointed as executive directors, and Mr Zhang Jijing retired from the position as executive director in December 2015.
    • Emoluments of newly appointed and former directors were paid by the Company for the period in which they served as directors.

    (b) Other benefits and interests

    For the year ended 31 December 2016, no retirement benefits, payments or benefits in respect of termination of directors’ services were paid or made, directly or indirectly, to the directors; nor are any payable (2015: None). No consideration was provided to or receivable by third parties for making available directors’ services (2015: None). There are no loans, quasi-loans or other dealings in favour of the directors, their controlled bodies corporate and connected entities (2015: None).

    No director of the Company had a material interest, directly or indirectly, in any significant transactions, arrangements and contracts in relation to the Company’s business to which the Company was or is a party that subsisted at the end of the year or at any time during the year ended 31 December 2016 (2015: None).

  • 13. Individuals with highest emoluments

    For the year ended 31 December 2016, none of the five highest paid individuals are directors (2015: none) whose emoluments are disclosed in Note 12. The aggregate of the emoluments in respect of these five individuals (2015: five) are as follows:

    The emoluments of the five individuals (2015: five) with the highest emoluments are within the following bands:

  • 14. Dividends

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    2015 Final dividend paid: HK$0.20 (2014: HK$0.20) per share 5,818 4,981
    2016 Interim dividend paid: HK$0.10 (2015: HK$0.10) per share 2,909 2,909
    2016 Final dividend proposed: HK$0.23 (2015: HK$0.20) per share 6,691 5,818
  • 15. Earnings per share

    The calculation of basic earnings per share and diluted earnings per share are based on the profit attributable to ordinary shareholders of the Company of HK$43,119 million for the year ended 31 December 2016 (2015: HK$41,812 million), calculated as follows:

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    Profit attributable to ordinary shareholders of the Company arising from:
    – Continuing operations 32,782 40,501
    – Discontinued operations 10,337 1,311
    43,119 41,812
    Weighted average number of ordinary shares (in million):
    Issued ordinary shares as at 1 January 29,090 24,903
    Weighted average number of newly issued ordinary shares (Note 44(a)) 1,611
    Weighted average number of ordinary shares as at 31 December (basic) 29,090 26,514
    Impact of issued convertible preferred shares (Note 44(a)) 100
    Weighted average number of ordinary shares as at 31 December (diluted) 29,090 26,614

    Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue to assume conversion of all dilutive potential ordinary shares. As at 31 December 2016, there are no share options or other equity securities of the Company in issue which if exercised would have a dilutive effect on the issued ordinary share capital as at 31 December 2016. For the year ended 31 December 2015, the Company’s dilutive potential ordinary shares included convertible preferred shares issued at 3 August 2015 (Note 44(a)), assuming conversion of convertible preferred shares into ordinary shares at 3 August 2015.

  • 16. Other comprehensive loss

    (a) Tax effects relating to each component of other comprehensive loss

    (b) Components of other comprehensive loss, including reclassification adjustments

  • 17. Segment reporting

    The Group has presented six reportable operating segments which are financial services, resources and energy, manufacturing, engineering contracting, real estate and others. Reportable segments are identified based on operating segments which are determined based on the structure of the Group’s internal organisation, management requirements and internal reporting system. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, whose financial performance is regularly reviewed by the board of directors to make decisions about resource to be allocated to the segment and assess its performance, and for which financial information regarding financial position, financial performance and cash flows is available. The details of these six reportable segments are as follows:

    Financial services: this segment includes banking, trust, asset management, securities and insurance services.
    Resources and energy: the major businesses in this segment include exploration, processing and trading of resources and energy products, including crude oil, coal and iron ore.
    Manufacturing: this segment includes manufacturing of special steels, heavy machineries, aluminium wheels and other products.
    Engineering contracting: this segment provides contracting and design services for infrastructure, real estate and industrial projects, etc.
    Real estate: this segment includes development, sale and holding of properties.
    Others: others include various businesses including investment and operation of infrastructures, telecommunication services, motor and food and consumer products business, commercial aviation services, publication services and others.

    (a) Segment results, assets and liabilities

    For the purposes of assessing segment performance and allocating resources among segments, the board of directors monitors the results, assets and liabilities, revenue and expenses attributable to each reportable segment on the following bases:

    Segment assets are those assets that are attributable to a segment, and segment liabilities are those liabilities that are attributable to a segment.

    Revenue and expenses are allocated to the reportable segments with reference to revenue generated by those segments and the expenses incurred by those segments or which otherwise arise from the depreciation of assets attributable to those segments.

    The measure used for reporting segment profit is “profit for the year”. To arrive at segment results, the Group’s profit is further adjusted for items not specifically attributed to individual segments, such as share of results of associates and joint ventures.

    Inter-segment pricing is based on similar terms as those available to other external parties.

    Information regarding the Group’s reportable segments as provided to the board of directors for the purposes of resources allocation and assessment of segment performance for the years ended 31 December 2016 and 2015 is set out below:

      For the year ended 31 December 2016
    Financial
    services
    HK$ million
    Resources
    and energy
    HK$ million
    Manufacturing
    HK$ million
    Engineering
    contracting
    HK$ million
    Real estate
    HK$ million
    Others
    HK$ million
    Operation
    management
    HK$ million
    Elimination
    HK$ million
    Total
    HK$ million
    Continuing operations
    Revenue from external customers 187,537 50,254 62,350 11,023 4,900 64,723 35 380,822
    Inter-segment revenue (324) 3,527 271 315 111 1,039 6 (4,945)
    Reportable segment revenue 187,213 53,781 62,621 11,338 5,011 65,762 41 (4,945) 380,822
    Share of profits/(losses) of
    associates, net of tax
    2,198 218 79 41 768 (986) 5 2,323
    Share of profits of joint
    ventures, net of tax
    809 657 858 552 2,876
    Finance income (Note 9) 399 225 248 375 132 2,521 (2,348) 1,552
    Finance costs (Note 9) (2,086) (716) (95) (335) (1,476) (6,425) 2,445 (8,688)
    Depreciation and amortisation (Note 10(b)) (3,187) (2,287) (3,547) (157) (250) (2,755) (54) (12,237)
    Impairment losses (Note 8) (61,845) (10,538) (831) 775 (556) (595) (73,590)
    Profit/(loss) before taxation 71,691 (9,243) 2,343 1,969 3,676 4,947 (4,249) (411) 70,723
    Income tax (16,193) 2,721 (1,033) (296) (1,412) (1,729) (449) (2) (18,393)
    Profit/(loss) for the year from
    continuing operations
    55,498 (6,522) 1,310 1,673 2,264 3,218 (4,698) (413) 52,330
    Profit for the year from
    discontinued operations
    10,309 10,309
    Profit/(loss) for the year 55,498 (6,522) 1,310 1,673 12,573 3,218 (4,698) (413) 62,639
    Attributable to:
    – Ordinary shareholders of the Company 38,406 (6,899) 1,740 1,675 12,111 1,987 (5,488) (413) 43,119
    Continuing operations 38,406 (6,899) 1,740 1,675 1,774 1,987 (5,488) (413) 32,782
    Discontinued operations 10,337 10,337
    – Non-controlling interests and
    holders of perpetual capital
    securities
    17,092 377 (430) (2) 462 1,231 790 19,520
    Continuing operations 17,092 377 (430) (2) 490 1,231 790 19,548
    Discontinued operations (28) (28)
    Reportable segment assets 6,729,902 135,784 96,112 36,796 143,596 113,090 150,506 (167,791) 7,237,995
    Including:
    Interests in associates 32,128 11,719 950 465 31,832 6,959 72 84,125
    Interests in joint ventures 3,999 2,906 9,149 3,333 19,387
    Reportable segment liabilities 6,237,647 160,848 49,474 26,579 94,244 70,059 167,944 (264,651) 6,542,144
    Including:
    Bank and other loans 2,964 41,398 15,088 1,276 10,721 32,863 21,749 (13,240) 112,819
    Debt instruments issued 432,579 1,453 4,242 4,682 100,937 543,893
      For the year ended 31 December 2015 (Restated)
    Financial
    services
    HK$ million
    Resources
    and energy
    HK$ million
    Manufacturing
    HK$ million
    Engineering
    contracting
    HK$ million
    Real estate
    HK$ million
    Others
    HK$ million
    Operation
    management
    HK$ million
    Elimination
    HK$ million
    Total
    HK$ million
    Continuing operations
    Revenue from external customers 205,378 45,664 60,077 14,676 6,025 63,348 142 395,310
    Inter-segment revenue 649 2,287 284 100 90 866 (4,276)
    Reportable segment revenue 206,027 47,951 60,361 14,776 6,115 64,214 142 (4,276) 395,310
    Share of profits/(losses) of
    associates, net of tax
    4,350 (430) 92 37 232 441 19 4,741
    Share of profits/(losses) of joint
    ventures, net of tax
    357 (1,585) (69) 315 827 (155)
    Finance income (Note 9) 435 369 431 323 58 3,668 (2,926) 2,358
    Finance costs (Note 9) (1,837) (861) (135) (578) (1,649) (8,000) 3,821 (9,239)
    Depreciation and amortisation (Note 10(b)) (3,087) (1,821) (3,868) (135) (165) (2,667) (31) (11,774)
    Impairment losses (Note 8) (55,784) (21,764) (560) (7) (27) (946) (105) 5 (79,188)
    Profit/(loss) before taxation 89,912 (22,997) 3,582 3,488 3,448 4,937 (4,064) 339 78,645
    Income tax (19,729) 4,679 (958) (887) (628) (1,337) (1,008) 444 (19,424)
    Profit/(loss) for the year from
    continuing operations
    70,183 (18,318) 2,624 2,601 2,820 3,600 (5,072) 783 59,221
    Profit for the year from
    discontinued operations
    1,472 1,472
    Profit/(loss) for the year 70,183 (18,318) 2,624 2,601 4,292 3,600 (5,072) 783 60,693
    Attributable to:
    – Ordinary shareholders of the Company 52,753 (17,251) 2,496 2,601 4,137 2,501 (6,208) 783 41,812
    Continuing operations 52,753 (17,251) 2,496 2,601 2,826 2,501 (6,208) 783 40,501
    Discontinued operations 1,311 1,311
    – Non-controlling interests and
    holders of perpetual capital
    securities
    17,430 (1,067) 128 155 1,099 1,136 18,881
    Continuing operations 17,430 (1,067) 128 (6) 1,099 1,136 18,720
    Discontinued operations 161 161
    Reportable segment assets 6,211,176 141,693 97,208 42,245 232,809 113,738 132,562 (168,122) 6,803,309
    Including:
    Interests in associates 28,821 11,128 3,143 217 4,036 3,245 73 50,663
    Interests in joint ventures 3,794 2,628 9,582 6,697 22,701
    Reportable segment liabilities 5,777,576 147,960 47,529 30,467 160,689 73,651 155,973 (253,705) 6,140,140
    Including:
    Bank and other loans 1,339 42,562 16,521 1,282 85,618 37,672 12,586 (50,359) 147,221
    Debt instruments issued 345,120 446 5,033 4,750 5,283 89,804 (664) 449,772

    (b) Geographical information

    An analysis of the Group’s revenue and total assets by geographical area are as follows:

      Revenue from external customers
    For the year ended 31 December
    Reportable segment assets
    As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    (Restated)
    2016
    HK$ million
    2015
    HK$ million
    Mainland China 324,402 340,348 6,682,751 6,312,332
    Hong Kong and Macau 26,996 26,365 447,065 380,549
    Overseas 29,424 28,597 108,179 110,428
    380,822 395,310 7,237,995 6,803,309
  • 18. Cash and deposits

      As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    Cash 8,867 8,827
    Bank deposits 50,263 63,166
    Balances with central banks (note (i)):
    – Statutory deposit reserve funds (note (ii)) 520,751 519,487
    – Surplus deposit reserve funds (note (iii)) 65,795 75,983
    – Fiscal deposits (note (iv)) 3,989 4,532
    – Foreign exchange reserves (note (v)) 21,090 4,078
    Deposits with banks and non-bank financial institutions 256,544 125,542
    Less: allowance for impairment losses on deposits with banks and
    non-bank financial institutions (Note 45)
    (40)
    927,259 801,615

    Notes:

    • The balances with central banks represent deposits placed with central banks by China CITIC Bank Corporation Limited (“CITIC Bank”) and CITIC Finance Company Limited (“CITIC Finance”).
    • CITIC Bank and CITIC Finance place statutory deposit reserves with the People’s Bank of China and overseas central banks where they have operations. The statutory deposit reserves are not available for use in their daily business.

