June 22, The Directors. Citigroup Global Markets Asia Limited Goldman Sachs (Asia) L.L.C. Nomura International (Hong Kong) Limited

Transcription

1 , June 22, 2016 The Directors Citigroup Global Markets Asia Limited Goldman Sachs (Asia) L.L.C. Nomura International (Hong Kong) Limited Dear Sirs, We set out below our report on the financial information regarding (the Company ) and its subsidiaries (hereinafter collectively referred to as the Group ) for each of the three years ended December 31, 2013, 2014 and 2015 (the Relevant Periods ) (the Financial Information ) for inclusion in the prospectus of the Company dated June 22, 2016 (the Prospectus ) in connection with the initial listing of H shares of the Company on the Main Board of the Stock Exchange of Hong Kong Limited (the Hong Kong Stock Exchange ). On December 10, 1997, Orient Securities Limited Liability Company ( ) was established in Shanghai Municipality of the People s Republic of China (the PRC ) with the approval of the China Securities Regulatory Commission (the CSRC ). On October 8, 2003, upon approval from the CSRC and the Shanghai Municipal Government, Orient Securities Limited Liability Company was converted into a joint stock limited liability company, and was renamed. On March 23, 2015, the Company listed its shares on the Shanghai Stock Exchange with the stock code of The Company and all subsidiaries have adopted December 31, as their financial year end dates. During the Relevant Periods and as at the date of this report, the Company has direct or indirect interests in subsidiaries as set out in Note 20 to the Financial Information of this report. The statutory consolidated financial statements of the Group prepared in accordance with the relevant accounting rules and financial regulations applicable to enterprises in the PRC (the Underlying Financial Statements ) for the years ended December 31, 2013, 2014 and 2015 were audited by BDO China Shu Lun Pan Certified Public Accountants LLP. ( ( )) ( BDO ), a firm of certified public accountants registered in the PRC. The statutory financial statements of the subsidiaries, directly or indirectly controlled by the Company, were audited by independent auditors as set out in Note 20 to the Financial Information of this report. The Financial Information of the Group for the Relevant Periods set out in this report has been prepared from the Underlying Financial Statements, after making such adjustments as appropriate. For the purpose of the report, we have examined the Underlying Financial Statements and carried out such additional procedures as necessary in accordance with International Standards on Auditing issued by International Auditing and Assurance Standards Board (the IAASB ), and the Auditing Guideline Prospectuses and the Reporting Accountant issued by the Hong Kong Institute of Certified Public Accountants (the HKICPA ). I-1

2 The directors of the Company are responsible for the preparation of the Underlying Financial Statements and the contents of the Prospectus in which this report is included. It is our responsibility to compile the Financial Information set out in this report from the Underlying Financial Statements, to form an independent opinion on the Financial Information, and to report our opinion to you. In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the financial position of the Group and of the Company as at December 31, 2013, 2014 and 2015, and of the financial performance and consolidated cash flows of the Group for each of the three years ended December 31, 2013, 2014 and I-2

3 A. FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF PROFIT OR LOSS Year ended December 31, NOTES Revenue Commission and fee income ,783,796 2,459,949 6,620,956 Interest income ,517 1,446,142 4,289,716 Net investment gains ,149,334 3,906,270 9,341,932 Total revenue... 4,539,647 7,812,361 20,252,604 Other income and gains ,875 75, ,671 Total revenue and other income... 4,586,522 7,887,893 20,459,275 Depreciation and amortization... 9 (152,261) (148,665) (149,785) Staff costs (1,105,542) (1,447,765) (3,826,660) Commission and fee expenses (163,621) (260,350) (791,028) Interest expenses (1,261,011) (2,209,793) (4,548,512) Other operating expenses (821,697) (1,018,805) (2,080,873) Provision for/(reversal of) impairment losses (71,828) (4,953) 373 Total expenses... (3,575,960) (5,090,331) (11,396,485) Share of results of associates , , ,296 Profit before income tax... 1,134,237 2,933,689 9,499,086 Income tax expense (151,907) (574,987) (2,124,916) Profit for the year ,330 2,358,702 7,374,170 Attributable to: Shareholders of the Company... 1,007,422 2,341,671 7,325,225 Non-controlling interests... (25,092) 17,031 48, ,330 2,358,702 7,374,170 Earnings per share attributable to shareholders of the Company (Expressed in RMB Yuan per share) - Basic I-3

