CSC STEEL HOLDINGS BERHAD (Company No. 640357 - X) (Incorporated in Malaysia) AND ITS SUBSIDIARY COMPANIES REPORT OF THE DIRECTORS AND FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2012 (In Ringgit Malaysia) These Audited Financial Statements of the Group and the Company with *Qualified/Unqualified Auditors Report for the year ended December 31, 2012 were tabled at the Annual General Meeting/Adjourned Annual General Meeting held on... Director
CSC STEEL HOLDINGS BERHAD (Incorporated in Malaysia) AND ITS SUBSIDIARY COMPANIES FINANCIAL STATEMENTS CONTENTS PAGE(S) Report of the directors 1-5 Independent auditors report 6-8 Statements of comprehensive income 9 Statements of financial position 10-13 Statements of changes in equity 14-15 Statements of cash flows 16-18 Notes to financial statements 19-67 Statement by directors 68 Declaration by the director primarily responsible for the financial management of the Company 69
CSC STEEL HOLDINGS BERHAD (Incorporated in Malaysia) REPORT OF THE DIRECTORS The directors of CSC STEEL HOLDINGS BERHAD have pleasure in submitting their report and the audited financial statements of the Group and the Company for the year ended December 31, 2012. PRINCIPAL ACTIVITIES The Company is principally involved in investment holding and provision of management services. The principal activities of its subsidiary companies are as disclosed in Note 14 to the Financial Statements. There have been no significant changes in the nature of the principal activities of the Company and its subsidiaries during the financial year. RESULTS OF OPERATIONS The results of operations of the Group and the Company for the financial year are as follows: The Group RM The Company RM Profit before tax 37,512,956 1,367,826 Tax expense (9,505,252) (404,644) Profit for the year 28,007,704 963,182 In the opinion of the directors, the results of operations of the Group and the Company during the financial year have not been substantially affected by any item, transaction or event of a material and unusual nature. DIVIDENDS Since the date of the last report, a final single tier dividend of 5% per share, amounting to RM18,660,000 and a special single tier dividend of 2% per share, amounting to RM7,464,000 in respect of the previous financial year, was declared and paid by the Company during the financial year. The directors proposed a final single tier dividend of 5% per share and a special single tier dividend of 2% per share, in respect of the current financial year. The proposed dividends, which are subject to approval of the shareholders at the forthcoming Annual General Meeting, have not been included as a liability in the financial statements. 1
RESERVES AND PROVISIONS There were no material transfers to or from reserves or provisions during the financial year other than those disclosed in the Financial Statements. ISSUE OF SHARES AND DEBENTURES The Company has not issued any new shares or debentures during the financial year. SHARE OPTIONS No options have been granted by the Company to any parties during the financial year to take up unissued shares of the Company. No shares have been issued during the financial year by virtue of the exercise of any option to take up unissued shares of the Company. As of the end of the financial year, there were no unissued shares of the Company under options. OTHER STATUTORY INFORMATION Before the statements of comprehensive income and the statements of financial position of the Group and the Company were made out, the directors took reasonable steps: (a) (b) to ascertain that proper action had been taken in relation to the writing off of bad debts and the making of allowance for doubtful debts, and have satisfied themselves that there were no known bad debts to be written off and that no allowance for doubtful debts is necessary; and to ensure that any current assets which were unlikely to realise their book values in the ordinary course of business had been written down to their estimated realisable values. At the date of this report, the directors are not aware of any circumstances: (a) (b) (c) (d) which would require the writing off of bad debts or the setting up of amount of allowance for doubtful debts in the financial statements of the Group and the Company; or which would render the values attributed to current assets in the financial statements of the Group and the Company misleading; or which have arisen and render adherence to the existing method of valuation of assets or liabilities of the Group and the Company misleading or inappropriate; or not otherwise dealt with in this report or financial statements which would render any amount stated in the financial statements of the Group and the Company misleading. 2
