(incorporated in the Cayman Islands with limited liability) Independent Auditors Report and Consolidated Financial Statements For the year ended 31 December 2012 (Prepared under International Financial Reporting Standards)
INDEPENDENT AUDITORS REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (Prepared under International Financial Reporting Standards) CONTENTS PAGE INDEPENDENT AUDITORS REPORT 1-2 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 3 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 5 CONSOLIDATED STATEMENT OF CASH FLOW 6-7 8-39
DTT(A)(13)I0050 INDEPENDENT AUDITORS' REPORT TO THE DIRECTORS OF EBT DIGITAL COMMUNICATIONS RETAIL GROUP (incorporated in the Cayman Islands with limited liability) We have audited the consolidated financial statements of EBT Digital Communications Retail Group (the "Company") and its subsidiaries ( collectively refer to as the "Group") set out on pages 3 to 39, which comprise the consolidated statement of financial position as at 31 December 2012, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Directors' Responsibility for the Consolidated Financial Statements The directors of the Company are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRSs), and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to report our opinion solely to you, as a body, in accordance with our agreed terms of engagements, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors considers internal control relevant to the entity's preparation of the consolidated financial statements that give a true and fair view 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 the directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. - 1 -
INDEPENDENT AUDITOR'S REPORT Basis for qualified opinion As described in Note 16 to the financial statements, the Group invested in an associate together with a valuation adjustment mechanism agreement ( Agreement ) in May 2010. The Group did not account for embedded derivatives in the Agreement in accordance with IAS 39 Financial Instruments: Recognition and Measurement. In our opinion, in the absence of such information concerning the financial instrument in the Agreement, we were unable to assess implication of this non-compliance on the consolidated financial statements. In addition, as described in Note 22 to the financial statements, the Group did not account for the Option Scheme granted in 2010 and 2011 in accordance with IFRS 2 Share-based payments. In our opinion, there is insufficient information concerning the Option Scheme in these financial statements to give a true and fair view of the financial position of the Group as at 31 December 2012, and of the result of the Group for the year then ended. It is not practicable for us to quantify the effect of the departure from this requirement. Qualified opinion arising from disagreements about accounting treatments In our opinion, except for the effects on the financial statements of the matters described in the "Basis for qualified opinion" paragraphs above, the consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2012, and their financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards. Deloitte Touche Tohmatsu Certified Public Accountants LLP Shanghai, China 8 August 2013-2 -
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME NOTES Revenue 7 1,810,233 1,270,299 Cost of sales (1,582,218) (1,098,852) Gross profit 228,015 171,447 Investment income 9 977 499 Other gains and losses 10 1,705 1,462 Distribution and selling expenses (247,255) (148,955) Administrative and general expenses (10,269) (12,628) Share of loss of an associate (348) (899) Finance costs 11 (680) - (Loss)/Profit before tax (27,855) 10,926 Income tax expenses 14 (46) (2,991) (Loss)/profit and total comprehensive income for the year and attributable to owners of the Company (27,901) 7,935-3 -
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2012 ASSETS NOTES Non-current assets Property, plant and equipment 15 17,645 11,180 Investment in an associate 16 2,550 4,151 Total non-current assets 20,195 15,331 Current assets Inventories 17 194,261 121,759 Trade and other receivables 18 179,472 178,381 Prepaid other taxes 7,014 878 Cash and bank balances 68,870 52,483 Total current assets 449,617 353,501 TOTAL ASSETS 469,812 368,832 Current liabilities Trade and other payables 19 118,820 91,568 Other tax liabilities 1,910 5,661 Short-term borrowings 20 14,000 - Total current liabilities 134,730 97,229 Net current assets 314,887 256,272 NET ASSETS 335,082 271,603 Capital and reserves Share capital 21 4,626 3,754 Reserves 330,456 267,849 TOTAL EQUITY 335,082 271,603 These consolidated financial statements of EBT Digital Communications Retail Group, registered number WK-237161, were approved by the board of directors on 8 August 2013 and signed on its behalf by: Director-Mark Qiu Director- Zhang Ge - 4 -