4 CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Year ended December 31, NOTE Profit for the year ,330 2,358,702 7,374,170 Other comprehensive income/(expense) attributable to owners of the Company, net of income tax: Items that may be reclassified subsequently to profit or loss: Net fair value gains on available-for-sale financial assets... 46(4) 296,282 1,216,240 1,101,732 Income tax impact... (73,371) (313,609) (272,979) Share of other comprehensive income/(expense) of associates... 2,960 (16,015) 11,781 Exchange differences arising on translation... (5,052) 1,993 (13,621) Others Other comprehensive income for the year, net of income tax , , ,306 Total comprehensive income for the year... 1,203,199 3,248,039 8,201,476 Attributable to: Shareholders of the Company... 1,228,291 3,231,008 8,152,138 Non-controlling interests... (25,092) 17,031 49,338 1,203,199 3,248,039 8,201,476 I-4

5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION NOTES Non-current assets Property and equipment ,465,749 1,536,867 1,718,155 Goodwill ,135 32,135 32,135 Other intangible assets ,178 86,188 96,549 Investments in associates ,011 1,003,793 1,908,526 Available-for-sale financial assets ,966,762 2,892,722 11,369,355 Held-to-maturity investments ,259,208 1,247, ,921 Financial assets held under resale agreements ,000 5,482,030 10,209,680 Deferred tax assets ,648 74, ,448 Total non-current assets... 6,258,691 12,354,991 25,945,769 Current assets Advances to customers ,806,953 9,946,058 14,241,083 Accounts receivable , , ,401 Other receivables and prepayments ,256,545 1,982,141 4,315,193 Available-for-sale financial assets ,667,097 37,539,696 48,507,365 Held-to-maturity investments ,078 Financial assets held under resale agreements ,157,873 8,037,221 16,288,535 Financial assets at fair value through profit or loss ,116,045 7,273,646 31,870,854 Derivative financial assets ,618 56,766 77,362 Deposits with exchanges and non-bank financial institutions , ,609 1,060,011 Clearing settlement funds ,147,075 5,648,617 8,825,404 Cash and bank balances ,986,047 23,803,149 55,343,507 Total current assets... 54,593,774 95,175, ,951,793 Total assets... 60,852, ,530, ,897,562 Current liabilities Borrowings , ,780 Due to banks and other financial institutions ,815,000 6,983,000 10,200,000 Accounts payable to brokerage clients ,893,673 21,783,072 43,193,275 Accrued staff costs , ,572 1,928,933 Other account payables, other payables and accruals ,799 1,197,918 2,203,981 Current tax liabilities... 60, ,999 1,682,468 Bonds payables ,781,294 Short-term financing bills payables ,500,000 6,779,791 8,396,061 Financial liabilities at fair value through profit or loss ,533, ,236 3,147,266 Derivative financial liabilities ,480 Financial assets sold under repurchase agreements ,214,322 37,012,674 36,665,091 Total current liabilities... 40,585,292 75,267, ,763,629 Net current assets... 14,008,482 19,908,098 69,188,164 Total assets less current liabilities... 20,267,173 32,263,089 95,133,933 Equity Share capital ,281,743 4,281,743 5,281,743 Reserves ,934,678 9,688,635 22,227,773 Retained profits ,333,878 4,382,755 7,448,603 Equity attributable to shareholders of the Company... 15,550,299 18,353,133 34,958,119 Non-controlling interests , , ,626 Total equity... 15,778,121 18,625,498 35,375,745 Non-current liabilities Borrowings , ,388 Financial assets sold under repurchase agreements ,500 11,215,000 Deferred tax liabilities , , ,606 Bonds payables ,399,719 12,679,834 47,181,194 Total non-current liabilities... 4,489,052 13,637,591 59,758,188 Total equity and non-current liabilities... 20,267,173 32,263,089 95,133,933 I-5

