(Incorporated in the Cayman Islands with limited liability) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 and 2009
(Incorporated in the Cayman Islands with limited liability) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 and 2009 Contents Pages Independent auditor s report 1-2 Consolidated balance sheets 3 Consolidated statements of comprehensive income 4 Consolidated statements of changes in equity 5 Consolidated cash flow statements 6 Notes to the consolidated financial statements 7 44
PricewaterhouseCoopers 22/F, Prince's Building Central, Hong Kong Telephone (852) 2289 8888 Facsimile (852) 2810 9888 www.pwchk.com INDEPENDENT AUDITOR S REPORT TO THE DIRECTORS OF E-LAND FASHION CHINA HOLDINGS, LIMITED (incorporated in the Cayman Islands with limited liability) We have audited the consolidated financial statements of E-Land Fashion China Holdings, Limited (the Company ) and its subsidiaries (together, the Group ) set out on pages 3 to 44, which comprise the consolidated balance sheets as at December 31, 2007, 2008 and 2009, and the consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated cash flow statements for the years then ended, and a summary of significant accounting policies and other explanatory notes. Directors responsibility for the financial statements The directors of the Company are responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. 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. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. An 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, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. 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. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
INDEPENDENT AUDITOR S REPORT TO THE DIRECTORS OF E-LAND FASHION CHINA HOLDINGS, LIMITED (continued) (incorporated in the Cayman Islands with limited liability) Opinion In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as at December 31, 2007, 2008 and 2009, and of its financial performance and its cash flows for each of the years then ended in accordance with International Financial Reporting Standards. Other matters The report, including the opinion, has been prepared for and only for you, as a body, in accordance with our agreed terms of engagement and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. PricewaterhouseCoopers Certified Public Accountants Hong Kong, July 15, 2010
CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 2007, 2008 AND 2009 As at December 31, Note ASSETS Non-current assets Property, plant and equipment 7 67,329 108,840 149,980 Intangible assets 8 1,415 7,606 18,579 Deferred income tax assets 9-1,222 15,284 68,744 117,668 183,843 Current assets Inventories 10 392,645 508,342 586,653 Trade and other receivables 11 66,700 474,400 646,196 Cash and cash equivalents 12 24,936 141,919 273,356 484,281 1,124,661 1,506,205 Total assets 553,025 1,242,329 1,690,048 EQUITY Capital and reserves attributable to the Company s equity holders Share capital 13 415 415 415 Share premium 13 25,405 25,405 25,405 Reserves 14 49,515 316,025 794,620 Total equity 75,335 341,845 820,440 LIABILITIES Non-current liabilities Deferred income tax liabilities 9-2,500 - Borrowings 15-17,087 - - 19,587 - Current liabilities Trade and other payables 16 11,662 323,439 403,384 Amounts due to related parties 17 466,028 107,855 140,028 Current income tax liabilities - 49,603 126,196 Borrowings 15-400,000 200,000 477,690 880,897 869,608 Total liabilities 477,690 900,484 869,608 Total equity and liabilities 553,025 1,242,329 1,690,048 Director Director The notes on pages 7 to 44 are an integral part of these consolidated financial statements. - 3 -
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Note For the year ended December 31, Revenue 6 1,963,039 2,845,177 3,695,206 Cost of sales 18 (501,771) (693,425) (867,550) Gross profit 1,461,268 2,151,752 2,827,656 Selling and marketing costs 18 (1,025,384) (1,622,323) (2,000,508) Administrative expenses 18 (31,463) (31,800) (47,529) Other (losses) / gain, net (268) 2,009 (537) Other expense, net 19 (4,750) (27,440) (22,876) Operating profit 399,403 472,198 756,206 Finance income - 1,086 2,877 Finance costs - (26,335) (18,443) Finance costs, net 21 - (25,249) (15,566) Cost of suspended capital market transaction 22 - (15,727) (4,437) Profit before income tax 399,403 431,222 736,203 Income tax expense 23 (109,430) (114,454) (191,134) Profit for the year 289,973 316,768 545,069 Other comprehensive income: Currency translation differences 14-144 964 Total comprehensive income for the year and attributable to equity holders of the Company 289,973 316,912 546,033 Dividends 24 - - 67,438 The notes on pages 7 to 44 are an integral part of these consolidated financial statements. - 4 -
