Financial Statements & Report of the Auditors

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1 Financial Statements & Report of the Auditors 45

2 Significant Accounting Policies a Statement of compliance These financial statements have been prepared in accordance with all applicable Statements of Standard Accounting Practice ( SSAPs ) and Interpretations issued by the Hong Kong Society of Accountants, accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Export Credit Insurance Corporation Ordinance (Cap.1115). A summary of the significant accounting policies adopted by the Corporation is set out below. b Basis of preparation of the financial statements The measurement basis used in the preparation of the financial statements is historical cost modified by the marking to market of certain investments in securities as explained in the accounting policies set out below. c Insurance funds The annual accounting basis has been adopted. The insurance funds comprise provision for unearned premiums and provision for claims. The results of each year are immediately transferred from the income and expenditure account to revenue reserves. (i) Provision for unearned premiums The relative proportion of retained premiums written in any financial year of the Corporation relating to the period of risk falling within the following financial year is carried forward as a provision for unearned premiums. (ii) Provision for claims Full provision is made for the estimated cost of claims intimated but not settled at the balance sheet date and for the estimated cost of claims incurred but not yet intimated by that date, after deducting the reinsurers share. d Contingency reserve and non-insurance reserve The Corporation is required to have adequate reserves to meet its obligations stipulated under section 12(3) of the Hong Kong Export Credit Insurance Corporation Ordinance (Cap. 1115), including the contingent liability to any unknown catastrophic claims that may arise from unexpired risks on contracts of insurance entered into by the Corporation. In addition, the Corporation considers it prudent to set aside an additional reserve for non-insurance purposes, to safeguard against exceptional fluctuation in the operating expenses or investment performance. Appropriate amounts, set aside for the above purposes, are disclosed as contingency reserve and non-insurance reserve respectively. Transfers to or from these reserves represent appropriations from revenue reserve, determined on the basis of criteria recommended by independent actuaries. e Investments (i) Non-trading securities are stated in the balance sheet at fair value. Changes in fair value are recognised in the investment revaluation reserve until the security is sold, or otherwise disposed of, or until there is objective evidence that the security is impaired, at which time the relevant cumulative unrealised gain or loss is transferred from the investment revaluation reserve to the income and expenditure account. 46

3 Significant Accounting Policies (Continued) f (ii) Transfers from the investment revaluation reserve to the income and expenditure account as a result of impairments are reversed when the circumstances and events that led to the impairment cease to exist and there is persuasive evidence that the new circumstances and events will persist for the forseeable future. (iii) Profits or losses on disposal of investments in securities are accounted for in the income and expenditure account as they arise. The profit or loss includes any amount previously held in the investment revaluation reserve in respect of that security. Cash equivalents Cash equivalents are short-term, highly liquid investments which are readily convertible into known amounts of cash without notice and which were within three months of maturity when acquired. For the purposes of the cash flow statement, cash equivalents would also include bank overdrafts and advances from banks repayable within three months from the date of the advance. g Fixed assets Fixed assets are stated in the balance sheet at cost less accumulated depreciation. Assets costing HK$5,000 or less are expensed on acquisition. Depreciation is calculated to write off the cost of fixed assets over their anticipated useful lives on a straight line basis as follows: Office premises 40 years Leasehold improvements 5 years Computer hardware and software 3 years Motor vehicles 3 years Office machinery and furniture 5 years h Leased assets Where assets are acquired under finance leases, the amounts representing the outright purchase price, which approximate the present value of the minimum lease payments, of such assets are included in fixed assets and the corresponding liabilities, net of finance charges, are recorded as obligations under finance leases. Depreciation is provided at rates which write off the cost of the assets in equal annual amounts over the estimated useful lives of the assets as set out in note (g) above. Finance charges implicit in the lease payments are charged to the income and expenditure account over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period. 47