      As at 31 December 2016, the statutory deposit reserve placed by CITIC Bank with the People’s Bank of China was calculated at 15% (31 December 2015: 15%) of eligible RMB deposits for domestic branches of CITIC Bank and at 15% (31 December 2015: 0%) of eligible RMB deposits from overseas financial institutions respectively. In addition, CITIC Bank is required to deposit an amount equivalent to 5% (31 December 2015: 5%) of its foreign currency deposits from domestic branch customers as statutory deposit reserve as at 31 December 2016.

      As at 31 December 2016, the statutory RMB deposit reserve rate applicable to Zhejiang Lin’an CITIC Rural Bank Corporation Limited, a subsidiary of CITIC Bank, was at 9% (31 December 2015: 9.5%).

      The amounts of statutory deposit reserve funds placed with the central banks of overseas countries are determined by respective jurisdictions. The statutory deposit reserve funds are interest bearing except for the foreign currency reserve funds deposits placed with the People’s Bank of China.

      As at 31 December 2016, the statutory deposit reserve placed by CITIC Finance with the People’s Bank of China was calculated at 7% (31 December 2015: 7.5%) of eligible RMB deposits from the customers of CITIC Finance. As at 31 December 2016, CITIC Finance is also required to deposit an amount equivalent to 5% (31 December 2015: 5%) of its foreign currency deposits from the customers as statutory deposit reserve.
    • The surplus deposit reserve funds are maintained with the People’s Bank of China for the purposes of clearing.
    • Fiscal deposits placed with the People’s Bank of China are not available for use in the Group’s daily operations, and are non-interest bearing.
    • The foreign exchange reserve is maintained with the People’s Bank of China in accordance with the related notice issued by the People’s Bank of China on 31 August 2015. The reserve is payable on a monthly basis at 20% (31 December 2015: 20%) of the total contract amount of customers driven forward transactions in the previous month. Such foreign exchange reserve is non-interest bearing and will be repayable in 12 months according to the notice.
    • In addition to the statutory deposit reserve funds, fiscal deposits and foreign exchange reserves, HK$5,517 million (31 December 2015: HK$7,416 million) included in cash and deposits as at 31 December 2016 were restricted in use. They mainly include guaranteed deposits.
  • 19. Placements with banks and non-bank financial institutions

      As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    Banks 32,335 49,563
    Non-bank financial institutions 154,601 92,222
    186,936 141,785
    Less: allowance for impairment losses (Note 45) (9) (10)
    186,927 141,775
    Analysed by remaining maturity:
    – Within 1 month 64,619 68,561
    – Between 1 month and 1 year 122,281 73,168
    – Over 1 year 27 46
    186,927 141,775
  • 20. Financial assets at fair value through profit or loss

    The remaining term to maturity of financial assets at fair value through profit or loss does not represent the Group’s intended holding period.

    (a) Debt trading financial assets

    (b) Certificates of interbank deposit

    (c) Investment funds

    (d) Trading equity investments

    (e) Financial assets designated at fair value through profit or loss

    Note:
    Debt securities traded on the China Domestic Inter-bank Bond Market are included in “Listed outside Hong Kong”.

  • 21. Derivative financial instruments

    The Group’s subsidiaries under the financial services segment act as an intermediary to offer derivative products including forwards and swap of interest rate and currency to its customers. These derivative positions are managed through entering back-to-back deals with external parties to ensure the remaining exposures are within acceptable risk levels. Meanwhile, derivatives are also used for proprietary trading purposes.

    Subsidiaries under non-financial services segment of the Group enter into forward and swap contracts to hedge their exposure to fluctuations in foreign exchange rates, commodity prices and interest rates.

    The following tables and notes provide an analysis of the nominal amounts of derivatives and the corresponding fair values as at the balance sheet date. The nominal amounts of the derivatives indicate the volume of transactions outstanding as at the balance sheet date; they do not represent amounts at risk. Hedging instruments are derivatives qualified for hedge accounting, and non-hedging instruments are derivatives not qualified for hedge accounting.

    (a) Nominal amount analysed by remaining maturity

    The remaining term to maturity of derivatives does not represent the Group’s intended holding period.

    (b) Credit risk weighted amounts

    The credit risk weighted amounts are solely in connection with the derivatives held by CITIC Bank, and have been computed in accordance with “Regulation Governing Capital of Commercial Banks (provisional)” promulgated by the China Banking Regulatory Commission in the year of 2012, and depends on the status of the counterparties and the maturity characteristics of the instruments including those customer-driven back-to-back transactions. As at 31 December 2016, the credit risk weighted amount for counterparty was HK$41,513 million (31 December 2015: HK$22,332 million).

    (c) Derivatives designated as hedging instruments

    (i) Fair value hedge

    Fair value hedge is adopted to hedge the risk that a financial instrument’s fair value will fluctuate because of changes in market interest rates or foreign exchange rates by using interest rate swaps or foreign currency forward contracts.

    (ii) Cash flow hedge

    Cash flow hedge is adopted to hedge the risk that a financial instrument’s cash flows will fluctuate because of changes in market interest rates, foreign exchange rates or commodity price by using foreign currency forward contracts, commodity forward contracts or interest rate swaps.

  • 22. Trade and other receivables

      As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    Trade and bills receivables (note (a)) 32,990 27,333
    Interest receivables (note (b)) 37,579 36,750
    Prepayments, deposits and other receivables (note (c)) 68,373 77,264
    138,942 141,347

    As at 31 December 2016, the amount of the Group’s prepayments, deposits and other receivables expected to be recovered or recognised as expense after more than one year is HK$14,243 million (31 December 2015: HK$16,502 million). The remaining trade and other receivables are expected to be recovered or recognised as expense within one year.

    (a) Trade and bills receivables

    (i) Ageing analysis

    As at the balance sheet date, the ageing analysis of trade and bills receivables of the Group based on invoice date and net of allowance for impairment losses is as follows:

      As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    Within 1 year 29,055 23,522
    Over 1 year 5,370 4,947
    34,425 28,469
    Less: allowance for impairment losses (Note 45) (1,435) (1,136)
    32,990 27,333

    Each business unit has its own defined credit policy that is specific to the respective business environment and market practice.

    (ii) Impairment of trade and bills receivables

    The movements in the allowance for impairment losses on trade and other receivables during the years ended 31 December 2016 and 2015 are disclosed in Note 45.

    As at 31 December 2016, the Group’s trade and bills receivables of HK$103 million (31 December 2015: HK$411 million) were individually determined to be impaired. These receivables mainly relate to customers which were in financial difficulties. It is assessed that a portion of such receivables is expected to be recovered. Consequently, specific allowance for impairment losses is recognised.

    (iii) Trade and bills receivables that are not impaired

    The ageing analysis of past due trade and bills receivables that are neither individually nor collectively considered to be impaired is as follows:

      As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    Less than 1 year past due 1,298 1,365
    Over 1 year past due 383 407
    1,681 1,772

    Receivables that are past due but not impaired are related to a number of third-party customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered to be fully recoverable.

    (b) Interest receivables

      As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    Interest receivables 41,949 39,297
    Less: allowance for impairment losses (Note 45) (4,370) (2,547)
    37,579 36,750

    (c) Prepayments, deposits and other receivables

      As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    Prepayments, deposits and other receivables 69,925 78,661
    Less: allowance for impairment losses (Note 45) (1,552) (1,397)
    68,373 77,264
  • 23. Inventories

      As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    Raw materials 4,294 3,104
    Work-in-progress 4,319 4,622
    Finished goods 15,063 13,318
    Properties:
    – Properties under development 16,684 86,927
    – Properties held-for-sale 5,472 18,460
    – Others 1,391 2,190
    Others 1,682 1,826
    48,905 130,447

    The analysis of the amount of inventories recognised as an expense and included in profit or loss is as follows:

      For the year ended 31 December
      2016
    HK$ million
    2015
    HK$ million
    Carrying amount of inventories sold 148,416 146,594
    Write-down of inventories (Note 45) 1,035 831
    Reversal of write-down of inventories (Note 45) (483) (145)
    148,968 147,280

    As at 31 December 2016, the Group’s inventories included an amount of HK$18,515 million expected to be recovered after more than one year (31 December 2015: HK$89,589 million).

    As at 31 December 2016, the carrying amount of restricted inventories of CITIC Resources Holdings Limited (“CITIC Resources”), a subsidiary of the Group, was HK$ Nil (31 December 2015: HK$270 million).

  • 24. Financial assets held under resale agreements

  • 25. Loans and advances to customers and other parties

    (a) Loans and advances

    (b) Loans and advances to customers and other parties analysed by type of security

    (c) Assessment method of allowance for impairment losses

    Notes:

    • Identified impaired loans and advances to customers and other parties include loans and advances for which objective evidence of impairment exists and which have been assessed as bearing significant impairment losses which are assessed individually or collectively (portfolios of homogeneous loans and advances).
    • As at 31 December 2016, the loans and advances of the Group for which the impairment allowance were individually assessed amounted to HK$46,429 million (31 December 2015: HK$37,094 million). The secured and unsecured portion of these loans and advances were as follows:

    As at 31 December 2016, the fair value of pledge and collateral held against these loans and advances amounted to HK$20,842 million (31 December 2015: HK$19,935 million).

    The fair value of pledge and collateral was estimated by management based on the latest available external valuations adjusted by taking into account the current realisation experience as well as market situation.