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Share capital Share premium Reserves Total Note RMB 000 At January 1, 2007 - - 328,670 328,670 Comprehensive income Profit for the year - - 289,973 289,973 Total comprehensive income - - 289,973 289,973 Transactions with equity holders Issue of ordinary shares 13 415 25,405-25,820 Deemed distribution payable upon the 14(a) Group Reorganization - - (399,328) (399,328) Deemed distribution - net assets retained 14(b) in ELand World Shanghai upon the Group Reorganization - - (130,668) (130,668) Deemed distribution - return to equity 14(c) - holders - (39,132) (39,132) Total transactions with equity holders 415 25,405 (569,128) (543,308) At December 31, 2007 415 25,405 49,515 75,335 At January 1, 2008 415 25,405 49,515 75,335 Comprehensive income Profit for the year - - 316,768 316,768 Other comprehensive income Currency translation differences - - 144 144 Total comprehensive income - - 316,912 316,912 Transactions with equity holders Deemed distribution to equity holders 14(d) - - (50,402) (50,402) Total transactions with equity holders - - (50,402) (50,402) At December 31, 2008 415 25,405 316,025 341,845 At January 1, 2009 415 25,405 316,025 341,845 Comprehensive income Profit for the year - - 545,069 545,069 Other comprehensive income Currency translation differences - - 964 964 Total comprehensive income - - 546,033 546,033 Transactions with equity holders Dividends 24 - - (67,438) (67,438) Total transactions with equity holders - - (67,438) (67,438) At December 31, 2009 415 25,405 794,620 820,440 The notes on pages 7 to 44 are an integral part of these consolidated financial statements. - 5 -
CONSOLIDATED CASH FLOW STATEMENTS Note For the year ended December 31, Cash flows from operating activities 25 Cash generated from/(used in) operating activities 247,434 (54,618) 701,718 Interest paid - (26,335) (18,443) Income tax paid (109,181) (63,573) (131,103) Net cash generated from/(used in) operating activities 138,253 (144,526) 552,172 Cash flows from investing activities Purchase of property, plant and equipment (98,907) (153,113) (134,441) Purchase of intangible assets (1,098) (2,291) (4,619) Proceeds from disposal of property, plant and equipment - 1 - Interest received - 1,003 2,877 Net cash used in investing activities (100,005) (154,400) (136,183) Cash flows from financing activities Proceeds from issue of ordinary shares 25,820 - - Proceeds from borrowings - 1,195,544 1,440,201 Repayments of borrowings - (778,457) (1,657,288) Net return to equity holders 14(c) (39,132) - - Dividends paid - - (67,438) Net cash (used in)/generated from financing activities (13,312) 417,087 (284,525) Net increase in cash and cash equivalents 24,936 118,161 131,464 Cash and cash equivalents, beginning of the year - 24,936 141,919 Effect of foreign exchange rate changes - (1,178) (27) Cash and cash equivalents, end of the year 24,936 141,919 273,356 The notes on pages 7 to 44 are an integral part of these consolidated financial statements. - 6 -
1 General information E-Land Fashion China Holdings, Limited (the Company ) was incorporated on September 12, 2007 in the Cayman Islands with limited liability under the Companies Law of the Cayman Islands. The address of the Company s registered office is Walker House, 87 Mary Street, George Town, Grand Cayman KY1-9005, Cayman Islands. The Company is an investment holding company. Its subsidiaries as set out in note 28 are engaged in the design and sale of women s apparel products in the People s Republic of China (the PRC ) ( Women s Apparel Business ). The Company and its subsidiaries are collectively referred to as the Group. These consolidated financial statements are presented in Renminbi ( RMB ) unless otherwise stated. These consolidated financial statements have been approved for issue by the Board of Directors on July 15, 2010. 2 Group reorganisation and presentation of financial statements for the year ended December 31, 2007 2.1 Group reorganisation The Group s Women s Apparel Business was previously operated as operating units (the Women s Apparel Business Units ) under E.Land Fashion (Shanghai) Co., Ltd. ( ELand World Shanghai ), a company incorporated in the PRC and wholly-owned by ELand World Limited ( ELand World ), the ultimate holding company of the Company incorporated in the Republic of Korea. Pursuant to a group reorganisation (the Group Reorganisation ) during the year ended December 31, 2007, the Company become the holding company of its subsidiaries which succeeded the Women s Apparel Business from Eland World Shanghai. The Group Reorganisation involved the transfer of the Women s Apparel Business and its related assets and liabilities, except for trade and other receivables and payables and amounts with related parties, from Eland World Shanghai to E.Land International Fashion (Shanghai) Co., ( Eland China Shanghai ), a wholly owned subsidiary of the Company. The transfer was completed on December 31, 2007. The Women s Apparel Business Units has been under the common control of the same controlling party, Eland World, before