6 STATEMENT OF FINANCIAL POSITION NOTES Non-current assets Property and equipment ,439,520 1,508,311 1,682,287 Goodwill ,948 18,948 18,948 Other intangible assets ,211 79,079 88,254 Investments in subsidiaries ,096,003 3,930,263 6,250,653 Investments in associates , ,867 1,188,669 Available-for-sale financial assets ,490 2,038,514 8,325,648 Held-to-maturity investments ,259,208 1,247, ,921 Financial assets held under resale agreements ,000 5,482,030 10,209,680 Deferred tax assets ,651 27, ,660 Total non-current assets... 7,848,349 15,099,869 28,245,720 Current assets Advances to customers ,792,976 9,735,315 13,532,052 Accounts receivable ,317 93, ,311 Other receivables and prepayments ,157 1,241,746 1,582,326 Available-for-sale financial assets ,685,519 37,050,830 46,926,696 Held-to-maturity investments ,078 Financial assets held under resale agreements ,688,892 7,388,074 16,155,335 Financial assets at fair value through profit or loss ,323,862 4,878,869 28,095,836 Derivative financial assets ,618 55,909 73,116 Deposits with exchanges and non-bank financial institutions , , ,792 Clearing settlement funds ,740,224 3,466,377 6,038,318 Cash and bank balances ,804,278 18,337,300 37,920,818 Total current assets... 47,290,763 82,952, ,348,678 Total assets... 55,139,112 98,052, ,594,398 Current liabilities Due to banks and other financial institutions ,815,000 6,983,000 10,200,000 Accounts payable to brokerage clients ,712,097 16,328,757 26,919,127 Accrued staff costs , ,382 1,204,060 Other account payables, other payables and accruals , ,295 1,819,422 Current tax liabilities... 48, ,748 1,516,464 Bonds payables ,797,902 Short-term financing bills payables ,500,000 6,809,791 7,799,271 Financial liabilities at fair value through profit or loss ,170 2,460,558 Derivative financial liabilities ,425 Financial assets sold under repurchase agreements ,627,426 36,565,276 36,066,590 Total current liabilities... 35,154,553 67,726,681 91,895,819 Net current assets... 12,136,210 15,226,230 60,452,859 Total assets less current liabilities... 19,984,559 30,326,099 88,698,579 Equity Share capital ,281,743 4,281,743 5,281,743 Reserves ,887,964 9,623,661 21,769,321 Retained profits ,322,887 4,121,998 6,824,081 Total equity 15,492,594 18,027,402 33,875,145 Non-current liabilities Financial assets sold under repurchase agreements ,500 11,215,000 Deferred tax liabilities , , ,611 Bonds payables ,397,975 11,778,783 42,787,823 Total non-current liabilities... 4,491,965 12,298,697 54,823,434 Total equity and non-current liabilities... 19,984,559 30,326,099 88,698,579 I-6

7 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY NOTES Share capital Capital reserve Equity attributable to shareholders of the Company Surplus reserve Reserves General reserve Investment revaluation reserve Translation reserve Retained profits Subtotal Non-controlling interests RMB 000 (Note 45) (Note46) (Note 46) (Note 46) (Note 46) (Note 46) (Note 47) At January 1, ,281,743 3,796,107 1,019,469 2,401, ,430 (6,596) 3,126,574 14,750, ,014 14,998,196 Profit for the year... 1,007,422 1,007,422 (25,092) 982,330 Other comprehensive income/(expenses) for the year.. 225,921 (5,052) 220, ,869 Total comprehensive income/(expenses) for the year.. 225,921 (5,052) 1,007,422 1,228,291 (25,092) 1,203,199 Capital injection by non-controlling shareholders... 4,900 4,900 Appropriation to surplus reserve ,833 (103,833) Appropriation to general reserve ,111 (268,111) Dividends recognized as distribution (428,174) (428,174) (428,174) At December 31, 2013 and January 1, ,281,743 3,796,107 1,123,302 2,669, ,351 (11,648) 3,333,878 15,550, ,822 15,778,121 Total equity Profit for the year... 2,341,671 2,341,671 17,031 2,358,702 Other comprehensive income for the year ,344 1, , ,337 Total comprehensive income for the year ,344 1,993 2,341,671 3,231,008 17,031 3,248,039 Capital injection by non-controlling shareholders... 27,512 27,512 Appropriation to surplus reserve ,021 (312,021) Appropriation to general reserve ,599 (552,599) Dividends recognized as distribution (428,174) (428,174) (428,174) At December 31, 2014 and January 1, ,281,743 3,796,107 1,435,323 3,222,165 1,244,695 (9,655) 4,382,755 18,353, ,365 18,625,498 Profit for the year... 7,325,225 7,325,225 48,945 7,374,170 Other comprehensive income(expenses) for the year ,534 (13,621) 826, ,306 Total comprehensive income/(expenses) for the year.. 840,534 (13,621) 7,325,225 8,152,138 49,338 8,201,476 IPO of A shares... 1,000,000 9,030,000 10,030,000 10,030,000 Costs of IPO of A shares... (242,526) (242,526) (242,526) Capital injection by non-controlling shareholders... 97,680 97,680 Appropriation to surplus reserve... 1,022,675 (1,022,675) Appropriation to general reserve... 1,916,266 (1,916,266) Dividends recognized as distribution (1,320,436) (1,320,436) (1,757) (1,322,193) Others... (14,190) (14,190) (14,190) At December 31, ,281,743 12,569,391 2,457,998 5,138,431 2,085,229 (23,276) 7,448,603 34,958, ,626 35,375,745 I-7