At the date of this report, there does not exist: (a) (b) any charge on the assets of the Group and the Company which has arisen since the end of the financial year which secures the liability of any other person; or any contingent liability of the Group and the Company which has arisen since the end of the financial year. No contingent or other liability has become enforceable, or is likely to become enforceable within the period of twelve months after the end of the financial year which, in the opinion of the directors, will or may substantially affect the ability of the Group and the Company to meet their obligations as and when they fall due. In the opinion of the directors, no item, transaction or event of a material and unusual nature has arisen in the interval between the end of the financial year and the date of this report which is likely to affect substantially the results of operations of the Group and the Company for the succeeding financial year. DIRECTORS The following directors served on the Board of the Company since the date of the last report: Tan Chin Teng Pang Fee Yoon Chong Khim Leong @ Chong Kim Leong Brig. Gen. (B) Dato Mohd Zaaba @ Nik Zaaba Bin Nik Daud Nee, Lung-Yuan Liu, Jih-Gang Chen, High-Pinn (appointed on November 1, 2012) Liang, Hsiu-Chang @ Liang Shu Charng (resigned on November 1, 2012) In accordance with Article 128 of the Company s Articles of Association, Messrs. Tan Chin Teng and Chong Khim Leong @ Chong Kim Leong retire by rotation and, being eligible, offer themselves for re-election at the forthcoming Annual General Meeting. Mr. Chen, High-Pinn, who was appointed to the Board since the date of the last Annual General Meeting, retires under Article 133 of the Company s Articles of Association and, being eligible, offers himself for re-election at the forthcoming Annual General Meeting. 3
DIRECTORS INTERESTS The shareholdings in the Company and ultimate holding company of those who were directors at the end of the financial year, as recorded in the Register of Directors Shareholdings kept by the Company under Section 134 of the Companies Act, 1965, are as follows: Shares in the Company No. of ordinary shares of RM1 each Balance at 1.1.2012 Bought Sold Balance at 31.12.2012 Registered in the name of directors Pang Fee Yoon 20,000 - - 20,000 Chong Khim Leong @ Chong Kim Leong 20,000 - - 20,000 Shares in ultimate holding company, China Steel Corporation No. of ordinary shares of *NTD10 each Balance at 1.1.2012/ Date of appointment Bought Sold Balance at 31.12.2012 Registered in the name of directors Nee, Lung-Yuan 290,256 - - 290,256 Liu, Jih-Gang 136,508 2,047-138,555 Chen, High-Pinn 372,070 25,988-398,058 Deemed interest Liu, Jih-Gang 952 14-966** * New Taiwan Dollar ** Indirect interest by virtue of shares held by members of the directors family and by companies in which the directors have interest. By virtue of their interests in the shares of the ultimate holding company, the above directors are deemed to have an interest in the shares of the Company and of all related companies to the extent of the ultimate holding company s interest. 4
DIRECTORS BENEFITS Since the end of the previous financial year, none of the directors of the Company has received or become entitled to receive any benefit (other than those disclosed as directors remuneration in the financial statements) by reason of a contract made by the Company or a related corporation with the director or with a firm of which the director is a member, or with a company in which the director has a substantial financial interest. During and at the end of the financial year, no arrangement subsisted to which the Company was a party whereby directors of the Company might acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate. HOLDING COMPANIES The Company is a subsidiary of China Steel Asia Pacific Holdings Pte. Ltd., a company incorporated in the Republic of Singapore. The directors regard China Steel Corporation, a company incorporated in Taiwan, as the ultimate holding company. AUDITORS The auditors, Messrs. Deloitte & Touche, have indicated their willingness to continue in office. Signed on behalf of the Board in accordance with a resolution of the Directors, CHEN, HIGH-PINN TAN CHIN TENG Melaka April 8, 2013 5
