SGSB Group Co., Ltd. Auditor s Report and Audited Financial Statements (For the Year Ended 31 December 2013)

Transcription

1 . Auditor s Report and Audited Financial Statements (For the Year Ended 31 December 2013)

2 . Auditor s Report and Audited Financial Statements (For the Year Ended 31 December 2013) Contents Page Auditor s Report 2-3 Financial Statements Separate/Consolidated Statements of Financial Position 1-4 Separate/Consolidated Statements of Comprehensive Income 5-6 Separate/Consolidated Statements of Cash Flows 7-8 Separate/Consolidated Statements of Changes in Equity 9-12 Notes to Separate/Consolidated Financial Statements THERE ARE BOTH CHINESE AND ENGLISH VERSIONS OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2013 PROVIDED. SHALL ANY CONFLICT OF MEANING BETWEEN THESE TWO VERSIONS, THE CHINESE VERSION PREVAILS

3 Auditor s Report XinKuaiShiBaoZi (2014) No To the Board of Directors of.: We have audited the accompanying financial statements of SGSB (Group) Co., Ltd. ( SGSB ), including the separate and consolidated statement of financial position as of 31 December 2013, statement of comprehensive income for the year then ended, statement of changes in equity as of 31 December 2013 and statement of cash flows for the year then ended, together with the notes to the separate/consolidated financial statements. 1. Responsibility of SGSB s Management Management is responsible for the preparation and fair presentation of these financial statements in accordance with the rules and regulations in Accounting Standards for Business Enterprises. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. 2. Responsibility of the Certified Public Accountants Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with PRC Independent Standards on Audit for Certified Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. Our audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Auditor s Report Page 2

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 3. Audit Opinion In our opinion, the financial statements of SGSB present fairly, in all material respects, the financial position of the separate parent company and the group as of 31 December 2013 and the results of its operations and its cash flows for the year then ended, in accordance with the regulations of Accounting Norms for Business Enterprises and Accounting System for Limited Companies. BDO China Shu Lun Pan Certified Public Accountants LLP PRC Certified Public Accountant Li Ping PRC Certified Public Accountant Chang Dalei Shanghai, PRC March 19 th, 2014 Auditor s Report Page 3

5 SGSB (Group) Co., Ltd. Separate Statement of Financial Position As of 31 December 2013 (Presented in RMB unless otherwise specified) Assets Notes Closing Balance Opening Balance Current Assets Cash and cash equivalents 92,304, ,545, Financial assets held for trading 277, , Notes receivable 1,926, , Accounts receivable ,262, ,527, Prepayment 2,631, ,389, Dividend receivable 2,881, , Other receivables ,056, ,091, Inventories 10,486, ,183, Subtotal 166,826, ,612, Non-current Assets Available for sale financial assets 85,012, ,296, Long-term receivables 82,785, ,785, Long-term equity investment ,719, ,002, Investment properties 96,621, ,848, Fixed assets 32,693, ,917, Construction in progress 796, Intangible assets 23,447, ,813, Subtotal 644,075, ,664, Total Assets 810,902, ,276, Accompanying notes to financial statements are an integral part of the financial statements. Legal representative: Financial director: Financial manager: Financial Statements Page 1

6 SGSB (Group) Co., Ltd. Separate Statement of Financial Position (Continued) As of 31 December 2013 (Presented in RMB unless otherwise specified) Liabilities and Shareholders' Equity Notes Closing Balance Opening Balance Current liabilities Short-term loans 123,948, ,948, Notes payable - 2,734, Accounts payable 12,292, ,567, Receipt in advance 3,650, ,398, Employee benefits payable 840, , Taxes payable 312, , Dividends payable 1,032, ,032, Other payables 71,639, ,991, Non-current liabilities due within one year 520, , Other current liabilities - 500, Subtotal 214,236, ,245, Non-current liabilities Long-term loans 1,489, ,489, Long-term accounts payable 1,611, ,611, Deferred tax liabilities 1,197, ,197, Subtotal 4,298, ,298, Total liabilities 218,535, ,544, Shareholder's equity Share capital 448,886, ,886, Capital reserve 475,469, ,527, Surplus reserve 4,546, ,546, Retained earnings -336,535, ,229, Total Shareholder's equity 592,367, ,731, Total Liabilities and Shareholder's equity 810,902, ,276, Accompanying notes to financial statements are an integral part of the financial statements. Legal representative: Financial director: Financial manager: Financial Statements Page 2