8 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, OPERATING ACTIVITIES Profit before income tax... 1,134,237 2,933,689 9,499,086 Adjustments for: Interest expenses... 1,261,011 2,209,793 4,548,512 Share of results of associates... (123,675) (136,127) (436,296) Depreciation and amortization , , ,785 Provision for/(reversal of) impairment losses... 71,828 4,953 (373) Losses/(gains) on disposal of property and equipment and other intangible assets (4,800) (14,845) Foreign exchange (gains)/losses... 6,444 (4,099) (69,640) Net realized gains and income arising from available-forsale financial assets... (1,756,528) (2,766,175) (5,352,693) Interest income from held-to-maturity investments... (67,473) (69,906) (66,252) Net realized gains arising from loan and receivable investments and others... (5,396) (12,946) Unrealized fair value change of financial assets at fair value through profit or loss ,399 (309,298) (454,432) Unrealized fair value change of financial liabilities at fair value through profit or loss... 79,434 80,637 (9,846) Unrealized fair value change of derivative financial assets... (87,609) (15,644) 193,413 Operating cash flows before movements in working capital ,035 2,066,292 7,973,473 Increase in advances to customers... (1,393,119) (7,139,854) (4,261,924) Increase in financial assets held under resale agreements... (2,098,571) (10,724,378) (12,978,964) Increase in financial assets at fair value through profit or loss and derivative financial assets... (2,105,642) (1,848,290) (24,052,444) Decrease/(increase) in deposits and reserve funds and deposits with exchanges... 47,928 (469,370) (303,402) Increase in bank balances and clearing settlement funds restricted or held on behalf of customers... (225,218) (11,590,003) (23,534,003) Increase in accounts receivable, other receivables and prepayments... (199,277) (142,487) (3,003,709) Increase in other account payables, other payables and accruals , ,290 1,490,155 (Decrease)/increase in accounts payable to brokerage clients.. (26,102) 10,888,681 21,379,236 Increase/(decrease) in financial liabilities at fair value through profit or loss and derivative financial liabilities... 1,453,620 (735,453) 2,347,619 (Decrease)/increase in financial assets sold under repurchase agreements... (156,053) 15,891,852 10,773,917 Increase in deposits due to banks and other financial institutions... 2,665,000 3,168,000 3,217,000 Cash generated from operations... (1,039,407) 57,280 (20,953,046) Income taxes paid... (120,492) (293,620) (759,849) Interest paid... (1,068,787) (1,452,349) (2,343,247) NET CASH USED IN OPERATING ACTIVITIES... (2,228,686) (1,688,689) (24,056,142) INVESTING ACTIVITIES Dividends and interest received from investments... 1,421,164 1,694,138 2,109,903 Proceeds on disposal of property and equipment... 1,158 70,796 71,688 Disposal of available-for-sale financial assets, held-to maturity investments, loans and advances to customers... 42,360,595 63,982,526 89,747,463 Capital injection in associates... (122,000) (516,910) I-8