    (d) Movements of allowance for impairment losses

    (e) Overdue loans by overdue period

    Overdue loans represent loans of which the principal or interest are overdue one day or more.

  • 26. Available-for-sale financial assets

    The remaining term to maturity of available-for-sale financial assets does not represent the Group’s intended holding period.

    (a) Debt securities

    (b) Certificates of deposit and certificates of interbank deposit

    (c) Wealth management products issued by financial institutions

    (d) Equity investments

    (e) Investment funds

    Note:
    Debt securities traded on the China Domestic Inter-bank Bond Market are included in “Listed outside Hong Kong”.

  • 27. Held-to-maturity investments

    Note:
    Debt securities traded on the China Domestic Inter-bank Bond Market are included in “Listed outside Hong Kong”.

  • 28. Investments classified as receivables

    As at 31 December 2016, certain of the Group’s investments with an aggregate amount of HK$164,894 million (31 December 2015: HK$90,285 million) were managed by certain subsidiaries and related parties of the Group.

    The underlying assets of investments classified as receivables primarily include interbank assets and wealth management products issued by other banks, credit assets and rediscounted bills.

  • 29. Subsidiaries

    The particulars of the principal subsidiaries are set out in Note 57.

    The following table lists out the information relating to CITIC Bank, CITIC Heavy Industries Co., Limited (“CITIC Heavy Industries”) and CITIC Telecom International Holdings Limited (“CITIC Telecom International”), CITIC Resources, which are listed subsidiaries of the Group, and have material non-controlling interests. The summarised financial information below is before elimination of inter-group transactions and balances:

  • 30. Interests in associates

    Notes:
    (i) The particulars of the principal associates are set out in Note 57.

    Summarised financial information of the material associates are disclosed below:

    Note:
    No further disclosure due to the immaterial equity pick-up impact in the period from the date of investment to 31 December 2016.

    Aggregate information of associates that are not individually material:

  • 31. Interests in joint ventures

    The principals of the principal joint ventures are set out in Note 57.

    Summarised financial information of the material joint ventures are disclosed below:

    Note:
    In December 2016, the Group disposed 1.75% of its interest in CITIC Capital Holdings Limited and the remaining interest was classified as available-for-sale financial assets.

    Aggregate information of joint ventures that are not individually material:

  • 32. Fixed assets

      Property, plant and equipment
    Plant and
    buildings
    HK$ million
    Machinery
    and
    equipment
    HK$ million
    Construction
    in progress
    HK$ million
    Office
    and other
    equipment
    HK$ million
    Vehicles and
    vessels
    HK$ million
    Others
    HK$ million
    Sub-total
    HK$ million
    Land
    use rights
    HK$ million
    Total
    HK$ million
    Investment
    properties
    HK$ million
    Cost or valuation:
    At 1 January 2016 61,382 122,464 33,678 14,360 13,207 8,637 253,728 18,840 272,568 28,508
    Exchange adjustments (3,053) (4,294) (915) (878) (425) (388) (9,953) (706) (10,659) (776)
    Disposal of subsidiaries (1,579) (321) (869) (189) (179) (1,863) (5,000) (1,512) (6,512) (1,539)
    Additions 6,357 2,432 13,077 2,178 515 209 24,768 921 25,689 6,008
    Disposals (1,270) (1,316) (306) (606) (539) (1,047) (5,084) (33) (5,117) (1,011)
    Transfers 1,562 26,607 (30,934) 378 12 2,354 (21) (806) (827) (231)
    Change in fair value of
    investment properties
    580
    At 31 December 2016 63,399 145,572 13,731 15,243 12,591 7,902 258,438 16,704 275,142 31,539
    Accumulated depreciation,
    amortisation and impairment
    losses:
    At 1 January 2016 (13,997) (47,646) (10,646) (8,340) (4,126) (2,601) (87,356) (1,472) (88,828)
    Exchange adjustments 816 1,969 9 534 161 115 3,604 28 3,632
    Disposal of subsidiaries 540 168 6 59 150 647 1,570 100 1,670
    Charge for the year (2,043) (5,342) (2,195) (874) (506) (10,960) (250) (11,210)
    Written back on disposals 133 447 425 368 709 2,082 3 2,085
    Transfers (10,543) 10,543
    Impairment losses (Note 45) (2,300) (6,302) (74) (27) (368) (1,184) (10,255) (10,255)
    At 31 December 2016 (16,851) (67,249) (162) (9,544) (4,689) (2,820) (101,315) (1,591) (102,906)
    Net book value:
    At 31 December 2016 46,548 78,323 13,569 5,699 7,902 5,082 157,123 15,113 172,236 31,539
    Represented by:
    Cost 63,399 145,572 13,731 15,243 12,591 7,902 258,438 16,704 275,142
    Valuation 31,539
    63,399 145,572 13,731 15,243 12,591 7,902 258,438 16,704 275,142 31,539
    Cost or valuation:
    At 1 January 2015 54,006 104,830 25,987 13,311 12,726 5,962 216,822 17,962 234,784 28,744
    Exchange adjustments (2,835) (3,974) (646) (725) (404) (186) (8,770) (1,125) (9,895) (871)
    Business combinations 4,846 16,296 777 125 36 3,223 25,303 565 25,868
    Additions 4,255 1,210 16,164 1,804 855 667 24,955 1,706 26,661 590
    Disposals (855) (897) (353) (644) (651) (3,400) (268) (3,668)
    Transfers 1,965 4,999 (8,604) 198 638 (378) (1,182) (1,182) (616)
    Change in fair value of
    investment properties
    661
    At 31 December 2015 61,382 122,464 33,678 14,360 13,207 8,637 253,728 18,840 272,568 28,508
    Accumulated depreciation,
    amortisation and impairment
    losses:
    At 1 January 2015 (10,913) (23,777) (6,917) (7,241) (2,964) (2,475) (54,287) (1,194) (55,481)
    Exchange adjustments 761 1,724 4 435 194 163 3,236 83 3,319
    Business combinations (1,808) (8,374) (72) (19) (759) (11,032) (31) (11,063)
    Charge for the year (2,101) 5,056) (1,699) (1,018) (361) (10,235) (362) (10,597)
    Written back on disposals 188 515 269 202 598 1,772 1,772
    Transfers 130 161 344 635 32 667
    Impairment losses (Note 45) (254) (12,839) (3,733) (32) (476) (111) (17,445) (17,445)
    At 31 December 2015 (13,997) (47,646) (10,646) (8,340) (4,126) (2,601) (87,356) (1,472) (88,828)
    Net book value:
    At 31 December 2015 47,385 74,818 23,032 6,020 9,081 6,036 166,372 17,368 183,740 28,508
    Represented by:
    Cost 61,382 122,464 33,678 14,360 13,207 8,637 253,728 18,840 272,568
    Valuation 28,508
    61,382 122,464 33,678 14,360 13,207 8,637 253,728 18,840 272,568 28,508

    As at 31 December 2016, the Group was in the process of applying the ownership certificates in respect of certain premises and land use rights of HK$4,854 million (31 December 2015: HK$4,804 million). The Group anticipates that there would be no significant issues and costs in completing such procedures.

    (a) The tenure of the plant and buildings, land use rights and investment properties is as follows:

      As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    In Mainland China
    – leases of over fifty years 4,916 5,964
    – leases of between ten to fifty years 63,581 58,765
    – leases of less than ten years 1,134 1,466
    69,631 66,195
    In Hong Kong
    – leases of over fifty years 758 688
    – leases of between ten to fifty years 16,702 16,663
    17,460 17,351
    Properties held overseas
    – freehold 1,448 1,932
    – leases of more than fifty years 292
    – leases of between ten to fifty years 4,293 7,710
    – leases of less than ten years 76 73
    6,109 9,715
    Total 93,200 93,261

    (b) Fair value measurement of investment properties

    (i) Property valuation

    Investment properties were revalued as at 31 December 2016 and 2015 by the following independent professionally qualified valuers. Management of the Group had discussions with the surveyors on the valuation assumptions and valuation results when the valuation is performed at each balance sheet date.

    (ii) Fair value hierarchy

    The following table presents the fair value of the Group’s properties measured at the balance sheet dates on a recurring basis, categorised into the three-level hierarchy as defined in HKFRS 13, Fair value measurement. The level into which a fair value measurement is classified is determined with reference to the observability and significance of the inputs used in the valuation technique as follows:

    Level 1 valuations: Fair value measured using only Level 1 inputs i.e. unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date;

    Level 2 valuations: Fair value measured using Level 2 inputs i.e. observable inputs which fail to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available;

    Level 3 valuations: Fair value measured using significant unobservable inputs.

    The Group’s policy is to recognise transfers between levels of fair value hierarchy at the balance sheet date in which they occur. During the year ended 31 December 2016, there were no transfers between Level 1 and Level 2, or transfers into or out of Level 3 (2015: Nil).

    (iii) Valuation techniques and inputs used in Level 3 fair value measurements

    The fair value of investment properties located in Mainland China is determined by using income capitalisation approach and depreciated replacement cost approach under the circumstances.

    The income capitalisation approach is the sum of the term value and the reversionary value by discounting the contracted annual rent at the capitalisation rate over the existing lease period; and the sum of average unit market rent at the capitalisation rate after the existing lease period.

    Depreciated replacement cost values a property by taking into account of its current cost of replacement or reproduction, less deduction for physical deterioration and all relevant forms of obsolescence and optimisation. The fair value measurement is based on an estimate of the market value for the existing use of the land, plus the depreciated replacement cost.

    The fair value of certain of investment properties located in Hong Kong is determined using market comparison approach by reference to recent sales price of comparable properties on a price per square foot basis, adjusted for a premium or a discount specific to the quality of the Group’s buildings compared to the recent sales. Higher premium for higher quality buildings will result in a higher fair value measurement.

    The fair value of certain other investment properties located in Hong Kong is determined by using income capitalisation approach and with reference to sales evidence as available in the market.

  • 33. Intangible assets

      For the year ended 31 December
      Roads
    operating
    rights
    HK$ million
    Mining
    assets
    HK$ million
    Others
    HK$ million
    Total
    HK$ million
    Cost:
    At 1 January 2016 11,324 19,211 10,327 40,862
    Exchange adjustments (717) (445) (1,162)
    Additions 10 84 1,853 1,947
    Disposal of subsidiaries (41) (41)
    Disposals (25) (1,338) (1,363)
    At 31 December 2016 10,617 19,270 10,356 40,243
    Accumulated amortisation and impairment losses:
    At 1 January 2016 (768) (15,870) (3,652) (20,290)
    Exchange adjustments 57 130 187
    Disposal of subsidiaries 22 22
    Charge for the year (203) (65) (1,026) (1,294)
    Written back on disposals 1,196 1,196
    Impairment losses (Note 45) (735) (7) (742)
    At 31 December 2016 (914) (16,670) (3,337) (20,921)
    Net book value:
    At 31 December 2016 9,703 2,600 7,019 19,322
    Cost:
    At 1 January 2015 13,990 18,851 7,105 39,946
    Exchange adjustments (702) (5) (374) (1,081)
    Additions 36 365 1,265 1,666
    Disposals (37) (37)
    Transfers (note) (2,000) (2,000)
    Business combinations 2,368) 2,368
    At 31 December 2015 11,324 19,211 10,327 40,862
    Accumulated amortisation and impairment losses:
    At 1 January 2015 (2,447) (13,603) (2,872) (18,922)
    Exchange adjustments 45 2 121 168
    Charge for the year (287) (37) (855) (1,179)
    Written back on disposals 35 35
    Transfers (note) 1,921 1,921
    Impairment losses (Note 45) (2,232) (1) (2,233)
    Business combinations (80) (80)
    At 31 December 2015 (768) (15,870) (3,652) (20,290)
    Net book value:
    At 31 December 2015 10,556 3,341 6,675 20,572

    Amortisation charge is included in “cost of sales and services” and “other operating expenses” in the consolidated income statement.