7 SGSB (Group) Co., Ltd. Consolidated Statement of Financial Position As of 31 December 2013 (Presented in RMB unless otherwise specified) Assets Note Ending Balance Beginning Balance Current Assets Cash and cash equivalents ,200, ,232, Financial assets held for trading , , Notes receivable 5.3 3,320, ,211, Accounts receivable ,894, ,571, Prepayment ,241, ,453, Dividend receivable 5.4 2,881, , Other receivables ,130, ,701, Inventories ,244, ,439, Other current assets ,405, ,717, Subtotal 1,268,596, ,540, Non-current assets Available for sale financial assets ,012, ,296, Long-term equity investment ,534, ,564, Investment properties ,076, ,390, Fixed assets ,035, ,032, Construction in progress ,801, ,216, Intangible assets ,308, ,326, Research & development expenditures ,082, ,797, Goodwill ,908, ,234, Long-term prepaid expenses 33, Deferred tax assets ,526, ,232, Subtotal 779,320, ,092, Total assets 2,047,916, ,626,633, Accompanying notes to financial statements are an integral part of the financial statements. Legal representative: Financial director: Financial manager: Financial Statements Page 3

8 SGSB (Group) Co., Ltd. Consolidated Statement of Financial Position (Continued) As of 31 December 2013 (Presented in RMB unless otherwise specified) Liabilities and Shareholder's Equity Note Ending Balance Beginning Balance Current liabilities Short-term loans ,299, ,319, Notes payable ,225, ,734, Accounts payable ,210, ,546, Receipt in advance ,726, ,636, Employee benefits payable ,569, ,933, Taxes payable ,916, ,551, Dividends payable ,032, ,032, Other payables ,128, ,059, Non-current liabilities due within one year , , Other current liabilities ,623, , Subtotal 619,253, ,267, Non-current liabilities Long term loans ,675, ,489, Long-term payables ,961, ,257, Provisions ,783, ,338, Deferred tax liabilities ,451, ,689, Subtotal 498,870, ,775, Total liabilities 1,118,124, ,042, Shareholder's equity Share capital ,886, ,886, Capital reserve ,651, ,946, Surplus reserve ,546, ,546, Retained earnings ,996, ,548, Difference of foreign currency translation -52,193, ,485, Total owners' equity attributable to the parent company 795,894, ,345, Minority interests 133,898, ,244, Total shareholder's equity 929,792, ,590, Total liabilities and shareholder's equity 2,047,916, ,626,633, Accompanying notes to financial statements are an integral part of the financial statements. Legal representative: Financial director: Financial manager: Financial Statements Page 4

9 SGSB (Group) Co., Ltd. Separate Statement of Comprehensive Incomes For the Year Ended 31 December 2013 (Presented in RMB unless otherwise specified) Notes Current Year Prior Year 1. Revenue 11.4 Less: Cost of sales 11.4 Sales tax and surcharges Selling expenses General and Administration expenses Finance expenses Impairment Add: Net gain/(loss) from fluctuation in fair values Investment incomes 11.5 Including: Investment losses in associated and joint ventures 2. Operating profit Add: Non-operating incomes Less: Non-operating expenses Including: Net losses in disposal of non-current assets 3. Gross profits/(losses) Less: Corporate Income taxes 4. Net profits/(losses) 5. Other comprehensive incomes 6. Total comprehensive incomes 122,774, ,443, ,563, ,859, ,464, ,932, ,611, ,489, ,417, ,787, ,366, ,521, ,709, ,698, , , ,407, ,528, ,243, ,322, ,114, ,898, , , , , ,693, ,574, ,693, ,574, ,942, ,818, ,635, ,393, Accompanying notes to financial statements are an integral part of the financial statements. Legal representative: Financial director: Financial manager: Financial Statements Page 5

10 SGSB (Group) Co., Ltd. Consolidated Statement of Comprehensive Incomes For the Year Ended 31 December 2013 (Presented in RMB unless otherwise specified) Notes Current Year Prior Year 1. Revenues ,813,934, ,506,126, Including: Operating revenues 1,813,934, ,506,126, Costs 1,723,826, ,425,360, Including: Cost of sales ,296,513, ,067,777, Sales tax and surcharges ,281, ,662, Selling expenses ,811, ,229, General and Administration expenses ,541, ,484, Finance expenses ,305, ,595, Impairment ,372, ,612, Add: Net gain/(loss) from fluctuation in fair values , , Investment incomes ,437, ,605, Including: Investment losses in associated and joint ventures -1,388, ,833, Operating profit 144,393, ,352, Add: Non-operating income ,480, ,732, Less: Non-operating expense ,421, , Including: Net losses in disposal of non-current assets 156, , Gross profits 153,453, ,775, Less: Corporate Income taxes ,348, ,173, Net profits 108,105, ,602, Including: Net profit attributable to parent company 79,552, ,686, Non-controlling interests 28,553, ,916, Earning per share (1) Basic earnings per share (2) Diluted earnings per share Other comprehensive incomes ,321, ,924, Total comprehensive incomes 121,426, ,678, Attributable to parent company 92,873, ,171, Attributable to non-controlling shareholders 28,553, ,506, Accompanying notes to financial statements are an integral part of the financial statements. Legal representative: Financial director: Financial manager: Financial Statements Page 6