and after the Group Reorganisation. For the purpose of presenting the financial positions, financial results and cash flows of the Group in these financial statements, the Women s Apparel Business Units are deemed to be part of the Group throughout the year ended December 31, 2007. Accordingly, the consolidated financial statements of the Group have been prepared on the basis as if the current group structure had been in existence using the principles of merger accounting. The consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement of the Group for the year ended December 31, 2007 represented the results, changes in equity and cash flows of the Women s Apparel Business for the year as if the Company had always been the holding company of the Group. The consolidated financial statements prior to the Group Reorganisation were prepared based on the management accounts of companies now comprising the Group and the financial statements of Women s Apparel Business Units which were prepared based on the items of assets, liabilities, income and expenses that can be specifically identified to the Women s Apparel Business Units or allocated to the Women s Apparel Business Units. All items of balance sheet and income statement of the women s Apparel Business Units for the year ended December 31, 2007 are specifically identified, except for the expense described below. - 7 -
2 Group reorganisation and presentation of financial statements for the year ended December 31, 2007 (continued) 2.1 Group reorganisation (continued) Expenses which are impracticable to identify specifically are determined on the following basis: (a) delivery charges, staff training expenses and sundry office costs included in the selling and marketing costs were allocated based on the percentage of the revenue of the Women s Apparel Business Units as a percentage of the total revenue of ELand World Shanghai; (b) salaries, staff welfare, travelling and entertainment, sundry office costs and other expenses included in the administrative expenses were allocated based on (i) the percentage of headcounts of the Women s Appeal Business Units to the total of ELand World Shanghai; and/or (ii) the percentage of the revenue of the Women s Apparel Business Units as a percentage of the ELand World Shanghai, where appropriate; and (c) income tax expense were calculated based on the tax rate of Women s Apparel Business Units as if they are separate tax reporting entities. The directors of the Company believe that the above allocation presents a reasonable basis of estimating what the Women s Apparel Business Units operating results would have been on a stand-alone basis for the year ended December 31, 2007. Prior to the Group Reorganisation, no separate bank accounts have been maintained by the Women s Apparel Business Units. The treasury and cash disbursement functions of the Women s Apparel Business Units were centrally administrated by ELand World Shanghai. The funds provided for and withdrawn from ELand World Shanghai were presented as movements in the contributions and accumulated earnings of the Women s Apparel Business Units while there are no cash and cash equivalents balances for the Women s Apparel Business Units. Accordingly, there were no cash received/paid directly by the Group in connection with the Women s Apparel Business Units for the year ended December 31, 2007. For the purpose of presenting a complete set of financial statements of the Group, the consolidated cash flow statement includes the information of cash inflow/outflow or receipts/payments of the Women s Apparel Business Units received/paid by ELand World Shanghai. 2.2 Merger accounting for common control combination The consolidated financial statements incorporate the financial statements of the combining entities or businesses in which the common control combination occurs as if they had been combined from the date when the combining entities or businesses first came under the control of the controlling party. The net assets of the combining entities or businesses are combined using the existing book values from the controlling parties perspective. No amount is recognized in consideration for goodwill or excess of acquirers interest in the net fair value of acquiree s identifiable assets, liabilities and contingent liabilities over cost at the time of common control combination, to the extent of the continuation of the controlling party s interest. The consolidated income statement includes the results of each of the combining entities or businesses from the earliest date presented or since the date when the combining entities or businesses first came under the common control, where there is a shorter period, regardless of the date of the common control combination. - 8 -