4 Significant Accounting Policies (Continued) i Revenue recognition (i) Premiums Premiums are recognised in the period in which the amount is determined, which is generally the period in which the risk commenced. (ii) Dividend income Dividend income from listed equities is recognised when the share price of the investment goes ex-dividend. (iii) Interest income Interest income on deposits is accrued on a time-apportioned basis on the principal outstanding and at the rate applicable. Interest income on bonds is accrued on a time-apportioned basis on the face value outstanding and at the rate applicable. j Translation of foreign currencies Foreign currency transactions during the year are translated into Hong Kong dollars at the exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies have been translated into Hong Kong dollars at the approximate market rates of exchange ruling at the balance sheet date. Exchange gains and losses, whether realised or unrealised, are dealt with in the income and expenditure account. k Financial instruments Forward foreign exchange contracts are entered into for hedging against investments denominated in the respective foreign currencies and are valued at their fair value at the balance sheet date. Gains and losses on these contracts are recognised in the income and expenditure account during the period the related hedged investments are disposed of. Valuation differences arising on the outstanding contracts at the balance sheet date are included in investment revaluation reserve. l Related parties For the purposes of these financial statements, parties are considered to be related to the Corporation if the Corporation has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operation decisions, or vice versa, or where the Corporation and the party are subject to common control or common significant influence. Related parties may be individuals or entities. 48

5 Balance Sheet As at 31 March 2002 (Expressed in Hong Kong dollars) Note 2002($) 2001($) Assets Fixed assets - Office premises - Plant and equipment Investments Insurance and other receivables Bank deposits maturing in more than three months Cash and cash equivalents (3) 13,050,000 13,702,500 (3) 6,354,099 5,181,247 (4) 519,203, ,319,666 (5) 16,978,969 21,337,808 14,000,000 15,500,000 (13)(d) 35,207,929 39,681,758 Total assets 604,794, ,722,979 Equity and Liabilities Capital and reserves Capital Contingency reserve Non-insurance reserve Investment revaluation reserve Revenue reserve (1) 20,000,000 20,000,000 (8) 349,914, ,054,500 (8) 52,526,849 53,326,517 (8) (12,148,890) (18,091,420) (8) 126,482, ,364, ,775, ,653,762 Liabilities Provision for claims Insurance and other payables Unearned premiums Obligations under finance leases (9) 44,309,482 39,848,652 (6) 17,575,110 18,317,059 (10) 6,118,000 5,819,000 (11) 17,017 84,506 68,019,609 64,069,217 Total equity and liabilities 604,794, ,722,979 Approved : 17 May 2002 K K Cheung - Commissioner The notes on pages 46 to 48 and 53 to 59 form part of these financial statements. 49

6 Statement of Income and Expenditure For the year ended 31 March 2002 (Expressed in Hong Kong dollars) Note 2002($) 2001($) Turnover (2) 128,984, ,051,508 Premiums ceded to reinsurers Less : Reinsurers commission (48,206,652) (51,722,456) 19,285,081 14,447,243 (28,921,571) (37,275,213) 100,062, ,776,295 Increase in unearned premiums (299,000) (526,000) 99,763, ,250,295 Less : Gross claims Reinsurers' share 95,353,008 78,982,790 (42,725,484) (35,452,660) 52,627,524 43,530,130 Gross recoveries Reinsurers share (6,274,552) (6,232,602) 2,409,051 2,820,133 (3,865,501) (3,412,469) Other income Policy fees Profit on disposals of fixed assets Sundry income 48,762,023 40,117,661 51,001,564 60,132,634 4,254,800 3,784,725 15,984 86,484 50,539 23,080 4,321,323 3,894,289 Less : Operating expenses Staff costs Economic and status information Depreciation of fixed assets Office management Public relations Insurance and professional fees Travelling Human resources management Bad debt provision Finance lease interest 33,919,927 36,872,512 6,701,018 6,598,360 (3) 5,534,066 4,334,643 3,486,769 3,516,363 2,912,437 2,760,602 2,265,546 1,731, , ,793 1,425, ,580 14,780 59,408 7,911 19,185 56,848,172 57,220,805 Underwriting result for the year (1,525,285) 6,806,118 Investment income Less : Investment expenses Net investment income 7,564,511 32,919,410 (1,860,460) (1,765,749) (12) 5,704,051 31,153,661 Result for the year (8) 4,178,766 37,959,779 50