11 SGSB (Group) Co., Ltd. Separate Statement of Cash Flows For the Year Ended 31 December 2013 (Presented in RMB unless otherwise specified) 1. Cash flows from operating activities: Cash inflow from sale of goods and provision of services Cash inflow from tax refund Cash inflow from other operating activities Total cash inflow from operating activities Cash outflow for purchase of goods and services Payment to and for staff Taxation paid Other payment related to operating activities Total cash outflow from operating activities Net cash in/outflow generated from operation activities 2. Cash flow from investing activities Cash inflow from divestment Cash inflow from investment incomes Cash gain from disposal of fixed assets, intangible assets, and other long-term investment Cash inflow from disposal of subsidiaries and other operating units Other proceeds related to investment activities Total cash inflow from investing activities Cash paid for acquisition of fixed assets, intangible assets and other long-term assets Cash paid for investment Cash paid for other investment related activities Total cash outflow from investing activities Net cash in/outflow generated from investment activities 3. Cash flow from financing activities Borrowings received Cash received from other financing related activities Total cash inflow from financing activities Borrowings repaid Dividend, interest and profit paid Other cash outflow related to financing activities Total cash outflow from financing activities Net cash in/outflow from financing activities 4. Influence of fluctuation of exchange rate 5. Net increase/decrease in cash and cash equivalents Add: beginning balance of cash and cash equivalents 6. Ending balance of cash and cash equivalents Current Year Prior Year 135,192, ,753, ,116, ,665, ,180, ,973, ,934, ,375, ,652, ,300, ,832, ,990, ,005, ,602, ,277, ,267, ,768, ,705, ,833, , , ,766, ,595, ,207, , ,232, ,255, ,678, ,995, , , ,573, ,000, ,768, ,197, ,486, , ,600, ,600, ,810, ,410, ,600, ,600, ,600, ,372, ,781, ,868, ,840, ,381, ,430, ,781, , , ,759, ,137, ,545, ,682, ,304, ,545, Accompanying notes to financial statements are an integral part of the financial statements. Legal representative: Financial director: Financial manager: Financial Statements Page 7

12 SGSB (Group) Co., Ltd. Consolidated Statement of Cash Flows For the Year Ended 31 December 2013 (Presented in RMB unless otherwise specified) 1. Cash flows from operating activities: Cash inflow from sale of goods and provision of services Cash inflow from tax refund Cash inflow from other operating activities Total cash inflow from operating activities Cash outflow for purchase of goods and services Payment to and for staff Taxation paid Other payment related to operating activities Total cash outflow from operating activities Net cash in/outflow generated from operations 2. Cash flow from investing activities Current Year Prior Year 1,785,407, ,573,510, ,365, ,234, ,047, ,103, ,855,821, ,658,849, ,156,782, ,012,519, ,306, ,843, ,663, ,461, ,262, ,348, ,786,014, ,520,172, ,806, ,676, Cash inflow from divestment 2,596, , Cash inflow from investment incomes 11,766, ,604, Cash inflow from disposal of fixed assets, intangible assets, and other long-term assets 1,451, ,424, Cash inflow from disposal of subsidiaries and other operating units 35,040, Total cash inflow from investing activities 50,856, ,737, Cash paid for acquisition of fixed assets, intangible assets and other long-term assets 74,026, ,492, Cash paid for investment 54,293, Cash paid for acquisition of subsidiaries and other operating units 63,420, Cash paid for other activities related to investment 83,505, , Total cash outflow from investing activities 275,246, ,499, Net cash in/outflow generated from investment activities -224,390, ,762, Cash flow from financing activities Borrowing received Other proceeds related to financing activities Total cash inflow from financing activities Repayment of debts Payment of dividends and interest Cash paid for other activities related to finance Total cash outflow from financing activities Net cash in/outflow from financing activities 4. Influence of fluctuation of exchange rate 5. Net increase/decrease in cash and cash equivalents Add: beginning balance of cash and cash equivalents 6. Ending balance of cash and cash equivalents 309,242, ,531, ,810, ,052, ,531, ,388, ,600, ,386, ,726, ,883, , ,658, ,507, ,394, ,976, ,857, ,987, ,331, ,924, ,395, ,470, ,063, ,395, Accompanying notes to financial statements are an integral part of the financial statements. Legal representative: Financial director: Financial manager: Financial Statements Page 8