2 Group reorganisation and presentation of financial statements for the year ended December 31, 2007 (continued) 2.2 Merger accounting for common control combination (continued) The comparative amounts in the consolidated financial statements are presented as if the entities or businesses had been combined at the previous balance sheet date or when they first came under common control, whichever is shorter. All intra-group transactions, balances and unrealized gains on transactions between combining entities or businesses are eliminated on consolidation. Transaction costs, including professional fees, registration fees, costs of furnishing information to equity holder, costs or losses incurred in combining operations of the previously separate businesses, etc., incurred in relation to the common control combination that is to be accounted for by using merger accounting is recognized as an expense in the period in which it is incurred. 3. Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 3.1 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ( IFRS ) including International Accounting Standards ( IAS ). These consolidated financial statements have been prepared under the historical cost convention. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 5. (i) New and amended standards adopted by the group The Group has adopted the following new and amended IFRS as of January 1, 2009: Relevant to the Group s operations: IFRS 7 Financial Instruments Disclosures (amendment) effective January 1, 2009. The amendment requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the change in accounting policy only results in additional disclosures, there is no impact on the comprehensive income. - 9 -
3 Summary of significant accounting policies (continued) 3.1 Basis of preparation (continued) Changes in accounting policy and disclosures (continued) (i) New and amended standards adopted by the group (continued) IFRS 8, Operating segments - effective January 1, 2009. IFRS 8 replaces IAS 14, Segment reporting, and aligns segment reporting with the requirements of the US standard SFAS 131, Disclosures about segments of an enterprise and related information. The new standard requires a management approach, under which segment information is presented on the same basis as that used for internal reporting purposes. This has resulted in an increase in the number of reportable segments presented. In addition, the segments are reported in a manner that is more consistent with the internal reporting provided to the chief operating decision-maker. IAS 1 (revised). Presentation of financial statements effective January 1, 2009. The revised standard prohibits the presentation of items of income and expenses (that is, non-owner changes in equity ) in the statement of changes in equity, requiring nonowner changes in equity to be presented separately from owner changes in equity in a statement of comprehensive income. As a result the group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on comprehensive income. IAS 23, Borrowing costs effective January 1, 2009. In respect of borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after January 1, 2009, the Group capitalises borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The group previously recognised all borrowing costs as an expense immediately. The change in accounting policy had no material impact on the Group s or Company's financial statements. Not relevant to the Group s operations: IFRS 2 (amendment), 'Share-based payment' - effective January 1, 2009. The amendment deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services; they would not impact the number of awards expected to vest or valuation there of subsequent to grant date. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. - 10 -
3 Summary of significant accounting policies (continued) 3.1 Basis of preparation (continued) (ii) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group The following standards and amendments to existing standards and interpretations have been published and are mandatory for the Group s accounting periods beginning on or after January 1, 2010 or later periods, and the Group has not early adopted them. Management of the Company is in the process of assessing of the effect to the Group s operating results and financial position. Effective date - periods beginning on or after IAS 24 (Revised) Related party disclosures January 1, 2011 IAS 27 (Revised) Consolidated and separate financial statements July 1, 2009 IAS 32 (Amendment) Classification of rights issues February 1, 2010 IAS 39 Financial Instruments: recognition and measurement July 1, 2009 amendments for eligible hedged items IFRS 1 (Amendment) Presentation of financial statements January 1, 2010 IFRS 2 (Amendment) Group cash-settled share-based payment transactions January 1, 2010 IFRS 3 (Revised) Business combinations July 1, 2009 IFRS 9 Financial instruments: classification and measurement January 1, 2013 IFRIC 14 Prepayments of a minimum funding requirement January 1, 2011 IFRIC 17 Distributions of non-cash assets to owners July 