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF CSC STEEL HOLDINGS BERHAD (Incorporated in Malaysia) Report on the Financial Statements We have audited the financial statements of CSC STEEL HOLDINGS BERHAD, which comprise the statements of financial position of the Group and of the Company as of December 31, 2012 and the statements of comprehensive income, statements of changes in equity and statements of cash flows of the Group and of the Company for the year then ended, and a summary of significant accounting policies and other explanatory information, as set out on pages 9 to 66. Directors Responsibility for the Financial Statements The directors of the Company are responsible for the preparation of these financial statements so as to give a true and fair view in accordance with Malaysian Financial Reporting Standards, International Financial Reporting Standards and the requirements of the Companies Act, 1965 in Malaysia and for such internal controls as the directors determine are necessary to enable the preparation of 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 financial statements based on our audit. We conducted our audit in accordance with approved standards on auditing in Malaysia. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. (Forward) 6
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgement, 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 auditors consider internal control relevant to the entity s preparation of 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 financial statements. We believe that the audit evidence that we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements give a true and fair view of the financial position of the Group and of the Company as of December 31, 2012 and of their financial performance and cash flows for the year then ended in accordance with Malaysian Financial Reporting Standards, International Financial Reporting Standards and the requirements of the Companies Act, 1965 in Malaysia. Report on Other Legal and Regulatory Requirements In accordance with the requirements of the Companies Act, 1965 in Malaysia, we also report that: a) in our opinion, the accounting and other records and the registers required by the Act to be kept by the Company and by the subsidiaries of which we have acted as auditors have been properly kept in accordance with the provisions of the Act; b) we have considered the accounts and auditors report of the subsidiary of which we have not acted as auditors, as mentioned in Note 14 to the Financial Statements, being accounts that have been included in the financial statements of the Group; c) we are satisfied that the accounts of the subsidiaries that have been consolidated with the Company s financial statements are in form and content appropriate and proper for the purposes of the preparation of the financial statements of the Group, and we have received satisfactory information and explanations required by us for these purposes; d) the auditors reports on the accounts of the subsidiaries were not subject to any qualification and did not include any adverse comment made under Section 174 (3) of the Act. (Forward) 7
Other Reporting Responsibilities The supplementary information set out in Note 32 is disclosed to meet the requirement of Bursa Malaysia Securities Berhad and is not part of the financial statements. The directors are responsible for the preparation of the supplementary information in accordance with Guidance on Special Matter No. 1 Determination of Realised and Unrealised Profits or Losses in the Context of Disclosure Pursuant to Bursa Malaysia Securities Berhad Listing Requirements as issued by the Malaysian Institute of Accountants ( MIA Guidance ) and the directive of Bursa Malaysia Securities Berhad. In our opinion, the supplementary information is prepared in all material respects, in accordance with the MIA Guidance and the directive of Bursa Malaysia Securities Berhad. Other Matters As stated in Note 2 to the Financial Statements, CSC Steel Holdings Berhad adopted Malaysian Financial Reporting Standards on January 1, 2012 with a transition date of January 1, 2011. These standards were applied retrospectively by directors to the comparative information in these financial statements, including the statements of financial position as of December 31, 2011 and