7 Statement of Recognised Gains and Losses For the year ended 31 March 2002 (Expressed in Hong Kong dollars) Note 2002($) 2001($) Net losses not recognised in the statement of income and expenditure Deficit on revaluation of investments in securities (8) (11,023,238) (35,616,083) (11,023,238) (35,616,083) Result for the year Revaluation deficit / (surplus) transferred to income and expenditure account on disposal of investments in securities for the year 4,178,766 37,959,779 (8) 16,965,768 (19,696,403) 21,144,534 18,263,376 Total recognised gains / (losses) 10,121,296 (17,352,707) 51

8 Cash Flow Statement For the year ended 31 March 2002 (Expressed in Hong Kong dollars) Note 2002($) 2001($) Net cash inflow from operating activities (13)(a) 8,036, ,306 Returns on investments and servicing of finance Interest received from short term deposits Interest and dividends received from investments Interest element of finance lease rentals Net cash inflow from returns on investments and servicing of finance 1,767,949 4,657, , ,467 (7,911) (19,185) 2,195,609 5,301,561 Investing activities Placement of time deposits Maturity of time deposits Purchase of fixed assets Proceeds on disposal of fixed assets Purchase of investments Placement of funds with investment managers Net cash outflow from investing activities (28,500,000) (36,500,000) 30,000,000 56,000,000 (6,054,418) (4,341,838) 15,984 86,484 (10,100,000) 16,000,000 - (45,000,000) (14,638,434) (13,755,354) Net cash outflow before financing (4,406,340) (7,814,487) Financing Capital element of finance lease rentals (13)(b) (67,489) (72,615) Decrease in cash and cash equivalents (4,473,829) (7,887,102) Cash and cash equivalents at beginning of the year 39,681,758 47,568,860 Cash and cash equivalents at end of the year (13)(d) 35,207,929 39,681,758 52

9 Notes on the Financial Statements (Expressed in Hong Kong dollars) 1 Capital The capital of the Corporation is wholly provided by the Government of the Hong Kong Special Administrative Region under section 19 of the Hong Kong Export Credit Insurance Corporation Ordinance (Cap. 1115). 2 Turnover The principal activities of the Corporation are the transactions of export credit insurance. Turnover represents gross premiums written during the year in the ordinary course of business, net of discounts and returns. 3 Fixed assets Computer Office Office Leasehold hardware and Motor machinery and premises improvements software vehicles furniture Total Cost : Balance at 1 April 2001 Additions Disposals Balance at 31 March ,100,000 4,737,215 11,805, ,401 2,907,658 46,041, ,309 5,190, ,000 6,054,418 - (31,240) - - (338,735) (369,975) 26,100,000 5,323,284 16,995, ,401 2,815,923 51,726,261 Accumulated depreciation : Balance at 1 April 2001 Charge for the year Written back on disposal Balance at 31 March ,397,500 3,335,851 9,108, ,800 2,152,109 27,158, , ,954 3,543, , ,356 5,534,066 - (31,240) - - (338,735) (369,975) 13,050,000 4,121,565 12,652, ,600 2,170,730 32,322,162 Net book value : At 31 March ,050,000 1,201,719 4,343, , ,193 19,404,099 At 31 March ,702,500 1,401,364 2,696, , ,549 18,883,747 Note: The net book value of fixed assets of the Corporation includes an amount of $26,300 (2001: $52,600) in respect of assets held under finance leases. Depreciation and finance lease charges allocated to the income and expenditure account for the year amounted to $26,300 (2001: $62,300) and $7,911 (2001: $19,185) respectively. The leasehold land of the Corporation's office premises is situated in Hong Kong and held under a long-term lease. 53

10 Notes on the Financial Statements (Continued) (Expressed in Hong Kong dollars) 2002($) 2001($) 4 Investments (a)non-trading securities - debt securities Listed In Hong Kong Outside Hong Kong Unlisted In Hong Kong Outside Hong Kong (b)non-trading securities - equity securities Listed In Hong Kong Outside Hong Kong 8,309,700 7,672, ,153, ,141, ,463, ,813,474 51,147,034 62,530,500 16,885,285 6,561,239 68,032,319 69,091,739 72,911,396 70,575, ,668, ,180, ,579, ,756,161 (c) Deposits with investment managers 139,128,017 46,658,292 TOTAL 519,203, ,319,666 Investments expected to be held for - within one year - more than one year 5 Insurance and other receivables 188,499,933 96,591, ,703, ,727, ,203, ,319,666 Debtors and prepayments Interest and dividend receivable Amounts due from reinsurers Insurance and other receivables expected to be recovered - within one year - more than one year 6 Insurance and other payables 11,586,335 12,451,668 3,339,639 6,063,317 2,052,995 2,822,823 16,978,969 21,337,808 16,672,816 21,053, , ,153 16,978,969 21,337,808 Premium deposits Other creditors and accrued charges Policy fees received in advance Insurance and other payables expected to be settled - within one year - more than one year 13,421,100 13,506,750 4,116,510 4,688,809 37, ,500 17,575,110 18,317,059 4,550,910 5,355,909 13,024,200 12,961,150 17,575,110 18,317,059 54