1, 2009 IFRIC 19 Extinguishing financial liabilities with equity instruments July 1, 2010 Improvements to IFRS published in May 2009: IAS 1 (Amendment) Presentation of financial statements January 1, 2010 IAS 7 (Amendment) Statement of cash flow January 1, 2010 IAS 17 (Amendment) Lease January 1, 2010 IAS 18 (Amendment) Revenue January 1, 2010 IAS 36 (Amendment) Impairment of assets January 1, 2010 IAS 38 (Amendment) Intangible assets January 1, 2010 IAS 39 (Amendment) Financial instruments: Recognition and January 1, 2010 measurement IFRS 2 (Amendment) Share-based payment January 1, 2010 IFRS 5 (Amendment) Non-current assets held for sale and discontinued January 1, 2010 operations IFRS 8 (Amendment) Operating segments January 1, 2010 IFRIC 9 (Amendment) Reassessment of embedded derivatives January 1, 2010 IFRIC 16 (Amendment) Hedges of a net investment in a foreign operation January 1, 2010-11 -
3 Summary of significant accounting policies (continued) 3.1 Basis of preparation (continued) (iii) Change in accounting estimation Piror to 2009, the estimated useful lives used for the amortisation of leasehold improvements for retail shops of the Group were around one year. During the year ended December 31, 2009, the directors of the Company decided to change the estimated useful lives of leasehold improvements for retail shops to two years in order to reflect the change in economic usage of the leasehold improvements for retail shops. The Company s directors are of the view that the change in the estimated useful lives of leasehold improvements for retail shops can provide more comparable and relevant information to the users of the accounts of the Group. The effect of the change in accounting estimation leads to the increase in profit before income tax of the Group by around RMB 56,770,584 in the consolidated financial statements for the year ended December 31, 2009. 3.2 Consolidation Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group except for common control combinations where merge accounting is adopted (note 2.2). The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interests. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the consolidation income statement. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. 3.3 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors that make strategic decisions. - 12 -
3 Summary of significant accounting policies (continued) 3.4 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The consolidated financial statements are presented in Renminbi ( RMB ), which is the functional currency of the Company and majority of its subsidiaries and the presentation currency of the financial statements of the Company and the Group. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the consolidated income statement within finance income or cost. All other foreign exchange gains and losses are presented in the consolidated income statement within other (losses)/gains net. (c) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) (ii) (iii) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each consolidated income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the consolidated income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity, if any, are treated as assets and liabilities of the foreign entity and translated at the closing rate. - 13 -
3 Summary of significant accounting policies (continued) 3.5 Property, plant and equipment Property, plant and equipment, comprising leasehold improvements for retail shops, machinery, computers and equipment and motor vehicles are stated at historical cost less depreciation and impairment losses, if any. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Construction-in-progress (the CIP ) represents assets under construction and is stated at cost less impairment, if any. Cost includes construction of plant and equipment and other direct costs.. No depreciation is made on CIP until such time as the relevant assets are completed and ready for intended use. When the assets concerned are available for use, the costs are transferred to property, plant and equipment and depreciated in accordance with the policy as stated below. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged in the consolidated income statement during the financial period in which they are incurred. Depreciation of property, plant and equipment is calculated using the straight-line method to allocate the cost less impairment loss (if any), other than CIP, to their residual values over their estimated useful lives, as follows: Leasehold improvements for retail shops estimated useful lives (note 3.1) Machinery, computers and equipment 3-10 years Motor vehicles 5 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount (note 3.7). Gains and losses on disposals are determined by comparing the proceeds with carrying amount. These are included in the income statement. 3.6 Intangible assets Acquired computer software is recognised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives of 5 years. 3.7 Impairment of non-financial assets Assets that have an indefinite useful life are at least tested annually for impairment. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. - 14 -