9 CONSOLIDATED STATEMENTS OF CASH FLOWS continued Year ended December 31, NOTE Purchases of available-for-sale financial assets, held-to maturity investments, loans and advances to customers... (46,091,914) (71,954,873) (104,295,372) Purchases of property and equipment and other intangible assets... (978,495) (302,520) (441,552) Proceeds from other investment activities... 27,733 NET CASH USED IN INVESTING ACTIVITIES... (3,287,492) (6,631,933) (13,297,047) FINANCING ACTIVITIES Capital injection from non-controlling shareholders... 4,900 27,512 97,680 Proceeds from A shares issued... 10,030,000 Net proceeds from bonds and short-term financing bills payables issued... 6,900,000 12,565,129 40,654,412 Net proceeds from borrowings , ,320 Dividends paid to shareholders... (418,784) (419,984) (1,324,411) Transaction costs paid on issue of A shares... (242,526) Interest of bonds and short-term financing bills payables paid... (77,270) (483,138) (1,099,558) Interest of borrowings paid... (12,431) (14,675) Payments on other financing activities... (1,500) (605) (683) NET CASH FROM FINANCING ACTIVITIES... 6,407,346 12,043,189 48,480,559 NET INCREASE IN CASH AND CASH EQUIVALENTS ,168 3,722,567 11,127,370 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR... 2,093,218 2,972,921 6,701,562 Effect of foreign exchange rate changes... (11,465) 6,074 55,772 CASH AND CASH EQUIVALENTS AT END OF THE YEAR ,972,921 6,701,562 17,884,704 I-9

10 NOTES TO THE FINANCIAL INFORMATION 1. GENERAL INFORMATION, formerly known as the Orient Securities Limited Liability Company ( ), a limited liability company was established on December 10, On October 8, 2003, upon approval from the China Securities Regulatory Commission ( CSRC ) and the Shanghai Municipal Government, Orient Securities Limited Liability Company was converted into a joint stock limited liability company, and was renamed as. On March 23, 2015, the Company became listed on the Shanghai Stock Exchange with the stock code of The registered office of the Company is located at 22F, 23F and 25-29F, Building 2, No. 318, South Zhongshan Road, Shanghai, the People s Republic of China ( PRC ). The Company and its subsidiaries (the Group ) are principally engaged in securities and futures brokerage, margin financing and securities lending, securities investment advisory, securities investment and trading, asset management, agency sale of financial products, securities underwriting and sponsorship, and other business activities approved by CSRC. The Financial Information is presented in Renminbi ( RMB ), which is also the functional currency of the Company. 2. APPLICATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS For the purpose of preparing and presenting the Financial Information, the Group has consistently applied International Accounting Standards ( IASs ), International Financial Reporting Standards ( IFRSs ), amendments and the related Interpretation ( IFRICs ) (herein collectively referred to as the IFRSs ) which are effective for the accounting period beginning on January 1, 2015 throughout the Relevant Periods. In addition, the Group has early applied the following amendments: Amendments to IAS 27 Equity method in separate financial statements The Group has early adopted the amendments to IAS 27 Equity Method in Separate Financial Statements issued by the International Accounting Standards Board (the IASB ) in August 2014 in advance of its effective date, January 1, The amendments allow an entity to account for investments in subsidiaries, joint ventures and associates in its separate financial statements: at cost in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial instruments: recognition and measurement for entities that have not yet adopted IFRS 9), or using the equity method as described in IAS 28 Investments in Associates and Joint Ventures. The accounting option must be applied by category of investments. The Company has applied the equity method to account for investments in associate in its separate financial statements. I-10

11 2. APPLICATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS continued Except amendments to IAS 27, the Group has not early applied the following new and revised IFRSs which are relevant to the Group that have been issued but are not yet effective. IFRS 9 Financial instruments 1 IFRS 15 Revenue from contracts with customers 1 IFRS 16 Leases 2 Amendments to IFRS 11 Accounting for acquisitions of interests in joint operations 3 Amendments to IFRS 15 Clarifications to IFRS 15 Revenue from contracts with customers 1 Amendments to IAS 1 Disclosure initiative 3 Amendments to IAS 16 and IAS 38 Clarification of acceptable methods of depreciation and amortization 3 Amendments to IFRS Annual improvements to IFRS cycle 3 Amendments to IAS 16 and IAS 41 Agriculture: Bearer plants 3 Amendments to IFRS 10 and IAS 28 Sale or contribution of assets between an investor and its associate or joint venture 4 Amendments to IFRS 10, IFRS 12 and IAS 28 Investment entities: Applying the consolidation exception 3 Amendments to IAS 7 Disclosure initiative 5 Amendments to IAS 12 Recognition of deferred tax assets for unrealized losses 5 1 Effective for annual periods beginning on or after January 1, Effective for annual periods beginning on or after January 1, Effective for annual periods beginning on or after January 1, Effective for annual periods beginning on or after a date to be determined 5 Effective for annual periods beginning on or after January 1, 2017 The board of directors of the Company is in the process of assessing the impact of the new standards and amendments on the Financial Information. So far it has concluded that the adoption of them is unlikely to have significant impact on the Financial Information except for the following: IFRS 9 Financial instruments IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a fair value through other comprehensive income (FVTOCI) measurement category for certain simple debt instruments. Key requirements of IFRS 9 that are relevant to the Group are: All recognized financial assets that are within the scope of IAS 39 Financial instruments: Recognition and measurement are subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at I-11