13 SGSB (Group) Co., Ltd. Separate Statement of Changes in Equity For the Year Ended 31 December 2013 (Presented in RMB unless otherwise specified) Current Year Shares Capital Reserve Less: Treasury Stocks Specific Reserve Surplus Reserve General Risk Provision Accumulated Losses Total Shareholder's Equity 1. Previous year ending balance 448,886, ,527, ,546, ,229, ,731, Add: accounting policy changes Correction of previous-period accounting errors others 2. Beginning balance 448,886, ,527, ,546, ,229, ,731, Increase/decrease 15,942, ,693, ,635, (1) Net profit 27,693, ,693, (2) Other comprehensive incomes 15,942, ,942, Subtotal of (1) and (2) 15,942, ,693, ,635, (3) Owner inputs and reducing capital a. Owner inputs capital b. Shares included in owners' equity c. Others (4) Profit distribution a. Surplus reserve b. Common risk reserve c. Distribution to owners or shareholders d. Others (5) Internal transfer of owners' equity a. Capital reserve turn to stock equity b. Surplus reserve turn to stock equity c. Surplus reserve to recover loss d. Others (6) Special reserves 1.Appropriation for current year 2.use in current year Ending balance Accompanying notes to financial statements are an integral part of the financial statements. 448,886, ,469, ,546, ,535, ,367, Legal representative: Financial director: Financial manager: Financial Statements Page 9

14 SGSB (Group) Co., Ltd. Separate Statement of Changes in Equity (Continued) For the Year Ended 31 December 2013 (Presented in RMB unless otherwise specified) Shares Capital Reserve Less: Treasury Stocks Comparatives for Prior Year Specific Reserve Surplus Reserve General Risk Provision Accumulated Losses Total Shareholder's Equity 1. Previous year ending balance 448,886, ,346, ,546, ,654, ,124, Add: accounting policy changes Correction of previous-period accounting errors others 2. Beginning balance 448,886, ,346, ,546, ,654, ,124, Increase/decrease -17,818, ,574, ,393, (1) Net profit -16,574, ,574, (2) Other comprehensive incomes -17,818, ,818, Subtotal of (1) and (2) -17,818, ,574, ,393, (3) Owner inputs and reducing capital a. Owner inputs capital b. Shares included in owners' equity c. Others (4) Profit distribution a. Surplus reserve b. Common risk reserve c. Distribution to owners or shareholders d. Others (5) Internal transfer of owners' equity a. Capital reserve turn to stock equity b. Surplus reserve turn to stock equity c. Surplus reserve to recover loss d. Others (6) Special reserves 1.Appropriation for current year 2.use in current year Ending balance 448,886, ,527, ,546, ,229, ,731, Accompanying notes to financial statements are an integral part of the financial statements. Legal representative: Financial director: Financial manager: Financial Statements Page 10

15 SGSB (Group) Co., Ltd. Consolidated Statement of Changes in Equity For the Year Ended 31 December 2013 (Presented in RMB unless otherwise specified) Current Year Shareholder's Equity Attributable to Parent Company Shares Capital Reserve less: Treasury stocks Special Reserves Surplus Reserve General Risk Reserves Retained Earnings Others Non-controlling Interests Total Shareholder's Equity 1. Previous year ending balance brought forward 448,886, ,073, ,546, ,548, ,485, ,777, ,250, Add: accounting policy changes -25,127, ,532, ,660, Correction of previous-period accounting errors Others 2. Beginning balance 448,886, ,946, ,546, ,548, ,485, ,244, ,590, Increase/(decrease) for the current year 13,705, ,552, ,708, ,653, ,201, (1) Net profit 79,552, ,553, ,105, (2) Other comprehensive incomes 15,029, ,708, ,321, Subtotal of (1) and (2) 15,029, ,552, ,708, ,553, ,426, (3)Investment/(divestment) -1,324, ,899, ,224, a. Investment from shareholders -12,859, ,859, b. Others -1,324, ,040, ,364, (4) Distribution a. Surplus reserve b. Common risk reserve c. Distribution to owners or shareholders d. Others (5) Internal transfer of owners' equity a. Capital reserve turn to stock equity b. Surplus reserve turn to stock equity c. Surplus reserve to recover loss d. Others (6) Special reserves a.appropriation for current year b.use in current year 4. Ending balance 448,886, ,651, ,546, ,996, ,193, ,898, ,792, Accompanying notes to financial statements are an integral part of the financial statements. Legal representative: Financial director: Financial manager: Financial Statements Page 11