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share Share option UK Retained capital premium reserve reserve earnings Total At 1 January 2011 3,754 - - 393,607 (134,441) 262,920 Profit and total comprehensive income for the year - - - - 7,935 7,935 Recognition of share-based payment (Note 22) - - 748 - - 748 At 31 December 2011 3,754-748 393,607 (126,506) 271,603 Issue new shares 860 93,833 - - - 94,693 Loss and total comprehensive income for the year - - - - (27,901) (27,901) Recognition of share-based payment (Note 22) 12 291 (3,616) - - (3,313) At 31 December 2012 4,626 94,124 (2,868) 393,607 (154,407) 335,082 UK reserve As disclosed in Note 2, the entities now comprising the Group were previously held by EBT Mobile China Limited ("EBT UK"), pursuant to a group reorganisation schemes, the Company became the holding company of the Group on 18 August 2010. Upon the reorganization, all the reserve of EBT UK, which comprised share premium, capital reserve representing the liabilities waived by GMAI-Asia.com Inc., which was controlled by James A. Reiman, the then non-executive director of the Company; share option reserve; acquisition reserve representing the premium of the issued ordinary share capital of EBT UK at the time of the reverse acquisition by EBT Mobile Limited in the year 2005; capital redemption reserve and special reserve, have been transferred to UK reserve. By virtue of a special resolution and with sanction of an Order of the High Court of Justice dated 10 December 2008, in order to protect the interests of EBT UK s creditors; among the UK reserve, an amount of RMB229,228,000 were restricted from distribution. - 5 -
CONSOLIDATED STATEMENT OF CASH FLOW CASH FLOWS FROM OPERATING ACTIVITIES (Loss)/profit before tax (27,855) 10,926 Adjustments for: Finance cost 680 - Interest income (977) (499) Share of loss of an associate 348 899 Net foreign exchange gain (loss) 625 (102) Loss on disposal of property, plant and equipment 39 10 Depreciation of property, plant and equipment 10,016 5,307 Reversal of allowance for doubtful debt - (243) Allowance for inventory 177 220 Share-based payments expense (3,616) 748 Operating cash flows before movements in working capital (20,563) 17,266 (Increase) in inventories (72,679) (10,185) (Increase) in trade and other receivables 162 (32,267) (Decrease) increase in prepaid other taxes (6,136) 2,425 (Decrease) increase in trade payables (1,537) 47,078 Increase (decrease) in notes payables 6,985 (89) Increase (decrease) in accruals and other payables 21,804 (2,106) (Decrease) increase in other tax liabilities (3,751) 3,474 Cash generated from operations (75,715) 25,596 Income taxes paid (46) (2,991) Net cash (used in) generated from operating activities (75,761) 22,605 CASH FLOWS FROM INVESTING ACTIVITIES Interest received 977 499 Proceeds from disposal of property, plant and equipment 236 121 Payments for acquisition of property, plant and equipment (16,756) (9,667) Net cash used in investing activities (15,543) (9,047) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of bank borrowings (14,000) - Bank borrowings raised 28,000 - Interest paid (680) - Proceeds on issue of shares 94,996 - Net cash generated from financing activities 108,316 - NET INCREASE IN CASH AND CASH EQUIVALENTS 17,012 13,558 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 52,483 38,823 Effect of foreign exchange rate change (625) 102 CASH AND CASH EQUIVALENTS AT END OF YEAR 68,870 52,483-6 -
1. GENERAL INFORMATION EBT Digital Communications Retail Group ("the Company") is a company incorporated in the Cayman Islands under the Companies Law Chapter 22 of the Cayman Islands on 12 February 2010. The registered office of the Company is located at Walker House, 87 Mary Street, George Town, Grand Cayman KY1-9005, Cayman Islands. The Company is an investment holding company. The Company and its subsidiaries ("the Group") is engaged in retailing of digital products and services, including mobile phones, phone cards, computer, digital accessories and digital related value-added services based in China. The principle place of business of its subsidiaries is the People s Republic of China (the PRC ). The consolidated financial statements are presented in Renminbi (RMB), the currency of the primary economic environment in which the Company and its principal subsidiaries operate (the functional currency of the Company and the principal subsidiaries). 2. BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS The entities now comprising the Group were previously held by EBT UK. Pursuant to a group reorganisation scheme (the Reorganisations ) to rationalise the structure of the Group, the Company became the holding company of the Group on 18 August 2010. The Group, including the Company and its subsidiaries as set out below, resulting from the mentioned Reorganisations, is regarded as a continuing entity. Consequently, EBT UK has been liquidated on 12 June 2013. The direct and indirect interests in the following subsidiaries held by the Company as at 31 December 2012 and 2011 are as follow: Attributable equity interest Issued and fully held by the Company Place and date paid-up share capital/ As at As at of incorporation registered capital 31 December 31 December Principal Name of the subsidiary or establishment at the date of this report activities % % EBT Digital Communications British Virgin USD 2 100 100 Investment holding Retail Limited ("EBT BVI") Islands 12 Feb 2010 EBT Mobile China Limited ("EBT UK") United Kingdom GBP 269,756 100 100 Investment holding (previous named as EBT Mobile China plc") 7 Sept 2005 EBT Mobile Limited Hong Kong HKD 9,864 100 100 Investment holding 10 Dec 2004 EBT International Trade Shanghai, PRC RMB 329,800,077 100 100 retailing of digital (Shanghai) Co., Ltd. ("EBT Trade") 11 Apr 2000 products and services iatoz Beijing Co., Ltd. ("EBT Beijing") Beijing, PRC RMB 9,000,000 (i) (i) retailing of digital 9 Oct 1999 products and services - 7 -
