46. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

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1 258 Annual Report 2013 Franshion Properties (China) Limited 46. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The s principal financial instruments comprise bank loans and other borrowings and cash and short term deposits. The main purpose of these financial instruments is to raise finance for the s operations. The has various other financial assets and liabilities such as trade receivables and payables, which arise directly from its operations. It is, and has been throughout the year under review, the s policy that no trading in financial instruments shall be undertaken. The main risks arising from the s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below. Interest rate risk The s exposure to the risk of changes in market interest rates relates primarily to the s long term debt obligations with floating interest rates. The s policy is to manage its interest cost using a mix of fixed and variable rate debts. The s policy is to maintain approximately 30% of its interest-bearing borrowings at fixed interest rates. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the s and the Company s profit before tax (through the impact on floating rate borrowings). in basis points before tax HK$ 000 in basis points Company before tax HK$ 000 RMB 27 (43,420) 27 USD 27 (10,278) 27 (10,115) HKD 27 (410) 27 (410) RMB (27) 43,420 (27) USD (27) 10,278 (27) 10,115 HKD (27) 410 (27) December 2012 RMB 27 (39,755) 27 USD 27 (2,250) 27 (2,193) HKD 27 (1,092) 27 (1,092) RMB (27) 39,755 (27) USD (27) 2,250 (27) 2,193 HKD (27) 1,092 (27) 1,092

2 Franshion Properties (China) Limited Annual Report Interest rate risk (Continued) The sensitivity analysis above has been determined assuming that the change in interest rates had occurred at the end of the year and had applied the exposure to interest rate risk to those bank and other borrowings in existence at that date. The estimated percentage increase or decrease represents management s assessment of a reasonably possible change in interest rates over the year until the end of the next reporting period. Foreign currency risk All of the s turnover and substantially all of the s operating expenses are denominated in RMB, which is currently not a freely convertible currency. The PRC Government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of Mainland China. Shortages in the availability of foreign currencies may restrict the ability of the s PRC subsidiaries to remit sufficient foreign currencies to pay dividends or other amounts to the. Under existing PRC foreign exchange regulations, payments of current account items, including dividends, trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate PRC Governmental authorities is required where RMB is to be converted into foreign currencies and remitted out of Mainland China to pay capital account items, such as the repayment of bank loans denominated in foreign currencies. Currently, the s PRC subsidiaries may purchase foreign currencies for settlement of current account transactions, including the payment of dividends to the Company, without the prior approval of the State Administration of Foreign Exchange. The s PRC subsidiaries may also retain foreign currencies in their current accounts to satisfy foreign currency liabilities or to pay dividends. Since foreign currency transactions on the capital account are still subject to limitations and require approval from the State Administration of Foreign Exchange, this could affect the ability of the s subsidiaries to obtain the required foreign currencies through debt or equity financing, including by means of loans or capital contributions. The s financial assets and liabilities are not subject to foreign currency risk, except for certain short term deposits denominated in United States dollars. The fluctuations in the exchange rates of RMB against foreign currencies could affect the s results of operations. There are limited hedging instruments available in Mainland China to reduce the s exposure to exchange rate fluctuations between RMB and other currencies. To date, the has not entered into any hedging transactions in an effort to reduce the s exposure to foreign currency exchange risk. While the may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited, and the may not be able to hedge the s exposure successfully, or at all.

3 260 Annual Report 2013 Franshion Properties (China) Limited Foreign currency risk (Continued) The following table demonstrates the sensitivity at the end of the reporting period to a reasonably possible change in the exchange rate between HK$ and United States dollars ( US$ ) on the s profits for the years ended and in US$ rate HK$ 000 HK$ % (156,181) (77,908) -1% 156,181 77,908 The following table demonstrates the sensitivity at the end of the reporting period to a reasonably possible change in the exchange rate between RMB and US$ on the s profits s ended 31 December 2013 and in US$ rate HK$ 000 HK$ % (14,998) (10,056) -5% 14,998 10,056 Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The is exposed to credit risk arising from its land development revenue, the sale of properties, leasing activities, the provision of hotel and property management services and its financing activities, including deposits with banks and financial institutions and derivatives. Credit risk is managed by requiring tenants to pay rentals in advance. Outstanding tenants receivables are regularly monitored. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial asset.

4 Franshion Properties (China) Limited Annual Report Liquidity risk Due to the capital intensive nature of the s business, the ensures that it maintains sufficient cash and credit facilities to meet its liquidity requirements. The s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and other interest-bearing loans. In the opinion of the directors, most of the borrowings that mature within one year are able to be renewed and the is expected to have adequate source of funding to finance and manage its liquidity position. The maturity profile of the s financial liabilities as at the end of the reporting period, based on the contractual undiscounted payments, is as follows: 2013 but Total other borrowings 7,802,200 3,522,464 21,120,597 11,365,997 43,811,258 Trade payables 5,304,170 5,304,170 Other payables 4,120,324 4,120,324 Due to related parties 3,443,604 3,443,604 20,670,298 3,522,464 21,120,597 11,365,997 56,679, but Total other borrowings 10,341,133 3,412,558 11,763,998 9,360,132 34,877,821 Trade payables 2,525,712 2,525,712 Other payables 3,634,490 3,634,490 Due to related parties 99,634 99,634 16,600,969 3,412,558 11,763,998 9,360,132 41,137,657

5 262 Annual Report 2013 Franshion Properties (China) Limited Liquidity risk (Continued) Company 2013 but Total other borrowings 928, ,296 4,595,643 6,046,696 Other payables 12,002 12,002 Due to subsidiaries 15,197,718 15,197,718 Due to related parties 3,334,435 3,334,435 4,275, ,296 19,793,361 24,590, but Total other borrowings 2,515,368 2,515,368 Other payables 8,900 8,900 Due to subsidiaries 11,377,681 11,377,681 Capital management 2,524,268 11,377,681 13,901,949 The primary objectives of the s capital management are to safeguard the s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. The manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the may adjust the dividend payment to shareholders, issue new shares or sell assets to reduce debt. The is not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or processes for managing capital during the years ended 31 December 2013 and 31 December 2012.

6 Franshion Properties (China) Limited Annual Report Capital management (Continued) The monitors capital on the basis of the debt-to-adjusted-capital ratio. This ratio is calculated as net debt divided by adjusted capital. Net debt is calculated as total interest-bearing bank and other borrowings (as shown in the statement of financial position) less cash and cash equivalents, restricted bank balances and pledged deposits and certain other financial assets included in current assets. Adjusted capital comprises all components of equity (including non-controlling interests) and amounts due to related parties. The aims to maintain the debt-to-adjusted-capital ratio at a reasonable level. The debt-to-adjustedcapital ratios as at the end of the reporting periods were as follows: Notes HK$ 000 HK$ 000 other borrowings 32 35,806,135 28,275,422 Less: Cash and cash equivalents 28 (14,489,962) (12,888,442) Restricted bank balances and pledged deposits 28 (303,400) (575,983) Certain other financial assets included in current assets 27 (22,576) (123,330) Net debt 20,990,197 14,687,667 Total equity 47,219,456 34,502,830 Add: Amounts due to related parties 26 3,443,604 99,634 Adjusted capital 50,663,060 34,602,464 Debt-to-adjusted-capital ratio 41.4% 42.4% 47. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved and authorised for issue by the board of directors on 26 February 2014.

The Company has exposure to the following risks from its use of financial instruments:

38 FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT The Company has exposure to the following risks from its use of financial instruments: 38.1 Credit risk 38.2 Liquidity risk 38.3 Market risk This