16 SGSB (Group) Co., Ltd. Consolidated Statement of Changes in Equity (Continued) For the Year Ended 31 December 2013 (Presented in RMB unless otherwise specified) Shares Capital Reserve Comparatives for Prior Year Shareholder's Equity Attributable to Parent Company less: Treasury Stocks Special Reserves Surplus Reserve General Risk Reserves Retained Earnings Others Non-controlling Interests Total Shareholder's Equity 1. Previous year ending balance 448,886, ,610, ,546, ,234, ,649, ,292, ,452, Add: accounting policy changes -2,097, ,134, ,232, Correction of previous-period accounting errors Others 2. Beginning balance 448,886, ,513, ,546, ,234, ,649, ,157, ,219, Increase/decrease -39,566, ,686, ,163, ,087, ,370, (1) Net profit 41,686, ,916, ,602, (2) Other comprehensive incomes -40,678, ,163, ,409, ,924, Subtotal of (1) and (2) -40,678, ,686, ,163, ,506, ,678, (3)Investment/(divestment) 1,111, , ,692, a. Investment from shareholders b. Others 1,111, , ,692, (4) Distribution a. Surplus reserve b. Common risk reserve c. Distribution to owners or shareholders d. Others (5) Internal transfer of owners' equity a. Capital reserve turn to stock equity b. Surplus reserve turn to stock equity c. Surplus reserve to recover loss d. Others (6) Special reserves a.appropriation for current year b.use in current year 4. Ending balance 448,886, ,946, ,546, ,548, ,485, ,244, ,590, Accompanying notes to financial statements are an integral part of the financial statements. Legal representative: Financial director: Financial manager: Financial Statements Page 12

17 Notes to the Consolidated/Separate Financial Statements For the Year Ended 31 December Background Information. (hereinafter referred to as SGSB), a limited liability corporation with publicly issued A & B shares on the Shanghai Stock Exchange, is the first listed company in the sewing machinery industry of the People s Republic of China. The Company obtained the Corporate Business License authorized by the local administration of industry and commerce in April, The registered capital amounts to RMB 448,886,777, and the registered address is in 1201 Luoshan Road, Pudong New Area, Shanghai, PRC. The head office is located in 12F, 1200 Century Avenue, Pudong New Area. The legal representative is Mr. Zhang Min. The Company is mainly engaged in the manufacture and sales of industrial sewing machines and equipment, with more than 10 major categories of products with a total of 21 series and over 100 different varieties of sewing machines, including high speed lockstitch sewing machines, high speed overlock sewing machines, leather products sewing machines, bartacking sewing machines, bag closing sewing machines, button hole sewing machines and other specialized sewing equipment. Almost all its products are marked with the five registered trademarks Shanggong, Shuanggong, Butterfly, Bee and Flying Man. During recent years, the Company pays priority to the R&D of new sewing machinery products. Particularly after the acquisition of Durkopp Adler AG (public listed company in Germany) in 2005, the Company has been availing the advanced technology of Durkopp Adler to realize the upgrade and development of the products structure, and moving gradually the production of DA s products which are popular in Asian market to China with purpose of satisfying the growing demand of customers for auto-running sewing machines. The company acquired 100% shares of PFAFF Industriesysteme und Maschinen AG in March 2013 in order to consolidate and expand technical advantage and industry shares, and enhance marking competitiveness. In July 2013, the company purchased 100% shares of KSL Keilmann Sondermaschinenbau GmbH and its related companies to supplement the shortage in automatic sewing Notes Page 1

18 technology area and upgrade the core competencies and sustainable development capability. Moreover, the Company has also expanded its business in recent years, and entered material transmission equipment, office appliances, sensitive films, international trade and logistic industries. On 22 May 2006, it was approved of, on the General Meeting of Shareholders on Reform of non-tradable shares for listed companies that the non-tradable equity reform proposal, whose core content is that the non-tradable equity stockholders pay partially their shares to all the tradable equity shareholders at a ratio of 10 to 6 as consideration of getting tradable rights. After the payment, the total number of shares remains unchanged, but consequently the equity structure has changed. As at 31 December 2013, there are 448,886,777 shares in total, which all free floating shares. 2. Principle Accounting Policies, Accounting Estimates and Errors 2.1. Preparation Basis Based on the sustainable operation assumption and according to really occurred transactions and affairs, the Company prepares its financial statements, adopting <Accounting Standards for Business Enterprises-Basic Standards>, relevant 38 detailed accounting principles, guidelines on application of accounting principles, interpretation of accounting principles and other relevant regulations ( Accounting Standards ) and No. 15 Preparation Conventions of Information Disclosure by Companies Offering Securities to the Public - General Regulations on Financial Report (Revision 2010) promulgated by the CSRS Statement for Compliance with the Accounting Standards for Business Enterprises The financial statements and annotations prepared by the Company, strictly under the guideline of Accounting Standards for Business Enterprises, reflect truly and integrally the information such as financial status, business achievements and cash flows of the Company Accounting Period The accounting period starts from 1 January and ends on 31 December of the same year. Notes Page 2