2. GROUP REORGANISATIONS AND BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS - continued Attributable equity interest Issued and fully held by the Company Place and date paid-up share capital/ As at As at of incorporation registered capital 31 December 31 December Principal Name of the subsidiary or establishment at the date of this report activities % % Shanghai Everbright Communication Shanghai, PRC RMB 1,000,000 100 100 retailing of digital Terminal Products 13 Dec 1999 products and services Distribution Ltd. ("EBT Shanghai") products and services Suzhou Everbright Communication Jiangsu Province, PRC RMB 2,000,000 100 100 retailing of digital Terminal Products 28 May 2001 products and services Distribution Ltd. ("EBT Suzhou") Shanghai Yibo Telecommunications Shanghai, PRC RMB5,000,000 100 100 retailing of digital Products Co., Ltd. ("Shanghai YBT") 26 Jul 2007 products and services Suzhou Yiteng Telecommunications Jiangsu Province, PRC RMB 2,000,000 100 100 retailing of digital Products Co., Ltd. ("Suzhou Yiteng") 4 Feb 2008 products and services Hubei Yiteng Telecommunications Hubei Province, PRC RMB 500,000-100 retailer of digital Products Co., Ltd. ("Hubei Yiteng") (ii) 6 May 2008 products and services Shanghai EBT Telecommunications Shanghai, PRC RMB 10,000,000 100 100 retailing of digital Products Co., Ltd. ("EBT Tele") 26 Nov 2008 products and services Shanghai EBT Labour Service Shanghai, PRC RMB 500,000 (i) (i) Labour services Co., Ltd. ("EBT Labour") 17 Nov 2010 Hangzhou Shenyou Digital and Shanghai, PRC RMB 500,000 100 100 retailing of digital Telecommunications Products 12 Jun 2010 products and services Co., Ltd. ("EBT HZ") Ningbo Yiteng Telecommunications Products Ningbo, PRC RMB 1,500,000 100 100 retailer of digital Co., Ltd. ("EBT NB") 26 Apr 2011 products and services EBT Shanghai Trading Co., Ltd. Shanghai, PRC RMB 1,000,000 (i) - retailer of digital ("EBT Xungang") 2 Dec 2011 products and services (i) The Company does not directly or indirectly own the issued equity share capital of the above subsidiaries of the Group, however, the directors considered that the Company is able to substantially exercise control over these entities. Accordingly, these entities are considered as the subsidiaries of the Group (see Note 5). (ii) The entity was liquidated on 17 January 2012. - 8 -
3. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRSs") New and revised Standards and Interpretations applied in the current year In the current year, the Group has applied the following new and revised Standards and Interpretations. Amendments to IFRS 1 Amendments to IFRS 7 Amendments to IAS 12 Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters Disclosures Transfers of Financial Assets Deferred Tax: Recovery of Underlying Assets New and revised Standards and Interpretations issued but not yet effective The Group has not early applied the following new and revised Standards and Interpretations that have been issued but are not yet effective: Amendments to IFRSs Annual Improvements to IFRSs 2009-2011 Cycle 1 Amendments to IFRS 1 Government Loans 1 Amendments to IFRS 7 Disclosures Offsetting Financial Assets and Financial Liabilities 1 Amendments to IFRS 9 and IFRS 7 Mandatory Effective Date of IFRS 9 and Transition Disclosures 2 Amendments to IFRS 10, IFRS 11 and IFRS 12 Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance 1 Amendments to IFRS 10, IFRS 12 Investment Entities 4 and IAS 27 IFRS 9 Financial Instruments 2 IFRS 10 Consolidated Financial Statements 1 IFRS 11 Joint Arrangements 1 IFRS 12 Disclosure of Interests in Other Entities 1 IFRS 13 Fair Value Measurement 1 Amendments to IAS 1 Presentation of Items of Other Comprehensive Income 3 IAS 19 (Revised 2011) Employee Benefits 1 IAS 27 (Revised 2011) Separate Financial Statements 1 IAS 28 (Revised 2011) Investments in Associates and Joint Ventures 1 Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities 4 Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets 4 Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting 4 IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine 1 IFRIC 21 Levies 4 1 Effective for annual periods beginning on or after 1 January 2013 2 Effective for annual periods beginning on or after 1 January 2015 3 Effective for annual periods beginning on or after 1 July 2012 4 Effective for annual periods beginning on or after 1 January 2014-9 -
3. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRSs") - continued New and revised Standards and Interpretations issued but not yet effective - continued The directors of the Company anticipate that the application of the new and revised Standards and Interpretations issued but not yet effective will have no material effect on consolidated financial statements of the Group. 4. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with IFRSs. The consolidated financial statements have been prepared on the historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The principal accounting policies are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-congrolling interests having a deficit balance. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Merger accounting for business combinations involving entities under common control The consolidated financial statements incorporate the financial statement items of the combining entities or businesses in which the common control combination occurs as if they had been consolidated 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 consolidated using the existing book values from the controlling parties' perspective. No amount is recognised in respect of goodwill or excess of acquirer's 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 parties' interest. - 10 -