    Note:
    The roads and tunnels operating rights include a franchise to operate the Eastern Harbour Crossing in Hong Kong for the period ended 7 August 2016. At the end of the franchise period, the assets of the franchise had been vested in the franchisor, the Hong Kong government, for no compensation other than for certain plant, machinery and equipment as specified under the terms of the franchise. As at 31 December 2015, the intangible assets of roads and tunnels operating rights related to this franchise had been reclassified to trade and other receivables.

  • 34. Goodwill

    Goodwill is allocated to the Group’s cash-generating units identified in segments as follows:

    Based on management’s impairment assessment, impairment loss of HK$63 million was recognised for the year ended 31 December 2016 (2015: Nil).

  • 35. Income tax in the balance sheet

    (a) Current income tax in the balance sheet represents:

      As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    Income tax payable 9,999 8,987
    Land appreciation tax payable 427
    9,999 9,414

    (b) Deferred tax assets/(liabilities) recognised:

    The components of deferred tax assets recognised in the consolidated balance sheet and the movements during the years ended 31 December 2016 and 2015, without taking into consideration the offsetting of balances within the same tax jurisdiction, are as follows:

    Tax
    losses
    HK$ million
    Accrued
    expenses
    HK$ million
    Impairment
    loss on
    assets other
    than fixed
    assets and
    intangible
    assets
    HK$ million
    Fair value
    changes of
    financial
    instruments
    HK$ million
    Fixed
    assets and
    intangible
    assets
    HK$ million
    Others
    HK$ million
    Total
    HK$ million
    Deferred tax assets
    At 1 January 2015 6,457 2,858 11,000 777 2,202 1,876 25,170
    Credited/(charged) to profit or loss 5,295 (1,070) 1,658 3 737 156 6,779
    Credited/(charged) to other
    comprehensive income
    7 4 (6) 349 354
    Business combination 5 5
    Exchange adjustments and others 44 (221) (625) (59) (121) (344) (1,326)
    At 31 December 2015 11,796 1,574 12,037 715 2,823 2,037 30,982
    Credited/(charged) to profit or loss 1,650 464 4,247 (20) 1,772 (467) 7,646
    Charged to other comprehensive income (1) 1 (343) (281) (624)
    Disposal of subsidiaries (244) (118) (41) (220) (623)
    Exchange adjustments and others 87 (91) (934) (1) 50 (63) (952)
    At 31 December 2016 13,289 1,828 15,310 351 4,645 1,006 36,429

    The components of deferred tax liabilities recognised in the consolidated balance sheet and the movements during the years ended 31 December 2016 and 2015, without taking into consideration the offsetting of balances within the same tax jurisdiction, are as follows:

      Fair value
    changes of
    financial
    instruments
    HK$ million
    Temporary
    differences
    on fixed
    assets and
    intangible
    assets
    HK$ million
    Revaluation
    of investment
    properties
    HK$ million
    Others
    HK$ million
    Total
    HK$ million
    Deferred tax liabilities
    At 1 January 2015 (1,845) (546) (3,276) (2,635) (8,302)
    (Charged)/credited to profit or loss (452) 87 296 (445) (514)
    Charged to other comprehensive income (497) (93) (263) (853)
    Business combination (168) (241) (409)
    Exchange adjustments and others 44 (3) (159) (23) (141)
    At 31 December 2015 (2,750) (630) (3,232) (3,607) (10,219)
    (Charged)/credited to profit or loss (593) (233) (527) (328) (1,681)
    Credited/(charged) to other comprehensive income 2,452 (57) 39 2,434
    Disposal of subsidiaries 102 182 743 1,027
    Exchange adjustments and others 85 (88) 219 (102) 114
    At 31 December 2016 (704) (951) (3,415) (3,255) (8,325)

    (c) Deferred tax assets not recognised

    The Group has not recognised any deferred tax assets in respect of the following items:

      As at 31 December
      2016
    HK$ million
    2015
    HK$ million
    Deductible temporary differences 2,196 1,992
    Tax losses 11,394 12,681
    13,590 14,673

    It is not probable that future taxable profits against which the above deductible temporary differences and tax losses can be utilised by the Group. As at 31 December 2016, tax losses amounting to HK$6,862 million (31 December 2015: HK$8,421 million) that can be carried forward against future taxable income are expiring within 5 years.

    (d) Deferred tax liabilities not recognised

    As at 31 December 2016, the Group has not recognised any temporary differences relating to the undistributed profits of certain subsidiaries as the Group does not intend to have these subsidiaries making any profit distribution in the foreseeable future (31 December 2015: Nil).

  • 36. Deposits from banks and non-bank financial institutions

  • 37. Placements from banks and non-bank financial institutions

  • 38. Trade and other payables

    At the balance sheet date, the ageing analysis of the Group’s trade and bills payable based on the invoice date is as follows:

  • 39. Financial assets sold under repurchase agreements

    The Group did not derecognise financial assets transferred as collateral in connection with repurchase agreements. As at 31 December 2016, legal title of these collateral pledged has not been transferred to counterparties.

  • 40. Deposits from customers

    (a) Types of deposits from customers

    (b) Deposits from customers include pledged deposits for the following items:

  • 41. Bank and other loans

    (a) Types of loans

    (b) Maturity of loans

    (c) Bank and other loans are denominated in the following currency

    (d)

    As at 31 December 2016, the Group’s bank and other loans of HK$25,043 million (31 December 2015 HK$35,620 million) are pledged with cash and deposits, inventories, trade and other receivables, fixed assets and intangible assets with an aggregate carrying amount of HK$86,290 million (31 December 2015: HK$83,858 million).

    (e)

    All of the Group’s banking facilities are subject to the fulfilment of covenants relating to balance sheet ratios or ownership of a minimum shareholding in certain entities of the Group, as are commonly found in lending arrangements with financial institutions. If the Group were to breach the covenants the drawn down facilities would become payable on demand. The Group regularly monitors its compliance with these covenants. Further details of the Group’s management of liquidity risk are set out in Note 47(b). As at 31 December 2016, none of the covenants relating to drawn down facilities have been breached (31 December 2015: Nil).

  • 42. Debt instruments issued

    The Group did not have any defaults of principal, interest or other breaches with respect to its debt instruments issued during the year ended 31 December 2016 (2015: Nil).

    Certain debt instruments issued were purchased by certain subsidiaries of the Group during the year ended 31 December 2015. These debt instruments issued were eliminated in full on consolidation. No such situation occurred for the year ended 31 December 2016.

    Notes:

    (a) Corporate bonds issued

    (i) Details of corporate bonds issued by the Company

    (ii) Details of corporate bonds issued by CITIC Corporation

    (iii) Details of corporate bonds issued by CITIC Real Estate

    (iv) Details of corporate bonds issued by CITIC Telecom International

    (v) Details of corporate bonds issued by CITIC Heavy Industries

    (vi) Details of corporate bonds issued by CITIC Pacific’s subsidiaries

    (vii) Details of corporate bonds issued by CITIC Environment’s subsidiaries

    (b) Notes issued

    (i) Details of notes issued by CITIC Corporation

    (ii) Details of notes issued by CITIC Bank

    (c) Subordinated bonds issued

    The balance represents the subordinated debts issued by CITIC Bank or CITIC Bank International Limited (“CBI”), a subsidiary of CITIC Bank. The carrying amount of subordinated debts is as follows:

    (d) Certificates of deposit issued

    These certificates of deposit were issued by CBI with interest rate ranging from 0.46% to 3.62% per annum (31 December 2015: 0.46% to 3.73% per annum).

    (e) Certificates of interbank deposit issued

    As at 31 December 2016, CITIC Bank issued certain certificates of interbank deposit with a total value of RMB269,923 million (approximately HK$301,755 million) (31 December 2015: RMB171,356 million (approximately HK$204,536 million)). The yield ranges from 2.68% to 3.75% per annum (31 December 2015: 2.75% to 4.77% per annum). The original expiry terms are between 1 month to 2 years (31 December 2015: between 1 month to 2 years).

  • 43. Provisions

  • 44. Share capital, perpetual capital securities and reserves

    (a) Share capital

    On 12 August 2015, Xin Ma Apparel International Limited (a company incorporated in Hong Kong with limited liability and a wholly-owned subsidiary of Youngor Group Co., Ltd.) subscribed for 859,218,000 new shares of the Company at a price of HK$13.95 per share for an aggregate amount of HK$11,986,091,100.

    On 3 August 2015, the Company allotted and issued to Chia Tai Bright Investment Company Limited (“CT Bright”) 3,327,721,000 fully paid convertible preferred shares of the Company (“Preferred Shares”) for a total consideration of HK$45,922,549,800. On 14 August 2015, CT Bright converted all of the Preferred Shares at the conversion price of HK$13.80 per ordinary share and the Company allotted and issued 3,327,721,000 ordinary shares to CT Bright.

    As at 31 December 2016, the number of ordinary shares in issue of the Company was 29,090,262,630 (31 December 2015: 29,090,262,630).

    Details of the movements in share capital of the Group during the year are set out in the consolidated statement of changes in equity.

    (b) Share based payment

    Share Option Plan

    During the period between the adoption of the CITIC Pacific Share Incentive Plan 2000 (“the Plan 2000”) on 31 May 2000 and its expiry on 30 May 2010, the Company has granted six lots of share options.

    All options granted and accepted under the Plan 2000 can be exercised in whole or in part within 5 years from the date of grant.

    The share options at the exercise price of HK$18.20 per share, HK$19.90 per share, HK$22.10 per share, HK$47.32 per share, HK$22.00 per share and HK$20.59 per share expired at the close of business on 27 May 2007, 31 October 2009, 19 June 2011, 15 October 2012, 18 November 2014 and 13 January 2015, respectively.

    Other than the Plan 2000, certain of the Company’s subsidiaries have issued equity-settled share-based payments to certain of their employees. The aggregate amount of the share-based payments recognised by these companies is not material to the Group.