19 2.4. Reporting Currency The functional and presentation currency is RMB. The overseas subsidiaries adopt their functional currencies as those of the primary economic environment in which these subsidiaries operate and translate into RMB when preparing their financial statements Business Combination And Consolidated Financial Statements Business Combination Involving Entities Under Common Control The assets and liabilities obtained are measured at the carrying amounts as recorded by the enterprise being combined at the combination date. The difference between the carrying amount of the net assets obtained and the carrying amount of consideration paid for the combination (or the total face value of shares issued) is adjusted to share premium in the capital reserve. If the balance of share premium is insufficient, any excess is adjusted to retained earnings. Relevant professional expenditures directly attributed to the combination, including audit fee, appraisal fee, legal advice fee and etc., are charged to the income statement when occurs. Any issuance costs occurring in the process of issuing equity securities are offset against the share premium. If the balance of share premium is insufficient, any excess is adjusted to retained earnings. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by the Company Business Combinations Involving Entities Not Under Common Control The cost of a business combination paid by the acquirer is the aggregate of the fair value at the acquisition date of assets given, liabilities incurred or assumed, and equity securities issued by the acquirer, in exchange for control of the acquiree plus any cost directly attributable to the business combination. The difference between the fair value and the carrying amount of the assets given is recognized in profit or loss. Notes Page 3

20 The acquirer, at the acquisition date, allocates the cost of the business combination by recognizing the acquiree s identifiable asset, liabilities and contingent liabilities at their fair value at that date. Any excess of the cost of a business combination over the acquirer s interest in the fair value of the acquiree s identifiable net assets is recognized as goodwill. Any excess of the acquirer s interest in the fair value of the acquiree s identifiable net assets over the cost of a business combination is recognized in profit or loss Consolidation Consolidation Scope The scope of financial statements consolidation is decided based on the control. All subsidiaries are included within the scope of consolidation Consolidation Procedure When the accounting period or accounting policies of a subsidiary are different from those of the Company, the Company makes necessary adjustments to the financial statements of the subsidiary based on the Company s own accounting period or accounting policies. The consolidated financial statements are prepared based on the separate financial statements of the Company and its subsidiaries, with reference to other relevant documents, after the adjustment is made to the long-term investment using the equity method. Intra-group balances and transactions, and any unrealized profit or loss arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Where losses attributable to the minority shareholders of a subsidiary exceeds the minority shareholders interest in of the equity of the subsidiary, the excess, and any further losses attributable to the minority shareholders, are allocated against the equity attributable to the Company except to the extent that the minority shareholders have a binding obligation under the articles of association or an agreement and are able to make additional investment to cover the losses. Notes Page 4

21 a) Subsidiaries increase 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 that common control was established. 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, the consolidated income statement and the consolidated statement of cash flows respectively, based on their carrying amounts, from the date that common control was established. 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 consolidated financial statements from the date that control commences, based on the fair value of those identifiable assets and liabilities at the acquisition date, and the opening balances do not need to be restated. b) Subsidiaries disposal Where a subsidiary was disposed of during the reporting period, the identifiable assets, liabilities and results of operations of the subsidiaries are consolidated into consolidated financial statements up to the disposal date. If a parent disposes of partial equity interest or loses control of a subsidiary due to other factors, the parent should recognize any residual interest in the former subsidiary at its fair value when control is lost. Difference between the sum of the fair value of proceeds received and the fair value of residual interest and the carrying amount of the parent s former interest in the subsidiary s net assets, should be attributed to current investment income when control is lost. Besides, other comprehensive income related to investment in former subsidiary should be attributed to current investment income when control is lost. Notes Page 5

22 2.7. Cash and Cash Equivalents Cash and cash equivalents comprise cash on hand, demand deposits, and short-term, highly liquid investments, which are readily convertible into known amounts of cash and are subject to an insignificant risk of change in value Translation of Foreign Currencies Foreign Currency Transactions Foreign currency transactions are, on initial recognition, translated to RMB at the spot exchange rates at the dates of the transactions. The balance of foreign currency monetary items is adjusted and translated into functional currency at balance sheet date using the spot exchange rate. Regarding the year-end differences of translation in foreign currency, except those special borrowing accounts under the acquisition, building or production of assets to be capitalized are capitalized and accounted into related assets cost, all the other differences are accounted into current profits and losses. The foreign currency non-monetary items at historical cost are translated using the spot exchange rate. And the foreign currency non-monetary items at fair value are adjusted and translated into measurement currency at adoption date of fair value using the spot exchange rate. The difference of translation between different currencies is accounted into current profits and losses or capital reserves Translation of Financial Statement Prepared in Foreign Currencies The assets and liabilities of foreign operation are translated to RMB at the spot exchange rate at the balance sheet date. The equity items, excluding Retained earning, are translated to RMB at the spot exchange rates at the transaction dates. The income and expenses of foreign operation are translated to RMB at the spot exchange rates or the rates that approximate the spot exchange rates at the transaction dates. The resulting exchange differences are recognized in a separate component of equity. Upon entire/partial disposal of a foreign operation, the entire/partial cumulative amount of the exchange differences recognized in equity which relates to that foreign operation is transferred to profit or loss in the period in which the disposal occurs. Notes Page 6