4. SIGNIFICANT ACCOUNTING POLICIES - continued Merger accounting for business combinations involving entities under common control - continued The consolidated statement of comprehensive income 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 this is a shorter period, regardless of the date of the common control combination. The comparative amounts in the consolidated financial statements are presented as if the entitles or business had been combined at the end of the previous reporting period or when they first came under common control, whichever is shorter. Investment in an associate An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, an investment in an associate is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group's share of the profit or loss and other comprehensive income of the associate. When the Group's share of losses of an associate exceeds the Group's interest in that associate (which includes any long-term interests that, in substance, form part of the Group's net investment in the associate), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. Any excess of the cost of acquisition over the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate recognised at the date of acquisition is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. The requirements of IAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, Any impairment loss recognised forms part of the carrying amount of the the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases. - 11 -
4. SIGNIFICANT ACCOUNTING POLICIES - continued Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods sold and services provided in the normal course of business, net of discounts and other sales related tax. Sales of goods are recognised when goods are delivered and title has passed. Revenue from a contract to provide services is recognised by reference to the stage of completion of the contract. The stage of completion of the contract is determined as follows: servicing fees included in the price of products sold are recognised by reference to the proportion of the total cost of providing the servicing for the product sold. Interest income Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset s net carrying amount. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Foreign currencies The individual financial statements of each group entity are presented in the currency of the primary economic environment in which it operates (its functional currency). In preparing the financial statements of the each group entity, transactions in currencies other than the entity s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each end of reporting period, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the end of reporting period. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income statement for the period. - 12 -
4. SIGNIFICANT ACCOUNTING POLICIES - continued Foreign currencies - continued For the purpose of presenting group financial statements, the assets and liabilities of the Group s foreign operations are translated at exchange rates prevailing at the end of reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used. Such transaction differences are recognised as income or as expenses in the period in which the operation is disposed of. Retirement benefit costs The Group adopts defined contribution retirement benefit schemes. Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution schemes where the Group s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme. Pursuant to the relevant regulations of the Peoples Republic of China (PRC) government, the ten companies established in the PRC included in the group financial information have participated in central pension schemes (the Schemes ) operated by local municipal governments, whereby these ten companies are required to contribute a certain percentage of the basic salaries of their employees to the Schemes to fund their retirement benefits. The local municipal governments undertake to assume the retirement benefits obligations of all existing and future retired employees of the subsidiaries in the PRC. The only obligation of these ten companies with respect to the Schemes is to pay the ongoing required contributions under the Schemes mentioned above. Share-based payments arrangements Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 22. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group s estimate of equity instruments that will eventually vest, with a corresponding increase in equity (equity-settled employee benefits reserve). At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve. The policy described above is applied to all equity-settled share-based payment transactions that were granted before 31 December 2009. The Company has not accounted for the other equitysettled shared-based payments granted in 2010 and 2011. No amounts have been recognised in the consolidated financial statements. - 13 -