    As the Plan 2000 expired on 30 May 2010, the Company adopted a new plan, the CITIC Pacific Share Incentive Plan 2011 (“the Plan 2011”) on 12 May 2011, pursuant to which the board may at its discretion offer to grant share options to any eligible participant including any employee, executive director, non-executive director, independent non-executive director, consultant or representative of any member of the Group who shall make payment of HK$1 to the Company on acceptance. The exercise price determined by the board will be at least the higher of (i) the nominal value of the Company’s shares; (ii) the closing price of the Company’s shares as stated in the daily quotations sheet of The Stock Exchange of Hong Kong Limited on the date of offer the grant; and (iii) the average of the closing prices of the Company’s shares as stated in the daily quotations sheet of The Stock Exchange of Hong Kong Limited for the five business days immediately preceding the date of offer of the grant. The maximum number of the Company’s shares which may be issued upon exercise of all share options to be granted under the Plan 2011 must not exceed 10% of the Company’s shares in issue as at the date of adopting the Plan 2011 (i.e. as at 31 December 2016, the maximum number of shares available for issue under the Plan 2011 is 364,944,416 shares).

    No share options were granted under the Plan 2011 during the year ended 31 December 2016 (2015: Nil).

    • (i)

      Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:

    There were no share options granted or exercised during the year ended 31 December 2016 (2015: Nil).

    (c) Perpetual capital securities

    In April 2011 and May 2013, the Company issued perpetual subordinated capital securities (the “perpetual capital securities”) with a nominal amount of US$750 million (approximately HK$5,850 million) and US$1,000 million (approximately HK$7,800 million), respectively. These securities are perpetual and the distribution payments can be deferred at the discretion of the Company. Therefore, the perpetual capital securities are classified as equity instruments and recorded in equity in the consolidated balance sheet. On 15 April 2016, the perpetual capital securities of US$750 million were redeemed by the Company. The amounts as at 31 December 2016 and 2015 included the accrued distribution payments.

    (d) Nature and purpose of reserves

    • (i)

      Capital reserve
      In 2014, the Company paid a total consideration of HK$286,585 million to acquire the shares of CITIC Corporation, and the amount of the consideration was debited against the capital reserve in the Group’s consolidated financial statements. In addition, the potential cash payments related to put options issued in conjunction with business combination and gains or losses from transactions with non-controlling interests are directly debited or credited to the capital reserve in the Group’s consolidated financial statements.

    • (ii)

      Hedging reserve
      The hedging reserve comprises the effective portion of the cumulative net change in the fair value of hedging instruments used in cash flow hedge pending subsequent recognition of the hedged cash flow in accordance with the accounting policy adopted for cash flow hedge in Note 2(j)(ii).

    • (iii)

      Investment related reserves
      The investment related reserves comprise the cumulative net change in the fair value of available-for-sale financial assets until the financial assets are derecognised and share of other comprehensive income of associates and joint ventures, and are dealt with in accordance with the accounting policies set out in Note 2(i)(ii) and Note 2(f) respectively.

    • (iv)

      General reserve
      Pursuant to the relevant notices issued by regulatory bodies, certain subsidiaries in the financial services segment in the Mainland China are required to set aside a general reserve to cover potential losses.

    • (v)

      Exchange reserve
      The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of overseas operations as well as the effective portion of any foreign exchange differences arising from hedges of the net investment in these operations. The reserve is dealt with in accordance with the accounting policies set out in Note 2(h).

    (e) Capital management

    The Group’s primary objectives when managing capital are to safeguard the Group’s stability and growth, so that it can continue to provide returns for shareholders.

    The Group actively and regularly reviews and manages its capital structure, with reference to such financial ratios like debt (total of debt instruments issued and bank and other loans) to total equity ratio, to maintain a balance between the higher shareholders’ returns that might be possible with of borrowings obtained and the advantages and security afforded by a sound capital position, and makes adjustments to the capital structure in light of changes in economic conditions.

    Certain subsidiaries under the financial services segment are subject to capital adequacy requirements imposed by the external regulators. There was no non-compliance of capital requirements as at 31 December 2016 (31 December 2015: Nil).

  • 45. Movement of allowances for impairment losses

          For the year ended 31 December 2016    
      At
    1 January
    HK$ million
    Charge
    for the year
    HK$ million
    Reversal
    for the year
    HK$ million
    Recovery of
    write-off/
    (write-off)
    HK$ million
    Disposal of
    subsidiaries
    HK$ million
    Exchange
    differences
    and others
    HK$ million
    At
    31 December
    HK$ million
    Deposits and placements with banks and
    non-bank financial institutions (Note 18 and 19)
    10 40 1 (2) 49
    Trade and other receivables (Note 22) 5,080 8,240 (722) (3,930) (1,130) (181) 7,357
    Amounts due from customers for contract work 1,777 10 (805) (77) 49
    Inventories (Note 23) 2,433 1,035 (483) (73) (393) (6) 2,513
    Loans and advances to customers and
    other parties (Note 25)
    76,286 56,882 (3,279) (36,212) (5,067) 88,610
    Available-for-sale financial assets (Note 26) 853 810 (8) (349) (423) (20) 863
    Held-to-maturity investments (Note 27) 49 2 (48) (1) 2
    Investment classified as receivables (Note 28) 1,190 1,631 (564) (1) (122) 2,134
    Interests in associates (Note 30) 2,431 5 (83) (3) (36) 2,315
    Interests in joint ventures (Note 31) 1,497 11 (1) - 1,507
    Fixed assets (Note 32) 26,612 10,255 (53) (95) 217 36,936
    Intangible assets (Note 33) 15,814 742 (154) (3) 4 16,403
    Other assets 3,965 2,249 (82) (339) (1,213) (148) 4,432
      137,997 81,912 (5,943) (41,241) (3,260) (5,439) 164,026
          For the year ended 31 December 2015    
      At
    1 January
    HK$ million
    Charge
    for the year
    HK$ million
    Reversal
    for the year
    HK$ million
    Recovery of
    write-off/
    (write-off)
    HK$ million
    Exchange
    differences
    and others
    HK$ million
    At
    31 December
    HK$ million
    Deposits and placements with banks and
    non-bank financial institutions (Note 18 and 19)
    10 1 (1) 10
    Trade and other receivables (Note 22) 4,292 4,756 (635) (3,065) (268) 5,080
    Amounts due from customers for contract work 1,687 90 1,777
    Inventories (Note 23) 2,029 831 (145) (198) (84) 2,433
    Loans and advances to customers and
    other parties (Note 25)
    69,101 50,860 (3,033) (36,293) (4,349) 76,286
    Available-for-sale financial assets (Note 26) 1,845 756 (723) (950) (75) 853
    Held-to-maturity investments (Note 27) 53 1 (5) 3 (3) 49
    Investment classified as receivables (Note 28) 525 4,760 (113) (3,921) (61) 1,190
    Interests in associates (Note 30) 3,616 476 (1,682) 21 2,431
    Interests in joint ventures (Note 31) 1,613 (116) 1,497
    Fixed assets (Note 32) 9,259 17,448 (3) 101 (193) 26,612
    Intangible assets (Note 33) 13,597 2,233 (13) (3) 15,814
    Other assets 2,410 2,142 (602) (11) 26 3,965
      110,037 84,263 (5,259) (46,028) (5,016) 137,997
  • 46. Contingent liabilities and commitments

    (a) Credit commitments

    Credit commitments in connection with the financial services segment of the Group take the form of loan commitments, credit card commitments, financial guarantees, letters of credit and acceptances.

    Loan commitments represent the undrawn amount of approved loans with signed contracts. Credit card commitments represent the credit card overdraft limits authorised by the Group. Financial guarantees and letters of credit represent guarantee provided by the Group to guarantee the performance of customers to third parties. Acceptances comprise undertakings by the Group to pay bills of exchange drawn on customers. The Group expects most acceptances to be settled simultaneously with the reimbursement from the customers.

    The contractual amounts of credit commitments by category as at the balance sheet date are set out below. The amounts disclosed in respect of loan commitments and credit card commitments assume that amounts are fully drawn down. The amounts of guarantees, letters of credit and acceptances represent the maximum potential loss that would be recognised as at the balance sheet date if counterparties failed to perform as contracted.

    (b) Credit commitments analysed by credit risk weighted amount

    Note:

    • (i)

      The above credit risk weighted amount is solely in connection with the credit commitments held by CITIC Bank under the financial services segment of the Group.

    • (ii)

      As at 31 December 2016 and 2015, the credit risk weighted amount refers to the amount as computed in accordance with the rules set out by the China Banking Regulatory Commission and depends on the status of counterparties and the maturity characteristics. The risk weighting used is ranging from 0% to 150%.

    (c) Redemption commitment for treasury bonds

    As an underwriting agent of PRC treasury bonds, CITIC Bank has the responsibility to buy back those bonds sold by it should the holders decide to early redeem the bonds held. The redemption price for the bonds at any time before their maturity dates is based on the nominal value plus any interest unpaid and accrued up to the redemption date. Accrued interest payables to the bond holders are calculated in accordance with relevant rules of the Ministry of Finance and the People’s Bank of China. The redemption price may be different from the fair value of similar instruments traded at the redemption date.

    The redemption obligations below represent the nominal value of treasury bonds underwritten and sold by CITIC Bank, but not yet matured at the balance sheet date:

    As at 31 December 2016, the original maturities of these bonds vary from one to five years (31 December 2015: one to five years). Management of the Group expects the amount of redemption before maturity dates of these bonds will not be material. The Ministry of Finance will not provide funding for the early redemption of these bonds on a back-to-back basis, but will settle the principal and interest upon maturity.

    (d) Guarantees provided

    Except for guarantees that have been recognised as liabilities, the guarantees issued by the Group at the balance sheet date are as follows:

    Note:
    As at 31 December 2016, the guarantees provided to related parties by the Group include guarantees provided to former subsidiaries of the Group that were disposed to China Overseas Land & Investment Limited (“China Overseas”) in 2016 amounting to RMB5,300 million (approximately HK$5,900 million). The guarantees are being transferred to China Overseas which has provided counter guarantees to the Group (Note 48(b)).

    The relationship of related parties is disclosed in Note 48(a).

    Included in the above table, the Group’s counter guarantees issued to related parties and third parties at the balance sheet date are as follows:

    (e) Outstanding litigation and disputes

    The Group is involved in a number of current and pending legal proceedings. The Group provided for liabilities arising from those legal proceedings in which the outflow of economic benefit is probable and can be reliably estimated in the consolidated balance sheet. The Group believes that these accruals are reasonable and adequate.

    • (i)

      The Hong Kong Securities and Futures Commission (the “SFC”) Investigation
      Following the Company’s announcement of a foreign exchange related loss, on 22 October 2008, the SFC announced that it had commenced a formal investigation into the affairs of the Company. On 3 April 2009, the Commercial Crime Bureau of the Hong Kong Police Force began an investigation of suspected offences relating to the same matter.

      The SFC announced on 11 September 2014 that it has commenced proceedings in the Court of First Instance of the High Court of Hong Kong (the “High Court”) and the Market Misconduct Tribunal (the “MMT”), respectively, against the Company and five of its former executive directors.