11 Notes on the Financial Statements (Continued) (Expressed in Hong Kong dollars) 7 Obligations under forward contracts The Corporation enters into forward exchange contracts to hedge certain investments denominated in foreign currencies (principally Pound sterling, US dollar and Japanese yen). The Hong Kong dollar equivalent amount of forward exchange contracts entered into by the Corporation outstanding at 31 March 2002 is $5,350,932 (2001: Nil). 8 Reserves Investment Nonrevaluation Contingency insurance Revenue reserve reserve reserve reserve Total Balance at 1 April 2000 Result for the year Net change in value of investments Transfer to income and expenditure account on disposal of investments Transfer from / (to) revenue reserve Balance at 31 March ,221, ,622,000 56,311, ,851, ,006, ,959,779 37,959,779 (35,616,083) (35,616,083) (19,696,403) (19,696,403) - 48,432,500 (2,985,440) (45,447,060) - (18,091,420) 362,054,500 53,326, ,364, ,653,762 Balance at 1 April 2001 Result for the year Net change in value of investments Transfer to income and expenditure account on disposal of investments Transfer (to) / from revenue reserve (18,091,420) 362,054,500 53,326, ,364, ,653, ,178,766 4,178,766 (11,023,238) (11,023,238) 16,965, ,965,768 - (12,140,000) (799,668) 12,939,668 - Balance at 31 March 2002 (12,148,890) 349,914,500 52,526, ,482, ,775,058 55

12 Notes on the Financial Statements (Continued) (Expressed in Hong Kong dollars) 9 Provision for claims 2002($) 2001($) Buyer Country risks risks Total Total (a) Provision for claims intimated Gross provision at 1 April Claims paid against provision Provision no longer required written back Transfer from provision for claims not yet intimated Provision made during the year Gross provision at 31 March Reinsurers' share 20,293,065-20,293,065 7,708,889 (16,400,584) - (16,400,584) (4,555,760) 3,892,481-3,892,481 3,153,129 (3,892,481) - (3,892,481) (3,109,064) , , , , ,567 44,065 29,099,309-29,099,309 20,249,000 29,630,876-29,630,876 20,293,065 (13,333,894) - (13,333,894) (9,131,879) Net provision at 31 March (A) 16,296,982-16,296,982 11,161,186 (b) Provision for claims not yet intimated Gross provision at 1 April Claims paid against provision Provision no longer required written back Transfer to provision for claims intimated Provision made during the year Gross provision at 31 March Reinsurers' share 44,560,612 4,250,000 48,810,612 62,905,970 (43,900,190) - (43,900,190) (36,675,012) 660,422 4,250,000 4,910,422 26,230,958 (128,855) (2,000,000) (2,128,855) (22,420,346) 531,567 2,250,000 2,781,567 3,810,612 (531,567) - (531,567) - - 2,250,000 2,250,000 3,810,612 42,750,000 2,250,000 45,000,000 45,000,000 42,750,000 4,500,000 47,250,000 48,810,612 (19,237,500) - (19,237,500) (20,123,146) Net provision at 31 March (B) 23,512,500 4,500,000 28,012,500 28,687,466 (c) Total net provision at 31 March (A) + (B) 39,809,482 4,500,000 44,309,482 39,848,652 (d) Amounts of provision expected to be settled after more than 1 year Gross provision Reinsurers' share Net provision expected to be settled after more than one year 10,536,000 4,500,000 15,036,000 9,683,000 (4,741,200) - (4,741,200) (3,344,850) 5,794,800 4,500,000 10,294,800 6,338,150 56