3 Summary of significant accounting policies (continued) 3.8 Financial assets The Group s financial assets comprise only loans and receivables. The classification depends on the purpose for which the financial assets are acquired. Management determines the classification of its financial assets at initial recognition. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date. These are classified as noncurrent assets. The Group s loans and receivables are classified as trade and other receivables and cash and cash equivalents in the balance sheet (notes 3.10 and 3.11). Regular purchases and sales of financial assets are recognised on the trade-date - the date on which the Group commits to purchase or sell the asset. Loans and receivables are initially recognised at fair value and then subsequently carried at amortised cost using the effective interest method. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Impairment test of trade receivables is described in note 3.10. 3.9 Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises design costs, raw materials and processing fees. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable distribution costs. 3.10 Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the assets is reduced through the use of an allowance account, and the amount of the loss is recognised in the consolidated income statement within administrative expenses. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against administrative expenses in the consolidated income statement. 3.11 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other shortterm highly liquid investments with original maturities of three months or less. 3.12 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. - 15 -
3 Summary of significant accounting policies (continued) 3.13 Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 3.14 Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 3.15 Current and deferred income tax The tax expense for the year comprises current and deferred tax. Tax is recognised in the consolidated income statement. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. - 16 -
3 Summary of significant accounting policies (continued) 3.16 Employee benefits (a) Pension obligations The Group s companies participate in various defined contribution retirement benefit plans administered by the relevant governments in the PRC and Korea. The relevant governments undertake to assume the retirement benefit obligation payable to all existing and future retired employees under these plans and the Group has no further obligation for postretirement benefits beyond the contributions made. The Group s monthly contributions to the defined contribution retirement benefits plans are expensed in the income statement as incurred. (b) Other social security and benefits for PRC employees The Chinese employees of the PRC subsidiaries of the Group participate in employee social security plans, including pension as mentioned above, medical, housing and other welfare benefits, organised and administered by the governmental authorities. According to the relevant regulations, the premiums and welfare benefit contributions that should be borne by the PRC subsidiaries of the Company are calculated based on percentages of the total salary of employees, subject to a certain ceiling, and are paid to the labour and social welfare authorities. Contributions to the plans are expensed as incurred. 3.17 Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Group s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. (a) Sales of goods Revenue from the sales of goods is recognised when the risk and reward of the goods has been transferred to the customer, which is usually at the date when a group entity has delivered products to the customer, the customer has accepted the products, and there is no unfulfilled obligation that could affect the customer s acceptance of the products. (b) Interest income Interest income is recognised on a time-proportion basis using the effective interest method. - 17 -
3 Summary of significant accounting policies (continued) 3.18 Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor), including upfront payment made for leasehold land and land use rights, are charged to the consolidated income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. The definition of a lease includes contracts for the hire of an asset which contain a provision giving the hirer an option to acquire title to the asset upon the fulfillment of agreed conditions. These contracts are sometimes known as hire purchase contracts. 3.19 Provisions Provisions are recognized when the Group has a present obligation or constructive obligation as a result of past transactions or events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense. 3.20 Dividend distribution Dividend distribution to the Company s equity holders is recognised as a liability in the Group s and Company s financial statements in the period in which the dividends are approved by the Company s shareholders or directors, when appropriate. - 18 -