12 2. APPLICATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS continued IFRS 9 Financial instruments continued amortized cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured at FVTOCI. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss. With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value of financial liabilities attributable to changes in the financial liabilities credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss was presented in profit or loss. In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognized. The new general hedge accounting requirements retain the three types of hedge accounting. However, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an economic relationship. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity s risk management activities have also been introduced. The directors of the Company anticipate that the application of IFRS 9 in the future may affect the classification and measurement of the Group s financial assets and financial liabilities and it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed. I-12

13 2. APPLICATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS continued IFRS 15 Revenue from contracts with customers In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations when it becomes effective. The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition: Step 1: Identify the contract (s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation Under IFRS 15, an entity recognizes revenue when (or as) a performance obligation is satisfied, i.e. when control of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15. The directors of the Company anticipate that the application of IFRS 15 in the future may have impact on the amounts reported and disclosures made in the Group s consolidated financial statements and it is not practicable to provide a reasonable estimate of the effect of IFRS 15 until the Group performs a detailed review. IFRS 16 Leases IFRS 16 Leases was issued by IASB in January It will be effective for annual periods beginning on or after January 1, 2019 and will supersede IAS 17 Leases. This new standard provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessors and lessees. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. A lessee is required to recognize a right-of-use asset and a lease liability at the commencement of lease arrangement. Right-of-use asset includes the amount of initial measurement of lease liability, any lease payment made to the lessor at or before the lease commencement date, estimated cost to be incurred by the lessee for dismantling or removing the underlying assets from and restoring the site, as well as any other initial direct cost incurred by the lessee. Lease liability represents the present value of the lease payments. Subsequently, depreciation and impairment expenses, if any, on the right-of-use asset will be charged to profit or loss following the requirements of IAS 16 Property, Plant and Equipment, while lease liability will be increased by the interest accrual, which will be charged to profit or loss, and deducted by lease payments. I-13

14 2. APPLICATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS continued IFRS 16 Leases continued In respect of the lessor accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. The total operating lease commitment of the Group in respect of leased premises with terms more than 12 months as at December 31, 2015 amounted to RMB million. The directors of the Company do not expect the adoption of IFRS 16 as compared with the current accounting policy would result in significant impact on the Group s results but it is expected that certain portion of these lease commitments will be required to be recognized in the consolidated statement of financial position as right-of-use assets and lease liabilities. 3. SIGNIFICANT ACCOUNTING POLICIES The Financial Information has been prepared in accordance with the following accounting policies which conform with IFRSs. In addition, the Financial Information includes applicable disclosure required by the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange and by the Hong Kong Companies Ordinance. The Financial Information has been prepared on the historical cost basis except for certain financial instruments that are measured at fair values, as explained in the accounting policies set out below. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement data. Fair value for measurement and/or disclosure purpose in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2 Share-based Payment, leasing transactions that are within the scope of IAS 17 Leases, and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets. In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of inputs to the fair value measurement in its entirety, which are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. I-14

15 3. SIGNIFICANT ACCOUNTING POLICIES continued The principal accounting policies are set out below. Basis of consolidation The Financial Information incorporates the financial statements of the Company and entities (including structured entities) controlled by the Company and its subsidiaries. Control is achieved where the Company: has power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affect its returns. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Group has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Group considers all relevant facts and circumstances in assessing whether or not the Group s voting rights in an investee are sufficient to give it power, including: the size of the Group s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; potential voting rights held by the Group, other vote holders or other parties; rights arising from other contractual arrangements; and any additional facts and circumstances that indicate that the Group has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders meetings. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or losses and other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary. Profit or loss and each item of other comprehensive income are attributed to the shareholders of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the shareholders of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. I-15