23 2.9. Financial Instruments Financial instruments comprise financial assets, financial liabilities and equity instruments Category of Financial Instruments The Group classifies financial assets and liabilities into different categories at initial recognition based on the purpose of acquiring assets or assuming liabilities: financial assets and 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 Recognition And Measurement of Financial Instruments a) Financial assets and financial liabilities at fair value through profit or loss (including financial assets or financial liabilities held for trading) A financial asset or financial liability is classified as at fair value through profit or loss if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is a derivative. Subsequent to initial recognition, financial assets and financial liabilities at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. b) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity investments are stated at amortised cost using the effective interest method. c) Receivables Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, including accounts receivable, other receivables, Notes Page 7

24 notes receivable, prepayment and long term receivables and etc. Receivables are initially recognized as the contracted or agreed amounts, or the present values where they are of finance nature. When collected or disposed of, the differences between carrying values and receipts are charged to profit or loss. d) Available-for-sale financial assets Available-for-sale financial assets include non-derivative financial assets that are designated upon initial recognition as available for sales and other financial assets which do not fall into any of the above categories. An investment in equity instrument which does not have a quoted market price in an active market and whose fair value cannot be reliably measured is measured at cost subsequent to initial recognition. Other than investments in equity instruments whose fair value cannot be measured reliably as described above, subsequent to initial recognition, other available-for-sale financial assets are measured at fair value and changes therein, except for impairment losses and foreign exchange gains and losses from monetary financial assets, which are recognized directly in profit or loss, are recognized directly in equity. When an investment is derecognized, the cumulative gain or loss in equity is removed from equity and recognized in profit or loss. Dividend income from these equity instruments is recognized in profit or loss when the investee declares the dividends. Interest on available-for-sale financial assets calculated using the effective interest method is recognized in profit or loss. e) Other financial liabilities Other financial liabilities are measured at total of fair values and relevant expenditures initially and subsequently at amortized cost Determination And Measurement of Transfer of Financial Assets A financial asset is derecognized if the Group s contractual rights to the cash flows from the financial asset expire or if the Group transfers substantially all the risks and rewards Notes Page 8

25 of ownership of the financial asset to another party. Where a transfer of a financial asset in its entirety meets the criteria of the derecognition, the difference between the two amounts below is recognized in profit or loss: a) carrying amount of the financial asset transferred; b) the sum of the consideration received from the transfer and any cumulative gain or loss that has been recognized directly in equity De-recognition of Financial Liabilities The Company derecognizes a financial liability (or part of it) only when the underlying present obligation (or part of it) is discharged or a new contract is signed to replace the existing financial liability which the new one is different virtually. When the replacement exists, entire or part of a financial liability is derecognized and the new liability is recognized, the difference between the carrying value and consideration is charged to profit or loss. Where part of liabilities are purchased back, fair values are allocated between two parts which continue to recognize and are derecognized at the purchase-back date. The difference between the carrying value and consideration is charged to profit or loss Fair Values of Financial Assets And Liabilities Fair values are measured as quoted market prices in an active market Impairment a) Available-for-sale financial assets When a severely decline in the fair value of an available-for-sale financial assets has occurred or can be regarded as non-temporary after considering all the factors comprehensively, the impairment loss shall be recognized and the provision for impairment of the available-for-sale financial assets shall be made as per the negative balance between its fair value and its carrying amount. When an impairment loss of the financial asset available for sale is recognized, the cumulative loss generated from decline of fair value that had been recorded directly into the owners' equity shall be removed from the owners' equity and shall be recorded into the impairment loss. Notes Page 9