4 Financial risk management 4.1 Financial risk factors The Group s activities expose it to a variety of financial risks: market risk (including currency risk and fair value interest rate risk), credit risk, and liquidity risk. The Group s overall risk management program focuses on the unpredictability of financial market and seeks to minimize potential adverse effects on the Group s financial performance. (a) (i) Market risk Foreign exchange risk The functional currency of majority of the Group s companies is RMB since majority of the Group s subsidiaries operate in mainland China. Foreign exchange risk arises when the future commercial transactions of sales to and purchases from overseas and recognised assets or liabilities, such as trade and other receivables (note 11), cash and cash equivalents (note 12), trade and other payables (note 16), amounts due from/due to related parties (note 17 and 27(d))and borrowings (note 15), which are mainly denominated in United States dollar ( USD ), Korean Won ( KRW ) and Hong Kong dollar ( HKD ). The Group has not hedged its foreign exchange rate risk because the exposure is not significant. As at December 31, 2007, 2008 and 2009, if RMB had strengthened/weakened by 10% against USD, KRW and HKD with all other variables held constant, the post-tax profit for each year would have changed mainly as a result of foreign exchange gains/losses on translation of USD, KRW and HKD denominated cash and cash equivalents, trade and other receivables, trade and other payables and amounts due to related parties. Details of the changes are as follows: As at December 31 Post-tax profit increase/(decrease) - Strengthened 10% (3,146) 6,928 6,804 - Weakened 10% 3,146 (6,928) (6,804) - 19 -
4 Financial risk management (continued) 4.1 Financial risk factors (continued) (a) (ii) Market risk (continued) Interest-rate risk The Group s income and operating cash flows are substantially independent of changes in market interest rates, as the Group has no significant interest-bearing assets other than cash and cash equivalent. The Group s interest-rate risk arises from borrowings. Borrowings obtained at variable rates expose the Group to cash flow interest-rate risk. Borrowings obtained at fixed rates expose the Group to fair value interest-rate risk. Details of the Group s borrowings have been disclosed in note 15. (b) Credit risk The carrying amounts of cash and cash equivalents and trade receivables, other receivables and prepayments represent the Group s maximum exposure to credit risk in relation to financial assets. As at December 31, 2007, 2008 and 2009, all cash and cash equivalents were deposited in state-owned banks and reputable financial institutions and were hence without significant credit risk. The Group s credit risk is primarily attributable to its trade receivables from the department stores in respect of the sale proceeds received from consumers on behalf of the Group. In order to minimize the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. The Group has no significant concentration of credit risk in respect of trade and other receivables, with exposure spread over a large number of department stores all across diverse geographical areas. - 20 -
4 Financial risk management (continued) 4.1 Financial risk factors (continued) (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Group s objective is to maintain adequate committed credit lines to ensure sufficient and flexible funding is available to the Group. The table below analyses the Group s financial liabilities that will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant. As at December 31, 2007 Less than Between 1 Between 2 1 year and 2 years and 3 years Total RMB 000 Trade and other payables 11,662 - - 11,662 Amounts due to related parties 466,028 - - 466,028 As at December 31, 2008 477,690 - - 477,690 Borrowings 400,000-17,087 417,087 Interests payable on borrowings 16,790 1,266 1,266 19,322 Trade and other payables 172,571 - - 172,571 Amounts due to related parties 107,855 - - 107,855 As at December 31, 2009 697,216 1,266 18,353 716,835 Borrowings 200,000 - - 200,000 Interests payable on borrowings 8,400 - - 8,400 Trade and other payables 208,385 - - 208,385 Amounts due to related parties 140,028 - - 140,028 556,813 - - 556,813 The interest on borrowings is calculated based on borrowings held as at the balance sheet dates without taking account of future issues. Floating-rate interest is estimated using the interest rate prevailing at the balance sheet dates. - 21 -