16 3. SIGNIFICANT ACCOUNTING POLICIES continued Basis of consolidation continued Changes in the Group s ownership interests in existing subsidiaries Changes in the Group s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to shareholders of the Company. When the Group loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (1) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (2) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognized in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable IFRSs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 Financial Instruments: Recognition and Measurement, when applicable, the cost on initial recognition of an investment in an associate. The Group served as the manager of collective asset management schemes and funds. These collective asset management schemes and funds invest mainly in equities, debt securities and cash and cash equivalents. The Group s percentage of ownership in these structured entities can fluctuate from day to day according to the Group s and third-party s participation in them. Where the Group is deemed to control such collective asset management schemes and funds, with control determined based on an analysis of the guidance in IFRS 10 Consolidated financial statements, they are consolidated, with the interests of parties other than the Group being classified as liabilities because there is a contractual obligation for the relevant group entity as an issuer to repurchase or redeem units in such collective asset management schemes and funds for cash. These are presented as Third-party interests in consolidated asset management schemes and funds within financial liabilities designated at fair value through profit or loss in the consolidated statement of financial position. Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former shareholders of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are generally recognized in profit or loss as incurred. I-16

17 3. SIGNIFICANT ACCOUNTING POLICIES continued Business combinations continued At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value, except that: deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12 Income taxes and IAS 19 Employee benefits respectively; liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace sharebased payment arrangements of the acquiree are measured in accordance with IFRS 2 Share-based payment at the acquisition date; and assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that standard. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer s previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests proportionate share of the recognized amounts of the acquiree s identifiable net assets. The choice of measurement basis is made on a transaction-bytransaction basis. Other types of non-controlling interests are measured at their fair value or, when applicable, on the basis specified in another IFRSs. When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with the corresponding adjustments made against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration I-17

18 3. SIGNIFICANT ACCOUNTING POLICIES continued Business combinations continued that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IAS 39, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognized in profit or loss. When a business combination is achieved in stages, the Group s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date (i.e. the date when the Group obtains control), and the resulting gain or loss, if any, is recognized in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), and additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that date. Investments in subsidiaries Investments in subsidiaries are stated at cost less accumulated impairment losses, if any. Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business (see the accounting policy above) less accumulated impairment losses, if any. For the purposes of impairment testing, goodwill is allocated to each of the Group s cashgenerating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. For goodwill arising on an acquisition in a reporting period, the cash-generating unit to which goodwill has been allocated is tested for impairment before the end of that reporting period. If the recoverable amount of the cashgenerating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the amount of profit or loss on disposal. The Group s policy for goodwill arising on the acquisition of associates is described below. I-18

19 3. SIGNIFICANT ACCOUNTING POLICIES continued Investments in associates An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control over those policies. The results and assets and liabilities of associates are incorporated in the Financial Information using the equity method of accounting. The financial statements of associates used for equity accounting purposes are prepared using uniform accounting policies as those of the Group for like transactions and events in similar circumstances. Under the equity method, investments in an associate are initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize the Group s share of the profit or loss and other comprehensive income of the associate. When the Group s share of losses of an associate exceeds the Group s interest in that associate (which includes any long-term interests that, in substance, form part of the Group s net investment in the associate), the Group discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate. On acquisition of the investment in an associate, any excess of the cost of the investment over the Group s share of the net fair value of the identifiable assets and liabilities of the investee is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Group s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognized immediately in profit or loss in the period in which the investment is acquired. The requirements of IAS 39 are applied to determine whether it is necessary to recognize any impairment loss with respect to the Group s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases. The Group discontinues the use of the equity method from the date when the investment ceases to be an associate, or when the investment (or a portion thereof) is classified as held for sale. When the Group retains an interest in the former associate or joint venture and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IAS 39. The difference between the carrying amount of the associate or joint venture at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture is included in the determination of the gain or loss on disposal of the associate or joint venture. In addition, the Group accounts for all amounts previously recognized in other comprehensive income in relation to that associate or joint venture on the same basis as would be required if that associate or joint venture had I-19