      The SFC alleges that the Company and the former directors had engaged in market misconduct involving the disclosure of false or misleading information about the Company’s financial position in connection with losses that the Company had suffered through its investment in the leveraged foreign exchange contracts.

      In the action instigated by the SFC at the MMT, the SFC is asking the MMT to (i) determine whether any market misconduct has taken place, and (ii) identify persons who had engaged in such misconduct. In the event that the MMT makes determinations of market misconduct against either the Company or the former directors, it is understood that the SFC will seek from the High Court orders against those who have been found to have engaged in market misconduct to restore affected investors to their pre-transaction positions or to compensate affected investors for their losses. The SFC has not yet quantified the amount of such restoration or compensation sought in the proceedings in the High Court, which have been stayed pending the MMT results.

      The MMT hearing was completed in July 2016 with the outcome pending.

      On 15 October 2014, the Secretary for the Financial Services and the Treasury said that the Police’s investigation into the CITIC matters on aspects outside the subject matters of the SFC’s actions are still ongoing.

      In the absence of the findings of these proceedings and investigations being made available to the Company and due to the inherent difficulties involved in attempting to predict the outcome of such proceedings and investigations and in assessing the possible findings, the directors do not have sufficient information to reasonably estimate the fair value of contingent liabilities (if any) relating to such proceedings and investigations, the timing of the ultimate resolution of those matters or what the eventual outcome may be. However, based on information currently available, the directors are not aware of any matters arising from the above proceedings and investigations that might have a material adverse financial impact on the consolidated financial position or liquidity of the Group.

    • (ii)

      Mineralogy Disputes
      The MRSLAs provide that royalties are payable to Mineralogy by each of Sino Iron and Korean Steel on magnetite ore mined (Royalty Component A) and concentrate produced (Royalty Component B). The MRSLAs also provide that, unless certain exceptions apply, a Minimum Production Royalty is payable to Mineralogy by each of Sino Iron and Korean Steel where a minimum production level was not achieved by a specified date.

      Due to changes in the way in which seaborne-traded iron ore is priced, the Company considers that it is no longer possible to calculate Royalty Component B. Mineralogy and its related company, Queensland Nickel Pty Ltd., have commenced a number of proceedings against the Company, Sino Iron, Korean Steel, Sino Iron Holdings Pty Ltd. and certain officers of those companies containing or derived from claims for Royalty Component B and/or the Minimum Production Royalty. To the extent those proceedings remain on foot, they are described above in Note 3(l). Those proceedings continue to be vigorously contested by the Group. A trial in the Royalty Component B proceeding has been provisionally listed to commence on 14 June 2017 and to run for 15 sitting days.

      Despite the orders made by Justice Kenneth Martin in the remitted injunction application (described above), the Group does not consider that a reliable estimate can be made of the amount of any potential liability (if such liability is found to exist) for Royalty Component B arising from the Royalty B proceeding. Therefore, no provision has been recognised in the financial statements.

      There are a number of disputes with Mineralogy. Refer to Note 3(l) for details.

    • (iii)

      CITIC Resources Litigation
      (1) In August 2014, 山煤煤炭進出口有限公司 (the Shanxi Coal Import & Export Co., Ltd.) (“Shanxi Coal I/E”), a wholly-owned subsidiary of 山煤國際能源集團股份有限公司 (Shanxi Coal International Energy Group Co., Ltd.), commenced a claim in 山西省高級人民法院 (Shanxi High People’s Court) (the “Shanxi Court”) against, amongst others, CITIC Australia Commodity Trading Pty Limited (“CACT”) (“Shanxi Claim A”). Shanxi Coal I/E claimed from CACT (i) the sum of US$89,755,000 (HK$700,089,000) plus interest for breach of contract resulting from the alleged non-delivery of certain aluminium ingots by CACT to Shanxi Coal I/E, and (ii) costs in respect of Shanxi Claim A.

      In connection with Shanxi Claim A, Shanxi Coal I/E obtained an asset protection order from the Shanxi Court over a certain quantity of the Inventories. Service of Shanxi Claim A was effected on CACT in September 2015 by way of a public notice issued by the Shanxi Court. Court hearings were held subsequently.

      In January 2017, pursuant to a civil ruling of the Shanxi Court, the Shanxi Court has ruled Shanxi Claim A be transferred to the Public Security Bureau pursuant to Article 12. Any remedy Shanxi Coal I/E may have in respect of the aluminium ingots that are the subject of Shanxi Claim A will be determined in accordance with China’s criminal legal procedures. Following its transfer to the Public Security Bureau, Shanxi Claim A has terminated and Shanxi Coal I/E has no further recourse or rights against CACT in respect of Shanxi Claim A.

      (2) In the second half of 2015, CACT received an arbitration request notice from the International Court of Arbitration of the International Chamber of Commerce (the “ICC”) in respect of an arbitration application by Shanxi Coal I/E pursuant to which, Shanxi Coal I/E is (i) alleging that CACT has entered into two contracts for the supply of, and has failed to deliver, copper cathodes to Shanxi Coal I/E (the “Contracts”); and (ii) claiming the amount of US$27,890,000 (HK$217,542,000) as the aggregate purchase price Shanxi Coal I/E alleges it has paid to CACT under the Contracts, plus interest (“Shanxi Claim B”).

      CACT has not entered into the Contracts as alleged by Shanxi Coal I/E and considers Shanxi Claim B to be baseless. Accordingly, no adjustment has been made in the financial statements with respect to Shanxi Claim B.

      (3) In August 2014, CITIC Resources noted from an announcement issued by Qingdao Port International Co., Ltd. (the “Qingdao Port Int’l”) that a legal complaint dated 14 July 2014 (“ABN Claim”) had been issued by ABN AMRO Bank N.V., Singapore Branch (“ABN AMRO”) against CACT. According to the announcement, among other things, ABN AMRO had issued ABN Claim alleging that CACT had taken wrongful preservative measures in respect of cargo over which ABN AMRO claimed it had been granted a pledge (the “Subject Cargo”) and was seeking an order that (i) CACT compensate ABN AMRO for loss of RMB1,000,000 (HK$1,167,000), (ii) CACT withdraw its asset protection order over the Subject Cargo; and (iii) CACT bear all fees and legal costs of ABN Claim.

      In October 2016, CITIC Resources noted from an announcement issued by Qingdao Port Int’l that ABN AMRO had withdrawn ABN Claim.

    • (iv)

      There are some issues in dispute with MCC, and their details are disclosed in Note 3(k).

    (f) Capital commitments

    As at the balance sheet date, the Group had the following capital commitments not provided for in these consolidated financial statements:

    (g) Operating lease commitments

    The Group leases certain of its properties and fixed assets under operating leases. As at the balance sheet date, the Group’s future minimum lease payments under non-cancellable operating leases are as follows:

  • 47. Financial risk management and fair values

    Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the business of the Group. The Group has established policies and procedures to identify and analyse these risks, to set appropriate risk limits and controls, and to constantly monitor the risks and limits by means of reliable and up-to-date management information systems. The Group regularly updates and enhances its risk management policies and systems to reflect changes in markets, products and best practice risk management processes. Internal auditors also perform regular audits to ensure compliance with policies and procedures.

    The Group’s exposure to these risks and the financial risk management policies and practices used by the Group to manage these risks are described below.

    (a) Credit risk

    Credit risk represents the potential loss that may arise from a customer or counterparty’s failure to meet its obligation when due. For loan business, the Group identifies and manages the credit risk through its target markets definitions, credit approval process, post-disbursement monitoring and remedial management procedures. In respect of treasury businesses, credit risk mainly represents impairment losses of different types of investments due to default by issuers or counterparties, and inability of derivative counterparties in fulfilling their obligations. The Group sets credit limits for treasury activities and monitors them regularly with reference to the fair values of the relevant financial instruments.

    The Group is also confronted with credit risk resulting from receivables that arising from sale of goods and rendering of services within the non-financial services segments. The relevant subsidiaries have established a credit policy under which individual credit evaluations are performed on all customers to determine the credit limit and terms applicable to the customers. These evaluations focus on the customers’ financial position, the external ratings of the customers and their bank credit records where available.

    • (i)

      Maximum credit risk exposure
      The maximum exposure to credit risk as at the balance sheet date without taking into consideration of any collateral held or other credit enhancement is represented by the net balance of each type of financial assets in the balance sheet after deducting any impairment allowance. A summary of the maximum exposure is as follows:

    • (ii)

      Distribution by credit exposure is as follows:

    Notes:

    • (1)

      Collateral and other credit enhancements for overdue but not impaired loans and advances:

      As at 31 December 2016, the corporate loans and advances of the Group which were overdue but not impaired were HK$42,556 million (31 December 2015: HK$36,693 million). As at 31 December 2016, the secured portion of these loans and advances were HK$29,775 million (31 December 2015: HK$25,286 million), and the remaining loans and advances were unsecured.

      The fair value of collateral held against these loans and advances amounted to HK$28,672 million as at 31 December 2016 (31 December 2015: HK$24,554 million).

      The fair value of collateral was estimated by management based on the latest available external valuations, if any, adjusted by taking into account the current realisation experience as well as market situation.

    • (2)

      The balances represent collectively assessed allowance of impairment losses.

    • (iii)

      Loans and advances to customers and other parties analysed by industry sector:

    • (iv)

      Loans and advances to customers and other parties analysed by geographical sector:

    • (v)

      Rescheduled loans and advances to customers and other parties
      Rescheduled loans and advances are those loans and advances which have been restructured or renegotiated because of deterioration in the financial position of the borrower, or of the inability of the borrower to meet the original repayment schedule and for which the revised repayment terms are a concession that the Group would not otherwise consider.

    • (vi)

      Offsetting
      Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

      As at 31 December 2016, the Group did not enter into significant enforceable master netting arrangements with counterparties and therefore there were no significant offsettings of any assets and liabilities in the consolidated balance sheet (31 December 2015: Nil).

    (b) Liquidity risk

    Liquidity risk arises when there is mismatch between amounts and maturity dates of financial assets and financial liabilities.

    Each of the Group’s operating entity formulates liquidity risk management policies and procedures within the Group’s overall liquidity risk management framework and takes into consideration of the business and regulatory requirements applicable to individual entity.

    The Group manages liquidity risk by holding liquid assets (including deposits, other short term funds and securities) of appropriate quality and quantity to ensure that short term funding requirements are covered within prudent limits. Adequate standby facilities are maintained to provide strategic liquidity to meet unexpected and material demand for payments in the ordinary course of business.

    The following tables indicate the analysis by remaining maturities of the Group’s financial assets and liabilities:

    Credit Commitments include loan commitments, acceptances, credit card commitments, guarantees, letters of credit and others. The tables below summarise the amounts of credit commitments by remaining contractual maturity.

    (c) Interest rate risk

    Each of the Group’s operating entities has formulated its own interest risk management policies and procedures covering identification, measurement, monitoring and control of risks. The Group manages interest rate risk to control potential loss from interest rate risk at an acceptable level.