13 Notes on the Financial Statements (Continued) (Expressed in Hong Kong dollars) 10 Unearned premiums Note 2002($) 2001($) Gross unearned premiums at 31 March Reinsurers' share Net unearned premiums at 31 March 9,542,000 9,085,000 (3,424,000) (3,266,000) 6,118,000 5,819,000 Note: All of the unearned premiums of $6,118,000 (2001: $5,819,000) are expected to be earned within one year. 11 Obligations under finance leases At 31 March, the Corporation had obligations under finance leases payable as follows : Within 1 year After 1 year but within 5 years Finance charges relating to future periods 17,750 75,400-17,750 17,750 93,150 (733) (8,644) 17,017 84,506 Note : The amount of obligations under finance leases expected to be settled within one year is $17,017 (2001: $67,489) 12 Net investment income Investment income : Interest on bonds Interest on deposits (Loss) / profit on sale of investments Net exchange gain / (loss) Dividend income Sundry income Less: Investment expenses Fund management fees Sundry expenses 15,176,226 15,466,873 2,932,007 8,367,343 (14,565,996) 8,420, ,344 (2,711,699) 3,705,092 3,072, , ,734 7,564,511 32,919,410 1,617,265 1,608, , ,785 1,860,460 1,765,749 Net investment income 5,704,051 31,153,661 Note : The full receipt of interest earned from deposits is dependent upon the deposits not being uplifted before maturity. 57

14 Notes on the Financial Statements (Continued) (Expressed in Hong Kong dollars) 13 Notes on the cash flow statement 2002($) 2001($) (a) Reconciliation of result for the year to net cash inflow from operating activities Result for the year Investment income Fund management fees Depreciation of fixed assets Profit on disposals of fixed assets Finance lease interest Increase in unearned premiums Decrease / (increase) in insurance and other receivables Decrease in insurance and other payables Increase / (decrease) in provision for claims Net cash inflow from operating activities 4,178,766 37,959,779 (5,704,051) (31,153,661) (1,610,160) (1,589,892) 5,534,066 4,334,643 (15,984) (86,484) 7,911 19, , ,000 1,635,161 (4,609,942) (749,054) (3,948,302) 4,460,830 (812,020) 8,036, ,306 (b) Analysis of changes in financing during the year Finance lease obligations Balance at 1 April Cashflow from financing Balance at 31 March 84, ,121 (67,489) (72,615) 17,017 84,506 (c) Analysis of changes in cash and cash equivalents and other liquid investments during the year Cash and Other liquid cash equivalents investments Total Total Balance at 1 April Net cash outflow Placement of time deposits Maturity of time deposits Balance at 31 March 39,681,758 15,500,000 55,181,758 82,568,860 (4,473,829) - (4,473,829) (7,887,102) - 28,500,000 28,500,000 36,500,000 - (30,000,000) (30,000,000) (56,000,000) 35,207,929 14,000,000 49,207,929 55,181,758 (d) Analysis of the balances of cash and cash equivalents at the end of the year Cash at bank and in hand Short term deposits maturing within 3 months 4,207,929 2,681,758 31,000,000 37,000,000 35,207,929 39,681,758 58

15 Notes on the Financial Statements (Continued) (Expressed in Hong Kong dollars) 14 Taxation The results of the Corporation are not subject to taxation by virtue of section 27 of the Hong Kong Export Credit Insurance Corporation Ordinance (Cap. 1115). 15 Maximum liability The maximum liability of the Corporation at 31 March 2002 in respect of policies in force amounted to $9,552,450,000 (2001: $9,415,300,000). The maximum liability the Corporation is permitted to undertake as determined by the Legislative Council under section 23 of the Hong Kong Export Credit Insurance Corporation Ordinance (Cap. 1115) at 31 March 2002 is $12,500,000,000 (2001: $10,000,000,000). 59

Report of the Auditors

69 Report of the Auditors TO THE SHAREHOLDERS OF THE WHARF (HOLDINGS) LIMITED (INCORPORATED IN HONG KONG WITH LIMITED LIABILITY) We have audited the accounts on pages 70 to 117 which have been prepared