26 If, after an impairment loss has been recognized on an available-for-sale financial asset, the fair value of the debt instrument increases in a subsequent period and the increase can be objectively related to an event occurring after the impairment loss was recognized, the impairment loss is reversed through profit or loss. For the active trading available-for-sale financial assets in the market with good flow ability, the decline in market value should be considered severer if the drop range is over 50%. The decline in market value should be considered non-temporary if the duration of decline lasts longer than 6 months. b) Held-to-maturity investments The determination of impairment of held to maturity investments are in context of that of receivables Accounts Receivable Recognition And Provision For Single Significant Balance a) Recognition criterion: Top five biggest balance accounts; b) Provision method: Impairment test is performed account by account. If estimated future cash inflow is lower than the carrying amount, the difference is charged to the profit or loss. For short-term receivables, there are few differences between the future estimated cash inflows and carrying amounts, the future estimated cash inflows are not discounted to determine the provision to be made Recognition And Provision For Those Items Whose Single Balances Are Insignificant But Are Material For the Portfolio of These Items with the Same Level of Credit Risks a) Recognition of Portfolio of items with the similar credit risks. Those insignificant items with those tested but not impaired items are classified into several groups by ageing, say Portfolio of items with the similar credit risks, and are provided for based on some percentage of grouped amounts (or is provided for individually). b) Provision made by Collective group of items with the similar credit risks. Considering Notes Page 10

27 the actual loss rate and the consideration of actual recoverability, follows: provision is made as Ageing Provision for Accounts Receivable (%) Provision for Other Receivables (%) Within one year years years Over three years Recognition And Provision For Those Items Whose Single Balances Are Insignificant But Are Provided For Individually Such items represent specific accounts receivable and should be tested for impairment. If evidence shows that the receivables have been impaired, the differences between the estimated present values of future cash inflow and carrying values are recorded to profit or loss Inventories Composition The inventories comprise materials in transit, raw materials, finished goods, work in progress, outside processed materials, etc Measurement Cost of inventories is calculated using the weighted average method Net Realizable Value And Provision For Obsolescent And Slowing-moving Inventories In the year end, carrying amounts of inventories are adjusted to the net realizable values based on the full-scope physical inventory-take. Any excess of the costs over the net realizable values are recognized as a provision for diminution in the value of inventories. Net realizable values of finished goods, merchandises and raw materials for sale are the estimated selling prices in the normal course of business less the estimated expenses and Notes Page 11

28 related taxes necessary to make the sale. Net realizable values of materials to be further processed are the estimated selling prices in the normal course of business less the estimated costs to completion and the estimated expenses and related taxes necessary to make the sale. For those inventories held for sales or labor contracts, the net realizable values are based on the contract prices and if the inventories held are more than those already ordered, the net realizable values of the excess are with reference to the market prices. Provision for obsolescence is generally made by item, but made by class for those inventories of large amounts and low values. For those items that are produced and sold with the same ultimate use or purpose and in the same region, and are difficult to separate from other items, provision is made by total group of inventories. If factors that lead to inventories providing for in the prior periods have disappeared, the provision are written back and reversed. A reversal of an impairment loss will not result in the asset s carrying amount exceeding that which would have been determined had no impairment loss been recognized in prior years. The reversal is charged to the profit or loss Perpetual inventory system is used Low-values and packing materials are expensed entirely when used Long-term Equity Investments Initial Measurement a) Long-term equity investment formed in the merger of enterprises For the merger of enterprises under the common control, if the consideration of the merging enterprise is that it makes payment in cash, transfers non-cash assets or bear its debts, it shall, on the date of merger, regard the share of the book value of the owner's equity of the merged enterprise as the initial cost of the long-term equity investment. The difference between the initial cost of the long-term equity investment and the Notes Page 12

29 payment in cash, non-cash assets transferred as well as the book value of the debts borne by the merging party shall offset against the capital reserve. If the capital reserve is insufficient to dilute, the retained earnings shall be adjusted. All the directly related expenses, including audit fee, appraisal fee, legal services fee etc, shall be accounted into current profit or loss. For the merger under different control, the merger cost should be accounted at the fair value of assets paid, liabilities carried and equity bonds issued by the merging party at the merger date, and other direct expenses related to the transaction. For the gradual merger realized by separate procedures, the merger cost should be the sum of every separate transaction. In case of any future events defined in merger contract whose predictable occurrence could influence the merger cost and the related amount could be reliably calculated at merger date, such amount should also be included in merger cost. b) Long-term equity investment by other methods The initial cost of a long-term equity investment obtained by making payment in cash shall be the purchase cost which is actually paid. The initial cost of a long-term equity investment obtained on the basis of issuing equity securities shall be the fair value of the equity securities issued. The initial cost of a long-term equity investment of an investor shall be the value stipulated in the investment contract or agreement except the unfair value stipulated in the contract or agreement. Under the conditions that the exchange of non-monetary assets is characterized with business essence, and the fair value of the assets received or surrendered can be accounted in a reliable way, the book value of assets received is defined on basis of the fair value of assets surrendered, except there are conclusive evidences for the stronger reliability of the fair value of assets received. For the exchange of those non-monetary assets not meeting the above premises, the book value of assets surrendered and related taxes should be accounted as cost of assets received and the profits and losses shouldn t be concluded. Notes Page 13