    • (i)

      Asset-liability gap
      Interest rate risk arises from mismatch between repricing dates of financial assets and liabilities affected by market interest rate volatility.

    • (ii)

      Effective interest rate

    Note:

    • (i)

      The Group’s investments include financial assets at fair value through profit or loss, available-for-sale financial assets, held-to-maturity investments, and interests in associates and joint ventures. The calculation of effective interest rate is based on the interest yielding part of the financial assets.

    • (iii)

      Sensitivity analysis
      The Group uses sensitivity analysis to measure the potential effect of changes in interest rates on the Group’s profit or loss. As at 31 December 2016, it is estimated that a general increase or decrease of 100 basis points in interest rates, with all other variables held constant, the Group’s profit before taxation would decrease or increase by HK$9,393 million (31 December 2015: decrease or increase by HK$2,968 million).

      This sensitivity analysis is based on a static interest rate risk profile of the Group’s financial assets and financial liabilities and certain simplified assumptions. The analysis only measures the impact of changes in the interest rates within one year, showing how annualised interest income would have been affected by repricing of the Group’s financial assets and financial liabilities within the one-year period. The analysis is based on the following assumptions: (1) all assets and liabilities that reprice or mature within three months and after three months but within one year reprice or mature at the beginning of the respective periods; (2) there is a parallel shift in the yield curve and in interest rates; and (3) there are no other changes to the portfolio, all positions will be retained and rolled over upon maturity. The analysis does not take into account the effect of risk management measures taken by management. Because of its hypothetical nature with the assumptions adopted, actual changes in the Group’s profit before taxation resulting from increases or decreases in interest rates may differ from the results of this sensitivity analysis.

    (d) Currency risk

    Currency risk arises from the changes in exchange rates on the Group’s foreign currency denominated assets and liabilities. The Group measures its currency risk with foreign currency exposures, and manages currency risk by entering into spot foreign exchange transactions, use of derivatives (mainly foreign forwards and swaps), and matching its foreign currency denominated assets with corresponding liabilities in the same currency.

    The revenue from the Group’s Sino Iron Project is denominated in US$, which is also the functional currency for this entity. A substantial portion of its development and operating expenditure are denominated in Australian Dollars. The Group entered into plain vanilla forward contracts to manage the foreign currency risks.

    The Group funded the Sino Iron Project and the acquisition of bulk cargo vessels by borrowing US$ loans to match the future cash outflows of these assets. The Group’s investments in the Sino Iron Project and bulk cargo vessels (whose functional currency is in US$) have been designated as an accounting hedge against other US$ loans.

    The exposure to currency risk arising from the financial assets and financial liabilities at the balance sheet dates is as follows (expressed in HK$ million):

    The Group uses sensitivity analysis to measure the potential effect of changes in foreign currency exchange rates on the Group’s net profit or loss.

    Assuming all other risk variables remained constant, a 100 basis points strengthening or weakening of HK$ against US$, RMB and other currencies as at 31 December 2016 would decrease or increase the Group’s profit before taxation by HK$2,982 million (31 December 2015: decrease or increase by HK$2,228 million).

    This sensitivity analysis is based on a static foreign exchange exposure profile of financial assets and financial liabilities and certain simplified assumptions. The analysis is based on the following assumptions: (1) the foreign exchange sensitivity is the gain and loss recognised as a result of 100 basis points fluctuation in the foreign currency exchange rates against HK$; (2) the exchange rates against HK$ for all foreign currencies change in the same direction simultaneously and do not take into account the correlation effect of changes in different foreign currencies; and (3) the foreign exchange exposures calculated include both spot foreign exchange exposures, forward foreign exchange exposures and options, and all positions will be retained and rolled over upon maturity. The analysis does not take into account the effect of risk management measures taken by management. Because of its hypothetical nature with the assumptions adopted, actual changes in the Group’s profit before taxation resulting from increases or decreases in foreign exchange rates may differ from the results of this sensitivity analysis.

    (e) Fair values

    • (i)

      Financial instruments carried at fair value
      The following table presents the carrying amounts of financial instruments measured at fair value as at the balance sheet date across the three levels of the fair value hierarchy defined in HKFRS 13, Fair value measurement, with the fair value of each financial instrument categorised in its entirety based on the lowest level of input that is significant to that fair value measurement. The levels are defined as follows:

      –Level 1 (highest level): fair values measured using quoted market for similar active markets for identical financial instruments;

      –Level 2: fair values measured using quoted prices in active market for similar financial instruments, or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data;

      –Level 3 (lowest level): fair values measured using valuation techniques in which any significant input is not based on observable market data.

      The fair value of the Group’s financial assets and financial liabilities are determined as follows:

      –If traded in active markets, fair values of financial assets and financial liabilities with standard terms and conditions are determined with reference to quoted market bid prices and ask prices, respectively;

      –If not traded in active markets, fair values of financial assets and financial liabilities are determined in accordance with generally accepted pricing models or discounted cash flow analysis using prices from observable current market transactions for similar instruments. If there were no available observable current market transactions prices for similar instruments, quoted prices from counterparty is used for the valuation, and management performs analysis on these prices. Discounted cash flow analysis using the applicable yield curve for the duration of the instruments is used for derivatives other than options, and option pricing models are used for option derivatives.

      For the year ended 31 December 2016, there were no significant transfers between instruments in different levels (2015: Nil) and no significant changes in valuation techniques for determining the fair values of the instruments (2015: Nil).

      The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy:

    • (ii)

      Fair value of other financial instruments (carried at other than fair value)
      The carrying amounts and fair values of the Group’s financial assets and liabilities, other than those with carrying amounts that reasonably approximate to their fair values, are as follows:

    • (iii)

      Estimation of fair values
      As at the balance sheet date, the Group adopted the following major methods and assumptions in estimating the fair value of financial instruments.

      Debt securities and equity investments
      Fair value is based on quoted market prices as at the balance sheet date for trading financial assets and liabilities (excluding derivatives), available-for-sale financial assets, and held-to-maturity investments if there is an active market. If an active market does not exist for available-for-sale financial assets, the fair value is determined using valuation techniques.

      Loans and advances to customers and other parties, bank and other loans
      Loans and advances to customers and other parties, and bank and other loans are repriced at market rates at least annually. Accordingly, their carrying amounts approximate to their fair values.

      Placements with banks and non-bank financial institutions, financial assets held/sold under resale/ repurchase agreements
      Placements with banks and non-bank financial institutions, financial assets held/sold under resale/ repurchase agreements are mainly priced at market interest rates and mature within one year. Accordingly, the carrying amounts approximate to their fair values.

      Derivatives
      The fair values of foreign currency and interest rate contracts are either based on their listed market prices or by discount cash flow model at the measurement date.

      Financial guarantees
      The fair values of financial guarantees are determined by reference to fees charged in an arm’s length transaction for similar services, when such information is obtainable, or is otherwise estimated by reference to interest rate differentials, by comparing the actual rates charged by lenders when the guarantee is made available with the estimated rates that the lenders would have charged, had the guarantees not been available, where reliable estimates of such information can be made.

  • 48. Material related parties

    (a) Relationship of related parties

    • (i)

      In addition to subsidiaries, related parties include parent company, holding company’s fellow entities, associates and joint ventures of the Group.

    • (ii)

      CITIC Group, the parent and the ultimate controlling shareholder of the Group, is a state-owned company established in Beijing in 1979.

    (b) Related party transactions

    • (i)

      Transaction amounts with related parties:

    • Notes:

      • (1)

        These above transactions with related parties were conducted under the normal commercial terms.

      • (2)

        Interest rates of loans and advances to the related parties were determined at rates negotiated between the Group and the corresponding related parties on a case by case basis.

      • (3)

        During the relevant years, CITIC Bank, a subsidiary of the Group, entered into transactions with related parties in the ordinary course of its banking businesses including lending, assets transfer, wealth management, investment, deposit, settlement and clearing, off-balance sheet transactions, and purchase, sale and leases of property. These banking transactions were conducted under normal commercial terms and conditions and priced at the relevant market rates prevailing at the time of each transaction.

    • (ii)

      Outstanding balances with related parties:

    Notes:

    • (1)

      The above transactions with related party transactions which were conducted under the normal commercial terms.

    • (2)

      Interest rates of loans and advances to the related parties were determined at rates negotiated between the Group and the corresponding related parties on a case by case basis.

    • (3)

      The guarantees provided by the Group to the related parties were based on the terms agreed between the Group and the related parties on a case by case basis.

    (c) Transactions with other state-owned entities in the PRC

    In addition to these related party transactions disclosed in Note 48(b), transactions with other state-owned entities include but are not limited to the following:

    –sales and purchases of goods and provision of services;

    –purchase, sale and leases of property and other assets;

    –lending and deposit taking;

    –taking and placing of inter-bank balances;

    –derivative transactions;

    –entrusted lending and other custody services;

    –insurance and securities agency, and other intermediary services;

    –sale, purchase, underwriting and redemption of bonds issued by other state-owned entities; and

    –rendering and receiving of utilities and other services.

    (d) Key management personnel remuneration

    For the year ended 31 December 2016, the aggregate amount of the remuneration before tax paid to directors and executive officers of the Company amounted to HK$8.84 million (2015: HK$19.38 million).

  • 49. Structured entities

    (a) The principal guaranteed wealth management products issued and managed by the Group

    The principal guaranteed wealth management products issued and managed by CITIC Bank, a subsidiary of the Group, represent products to which CITIC Bank has guaranteed the investor’s principal investment. The investments of the wealth management products and the corresponding source of funding are categorised as financial assets and financial liabilities in accordance with the accounting policies.

    (b) Structured entities sponsored by third party institutions in which the Group holds an interest

    The Group holds an interest in some structured entities sponsored by third party institutions through investments in debt securities issued by these structured entities. Such structured entities include wealth management products, investment management products, trust investment plans, asset-backed securities and investment funds and the Group does not consolidate these structured entities.

    The following table sets out an analysis of the carrying amounts of interests held by the Group as at the balance sheet date in the structured entities sponsored by third party institutions, as well as an analysis of the line items in the balance sheet in which the relevant assets are recognised:

    (c) Structured entities sponsored by the Group which the Group does not consolidate but holds an interest

    The investments issued by unconsolidated structured entities sponsored by the Group are primarily wealth management products and trust plans without principal and/or return guarantee. The nature and purpose of these structured entities are for the Group to generate fees from managing assets on behalf of investors. These structured entities are financed through the issuance of products to investors. Interest held by the Group includes fees charged by providing management services and investment made by the Group.

    Wealth management products and trust plans
    As at 31 December 2016, the aggregate amount of assets held by the unconsolidated non-principal-guaranteed wealth management products and trust plans which are sponsored by the Group was HK$2,662,231 million (31 December 2015: HK$1,977,449 million).

    As at 31 December 2016, the carrying amounts of management fee receivables being recognised in the balance sheet were HK$601 million (31 December 2015: HK$650 million).

    As at 31 December 2016, the amount of placements from the Group with non-principal-guaranteed wealth management products sponsored by the Group was HK$69,312 million (31 December 2015: HK$30,158 million).