4. SIGNIFICANT ACCOUNTING POLICIES - continued Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realized, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Current and deferred tax is recognised in profit or loss, except when it relates to items that are recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity respectively. - 14 -
4. SIGNIFICANT ACCOUNTING POLICIES - continued Property, plant and equipment Property, plant and equipment including buildings held for use in the supply of goods or services, or for administrative purposes (other than construction in progress as described below) are stated at cost less subsequent accumulated depreciation and accumulated impairment losses, if any. Depreciation is recognised so as to write off the cost of items of property, plant, and equipment other than construction in progress less their residual values over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. Properties in the course of construction for supply or administrative purposes are carried at cost, less any recognised impairment loss. Such properties are classified to the appropriate categories of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. Intangible assets Intangible assets are stated at cost less amortisation and any recognised impairment loss and are amortised on a straight-line basis over their useful lives. With respect to lease agreements, the useful lives represent the term on the relevant lease agreement. Impairment of tangible At the end of reporting period, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. - 15 -
4. SIGNIFICANT ACCOUNTING POLICIES - continued Impairment of tangible and intangible assets - continued If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cashgenerating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in the income statement, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises all costs of purchase and related costs which have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less costs to be incurred in marketing, selling and distribution. Financial instruments Financial assets and financial liabilities are recognized in the consolidated statement of financial position when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets or financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. Financial assets The Group's financial assets are classified into loans and receivables. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the market place. The accounting policies adopted in respect of each category of financial assets are set out below. - 16 -
4. SIGNIFICANT ACCOUNTING POLICIES - continued Financial instruments - continued Effective interest method The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition. Interest income is recognized on an effective interest basis for debt instruments. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables including trade and other receivables and bank balances and cash are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Impairment of financial assets Financial assets are assessed for indicators of impairment at the end of the reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been affected. Objective evidence of impairment could include: significant financial difficulty of the issuer or counterparty; or breach of contract, such as default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financial re-organization; The financial assets including trade and other receivables, are assessed for impairment individually. Objective evidence or impairment for a portfolio of receivables could include the Group s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 30 days, as well as observable changes in national or local economic conditions that correlate with default on receivables. - 17 -
4. SIGNIFICANT ACCOUNTING POLICIES - continued Financial instruments - continued Impairment of financial assets- continued The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade and other receivables where the carrying amount is reduced through the use of an allowance account. When a trade and other receivables are considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit or loss. Financial liabilities and equity Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. - 18 -
4. SIGNIFICANT ACCOUNTING POLICIES - continued Financial instruments - continued Financial liabilities All financial liabilities are subsequently measured at amortised cost using the effective interest method. However, financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies, financial guarantee contracts issued by the Group, and commitments issued by the Group to provide a loan at below-market interest rate are measured in accordance with the specific accounting policies set out below. Financial liabilities including trade, bills and other payables are subsequently measured at amortized cost, using the effective interest method. Effective interest method The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or, where appropriate, a shorter period. Interest expense is recognized on an effective interest basis for debt instruments. Derecognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group s obligations are discharged, cancelled or they expire. The difference between te carrying amount of the financial liability decrecognised and the consideration paid and payable is recognised in profit or loss. 5. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the process of applying the Group s accounting policies, which are described in note 4, management has made the following judgements that have the most significant effect on the amounts recognised in the group financial statements. Consolidation of the special purpose entities The Company does not legally own the issued equity share capital of the following subsidiaries of the Group directly or indirectly (known as the Special Purpose Entity (SPE)): iatoz Beijing Co., Ltd. (EBT Beijing), Shanghai EBT Labour Service Co., Ltd. ("EBT Labour") and EBT Shanghai Trading Co., Ltd. - 19 -
5. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY- continued Consolidation of the special purpose entities - continued In making its judgement, management considered the detailed requirements to consolidate an SPE as set out in IAS27 Consolidated and Separate Financial Statements and SIC12 Consolidation Special Purpose Entities, and in particular, whether the Company in substance control the SPEs. The conclusion is that the Company does control the financial or the operating activities of the SPEs. Management considered the following indicators for a relationship in which the Company controls the SPEs and consequently should consolidate the financial statements of SPEs: Exclusive purchase rights Exclusive purchase rights are held by EBT Mobile Limited ("EBT Mobile"), a wholly owned subsidiary of the Company incorporated in Hong Kong, to acquire the entire equity share capital of the SPEs. Prior to 7 April 2005, these purchase rights were held by EBT International Trade (Shanghai) Co., Ltd. ("EBT Trade"), an indirect wholly owned subsidiary of the Company incorporated in PRC. Following a change in PRC law on 11 December 2004, a retail licence can be obtained in January 2006 under which foreign companies are permitted to undertake retail activities in China through its PRC subsidiaries. Following the above change, EBT Trade obtained a retail and wholesale licence in 2006. EBT Mobile will exercise the exclusive purchase rights when management considers the timing to be appropriate and after approval has been obtained from the authorities. Right to accrued benefits The purchase price in the above exclusive purchase rights is specified as the price paid on initial investment by the current legal owners. Consequently, any increase in value of the equity interests of the SPEs continues to accrue to EBT Mobile. In addition, EBT Mobile and EBT Trade have the discretion, through exclusive merchandise purchase agreements with the SPEs, to adjust the purchase prices of all items purchased by the SPEs. Decision-making Management considers on a day-to-day basis that the Company exerts control over the operations of the Chinese trading entities of EBT as directors direct the activities and decision making of those entities. Through the exclusive purchase rights in shares agreements and exclusive merchandise purchase agreements, the Company, in substance, has rights to obtain a majority of the operating benefits and benefits from shares value of the SPEs. Following the assessment of the above key factors, the directors are satisfied that the Company is able to exercise control over the SPEs and, accordingly, that the SPEs are considered as the subsidiaries of the Group. - 20 -
5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY- continued Depreciation of property, plant and equipment As described in note 4, the Group reviews the estimated useful lives of property, plant and equipment at the end of each reporting period. The cost of motor vehicles, fixture and office equipment, and leasehold improvement are depreciated on a straight-line basis over the assets' estimated useful lives. These are the common life expectancies applied in the retailing industry. Changes in the expected level of usage and technological developments could impact the economic useful lives and the residual values of these assets, therefore future depreciation charges would be revised. The carrying amount of plant and machinery as at 31 December 2012 was RMB17,645,000 (2011: RMB11,180,000). Estimated impairment of trade and other receivables When there is objective evidence of impairment of trade and other receivables, the Group takes into consideration the estimation of future cash collection. The amount of the impairment loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash collection (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of trade and other receivables as at 31 December 2012 was RMB179,472,000 (2011: RMB178,381,000) after making an allowance for doubtful debts of RMB31,511,000 (2011: RMB32,342,000). The effect of a change in an accounting estimate of impairment of trade receivables shall be recognised prospectively by including it in profit or loss in the year of the change. 6. CAPITAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS Capital risk management The Group manages its capital to ensure that entities in the Group will each be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of cash and cash equivalents and equity attributable to equity holders of the parent, comprising share capital, share premium accounts, other reserves and retained losses as disclosed in notes. It is the Group s policy to maintain a strong capital base so as to sustain future development of the Group s business and to maintain the confidence of creditors. - 21 -