    The aggregate amount of the non-principal-guaranteed wealth management products sponsored and issued by the Group after 1 January 2016 but matured before 31 December 2016 was HK$829,515 million (2015: HK$721,217 million).

    During the year ended 31 December 2016, the maximum exposure of the placements from the Group with non-principal guaranteed wealth management products sponsored by the Group was HK$64,170 million (2015: HK$43,776 million). In the opinion of management, the transactions were conducted in the ordinary course of business under normal terms and conditions and at market rates.

    During the year ended 31 December 2016, the amount of fee and commission income recognised from the abovementioned structured entities sponsored by the Group was HK$12,711 million (2015: HK$11,355 million).

    Securitisation transactions and loan transfers
    For the year ended 31 December 2016, the Group entered into transactions which involved transfers of financial assets including securitisation transactions, transfers of loans including non-performing loans, and financial assets sold under repurchase agreements. Details of the financial assets sold under repurchase agreements are set forth in Note 39. Details of securitisation and loan transfer transactions conducted by the Group for the year ended 31 December 2016 totalled HK$133,175 million are set forth below.

    During the year ended 31 December 2016, the Group entered into securitisation transactions backed by financial assets transferred with book value before impairment of HK$54,952 million (2015: HK$49,307 million), of which HK$49,922 million (2015: HK$46,432 million) were qualified for full de-recognition.

    The balance of HK$5,030 million (2015: HK$2,874 million) was in respect of non-performing loans transferred and the Group concluded that it had continuing involvement in these assets as at 31 December 2016 based on the related criteria set forth in Note 2(i) and Note 3. As at 31 December 2016, the Group continued to recognise assets of HK$771 million (31 December 2015: HK$341 million) under loans and advances to customers together with assets and liabilities of the same amount under other assets and other liabilities, respectively, arising from such continuing involvement (Note 25).

    During the year ended 31 December 2016, the Group also through other types of transactions transferred loans of book value before impairment of HK$78,223 million (2015: HK$56,200 million), of which HK$60,396 million represented non-performing loans (2015: HK$52,063 million). The Group carried out assessment based on the criteria as detailed in Note 2(i) and Note 3 and concluded that these transferred assets qualified for full de-recognition (Note 25(d)).

  • 50. Discontinued operations

    On 14 March 2016, the Company, CITIC Pacific and CITIC Corporation entered into an agreement with China Overseas to sell the Group’s interest in certain residential real estate projects in the PRC to one of the affiliates of China Overseas. Completion of the transaction took place in September 2016.

    In accordance with HKFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, the results and cash flows of the above mentioned residential real estate projects have been included in the discontinued operations of the Group. Comparative figures for the year ended 31 December 2015 have been reclassified accordingly.

    The aggregate results of the discontinued operations were as follows:

  • 51. Supplementary information to the consolidated cash flow statement

    (a) Cash and cash equivalents held by the Group are as follows:

    (b) Disposal of subsidiaries

    (C)

    In 2016, issuance of preference shares and other equity instruments by subsidiaries was mainly from CITIC Bank, a subsidiary of the Group, which issued RMB35 billion preference shares to qualified investors.

  • 52. Major Transactions with non-controlling interests

    Acquisition of additional interests in indirectly held subsidiaries

    In January 2016, CITIC Corporation acquired an additional 11.63% interest in CITIC Real Estate for an aggregate purchase consideration of RMB3,028 million (approximately HK$3,601 million). The Group recognised a decrease in non-controlling interests of HK$1,589 million, and a decrease in equity attributable to shareholders of the Company of HK$2,012 million.

    For the year ended 31 December 2016, the Company through its subsidiaries increased its shareholding in CITIC Bank by acquiring approximately 1.79% equity interests, for an aggregate purchase consideration of HK$4,176 million. The Group recognised a decrease in non-controlling interests of HK$6,900 million, and an increase in equity attributable to shareholders of the Company of HK$2,724 million.

    The effect of changes in the ownership interests of CITIC Real Estate and CITIC Bank on the equity attributable to shareholders of the Company during the year is summarised as follows:

  • 53. Balance sheet and reserve movement of the Company

    The balance sheet of the Company was approved and authorised for issue by the board of directors on 23 March 2017.

    Director: Chang Zhenming     Director: Wang Jiong

    (a) Reserve movement of the Company

  • 54. Post balance sheet events

    • (a)

      The Company, CITIC Capital China Partners III, L.P. (“CITIC Capital”) and Carlyle Asia Partners IV, L.P. (“Carlyle”) propose to acquire a controlling interest in McDonald’s Mainland China and Hong Kong businesses (the “Acquisition”) through Grand Foods Investment Holdings Limited (the “Purchaser”, being an indirect non-wholly-owned subsidiary of the Company).

      On 9 January 2017, the Purchaser entered into a sale and purchase agreement with, among others, McDonald’s China Holdings Limited (“MCHL”) and Golden Arches Investments Limited (“GAIL” and together with MCHL, the “Sellers”, being subsidiaries of McDonald’s Corporation) for the acquisition of the entire issued share capital of McDonald’s China Management Limited (the “Target”), at a total consideration of up to US$2,080 million (equivalent to approximately HK$16,141 million). The consideration for the Acquisition will be settled partly by way of cash and partly by way of new shares in Grand Foods Holdings Limited, being the intermediate holding company of the Purchaser, to be issued to GAIL.

      Upon closing of the Acquisition (“Closing”), the Target will be owned by Fast Food Holdings Limited (which is in turn indirectly owned as to approximately 61.54% and 38.46% by the Company and CITIC Capital respectively), Carlyle and GAIL as to 52%, 28% and 20%, respectively. The Target will become an indirect non-wholly-owned subsidiary of the Company. As Closing is subject to the fulfilment (or, if applicable, waiver) of certain conditions precedent, the Acquisition may or may not proceed.

    • (b)

      On 27 December 2016, CITIC Corporation, a wholly-owned subsidiary of the Company, Beijing Guoan Football Club Co., Ltd. (“Guoan FC”), a wholly-owned subsidiary of CITIC Corporation, and SINOBO Land Co., Ltd. (“SINOBO Land”), an independent third party, entered into a capital increase agreement; and on the same day, CITIC Corporation and SINOBO Land entered into a shareholder agreement (the “Agreements”). Pursuant to the Agreements, the registered capital of Guoan FC will be increased by RMB133,333,335, which will be fully subscribed by SINOBO Land at the consideration of RMB3,555,555,600 (the “Capital Increase”). The Capital Increase was approved by Chinese Football Association on 24 January 2017. When all the conditions in the Agreements are met, CITIC Corporation and SINOBO Land will hold 36% and 64% equity interest in Guoan FC, respectively.

    • (c)

      On 5 January 2017, CITIC Bank received approval from China Banking Regulatory Commission to establish China CITIC Baixin Bank Corporation Limited (“Baixin Bank”) with Fujian Baidu Borui Network Technology Company Limited. CITIC Bank will hold 1,400 million shares, representing 70% of the total shares of Baixin Bank.

  • 55. Approval of the consolidated financial statements

    The consolidated financial statements were approved and authorised for issue by the board of directors on 23 March 2017.

  • 56. Possible impact of amendments, new standards and interpretations issued but not yet adopted

    The Group has not applied the following amendments to standards and new standards which are effective for the financial year beginning after 1 January 2016 and which have not been early adopted in these consolidated financial statements.

    HKAS 12 (Amendments) ncome taxes (1)
    HKAS 7 (Amendments) Statement of cash flows (1)
    HKFRS 15 Revenue from contracts with customers(2)
    HKFRS 9 Financial instruments (2)
    HKFRS 16 Leases (3)
    Leases (3) HKAS 28 and HKFRS 10 (Amendments) Sale or contribution of assets between an investor and its associate or joint venture (4)

    (1) Effective for the annual periods beginning on or after 1 January 2017.

    (2) Effective for the annual periods beginning on or after 1 January 2018.

    (3) Effective for the annual periods beginning on or after 1 January 2019.

    (4) Originally effective for annual periods beginning on or after 1 January 2016. The effective date has now been deferred/removed.

    The Group is in the process of making an assessment of the impact of the above new standards and amendments to standards. None of these is expected to have a significant effect on the consolidated financial statements of the Group, except the following set out below:

    HKFRS 9, Financial instruments

    The new standard addresses the classification, measurement and de-recognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets.

    HKFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income and fair value through profit or loss. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in other comprehensive income in which case the accumulated fair value changes in other comprehensive income will not be recycled to the profit or loss in the future. For financial liabilities there were no changes to classification and measurement, except for the recognition of changes in own credit risk in other comprehensive income for liabilities designated at fair value through profit or loss.

    The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under HKAS 39. It applies to financial assets classified at amortised cost, debt instruments measured at FVOCI, contract assets under HKFRS 15 Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee contracts. While the Group is undertaking a detailed assessment of how its impairment provisions would be affected by the new model, it may result in an earlier recognition of credit losses.

    The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach.

    The Group is undertaking a detailed assessment of the effect of HKFRS 9. HKFRS 9 must be applied for financial years commencing on or after 1 January 2018. Based on the transitional provisions in the completed HKFRS 9, early adoption in phases was only permitted for annual reporting periods beginning before 1 February 2015. After that date, the new rules must be adopted in their entirety. The Group does not intend to adopt HKFRS 9 before its mandatory date.

    HKFRS 15, Revenue from contracts with customers

    The HKICPA has issued a new standard for the recognition of revenue. This will replace HKAS 18 which covers contracts for goods and services and HKAS 11 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer. The standard permits either a full retrospective or a modified retrospective approach for the adoption.

    The Group has made an initial assessment on the impact of this new standard, and not believed it is expected to have a significant effect on the consolidated financial statements of the Group. The Group will make further detailed assessments on the impact in 2017.

    HKFRS 15 is mandatory for financial years commencing on or after 1 January 2018. At this stage, the Group does not intend to adopt the standard before its effective date.

    HKFRS 16, Leases

    HKFRS 16 will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases.

    The accounting for lessors will not significantly change.

    The standard will affect primarily the accounting for group’s operating leases. As at the reporting date, the Group has non-cancellable operating lease commitments HK$18,930 million (Note 46(g)). However, the Group has not yet determined to what extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the Group’s profit and classification of cash flows.

    Some of the commitments may be covered by the exception for short-term and low value leases and some commitments may relate to arrangements that will not qualify as leases under HKFRS 16.

    The new standard is mandatory for financial years commencing on or after 1 January 2019. At this stage, the Group does not intend to adopt the standard before its effective date.

  • 57. Principal subsidiaries, associates and joint ventures

    (a) Principal subsidiaries

    (b) Principal associates

    Details of the Group’s interest in principal associates, which are accounted for using the equity method in the consolidated financial statements of the Group are as follows:

    (c) Principal joint ventures

    Details of the Group’s interest in principal joint ventures, which are accounted for using the equity method in the consolidated financial statements of the Group are as follows:

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