January 1, 2011, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended December 31, 2011 and related disclosures. We were not engaged to report on the restated comparative information and it is unaudited. Our responsibilities as part of our audit of the financial statements of the Group and of the Company for the year ended December 31, 2012 have, in these circumstances, included obtaining sufficient appropriate audit evidence that the opening balances as of January 1, 2012 do not contain misstatements that materially affect the financial position as of December 31, 2012 and their financial performance and cash flows for the year then ended. This report is made solely to the member of the Company, as a body, in accordance with Section 174 of the Companies Act, 1965 in Malaysia and for no other purpose. We do not assume responsibility to any other person for the contents of this report. DELOITTE & TOUCHE AF 0834 Chartered Accountants HIEW KIM TIAM Partner - 1717/8/13 (J) Chartered Accountant April 8, 2013 8
CSC STEEL HOLDINGS BERHAD (Incorporated in Malaysia) AND ITS SUBSIDIARY COMPANIES STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2012 The Group The Company 2012 2011 2012 2011 Note RM RM RM RM Revenue 5 1,126,993,592 1,206,148,361 4,852,428 4,905,670 Cost of sales (1,072,542,990) (1,150,909,872) - - Gross profit 54,450,602 55,238,489 4,852,428 4,905,670 Investment revenue 7 7,606,864 7,501,243 371,086 599,319 Other income 8,443,382 10,229,122 - - Sales and marketing expenses (20,584,265) (22,519,485) - - General and administrative expenses (11,479,062) (11,103,205) (3,855,688) (3,307,007) Finance costs 8 (144) (542) - - Other expenses (924,421) (782,220) - - Profit before tax 9 37,512,956 38,563,402 1,367,826 2,197,982 Tax expense 10 (9,505,252) (9,012,621) (404,644) (449,809) Profit for the year 28,007,704 29,550,781 963,182 1,748,173 Other comprehensive income Net fair value gain on available-for-sale financial assets 23,666-23,666 - Total comprehensive income for the year 28,031,370 29,550,781 986,848 1,748,173 Basic earnings per ordinary share (sen) 11 7.51 7.92 The accompanying Notes form an integral part of the Financial Statements. 9
CSC STEEL HOLDINGS BERHAD (Incorporated in Malaysia) AND ITS SUBSIDIARY COMPANIES STATEMENTS OF FINANCIAL POSITION AS OF DECEMBER 31, 2012 ASSETS The Group The Company December 31, 2012 December 31, 2011 January 1, 2011 December 31, 2012 December 31, 2011 January 1, 2011 Note RM RM RM RM RM RM Non-current assets Property, plant and equipment 12 264,207,931 263,566,732 284,141,240 944,128 1,026,256 1,075,655 Prepaid lease payments 13 18,740,493 19,016,298 19,253,684 - - - Investment in subsidiary companies 14 - - - 387,032,531 387,032,531 386,032,531 Other investments 15 3,207,208 2,311,200 2,311,200 3,207,208 2,311,200 2,311,200 Total non-current assets 286,155,632 284,894,230 305,706,124 391,183,867 390,369,987 389,419,386 (Forward) 10
The Group The Company December 31, 2012 December 31, 2011 January 1, 2011 December 31, 2012 December 31, 2011 January 1, 2011 Note RM RM RM RM RM RM Current assets Inventories 16 194,943,434 199,706,255 179,366,530 - - - Trade receivables 17 96,888,807 86,920,362 91,284,627 - - - Other receivables and prepaid expenses 17 9,259,952 31,904,916 11,059,679 979,465 5,000 27,357 Tax recoverable 3,412,287 9,667,696 2,133,179 483,116 331,350 126,559 Amount due from ultimate holding company 18 20,041,177-1,828,665 - - - Amount due from subsidiary company 18 - - - - 88,100,000 71,000,000 Amount due from other related company 18 43,886 - - - - - Fixed income fund, fixed deposits, short-term placements and cash and bank balances 19 236,832,965 233,190,534 291,069,262 71,819,741 11,350,894 76,466,774 Total current assets 561,422,508 561,389,763 576,741,942 73,282,322 99,787,244 147,620,690 Total Assets 847,578,140 846,283,993 882,448,066 464,466,189 490,157,231 537,040,076 (Forward) 11
The Group The Company December 31, 2012 December 31, 2011 January 1, 2011 December 31, 2012 December 31, 2011 January 1, 2011 Note RM RM RM RM RM RM EQUITY AND LIABILITIES Capital and reserves Issued capital 20 380,000,000 380,000,000 380,000,000 380,000,000 380,000,000 380,000,000 Treasury shares 21 (7,992,219) (7,415,698) (7,415,698) (7,992,219) (7,415,698) (7,415,698) Retained earnings 22 368,625,284 366,741,580 385,706,799 59,464,362 84,625,180 131,393,007 Reserves 22 32,464,805 32,441,139 32,441,139 32,464,805 32,441,139 32,441,139 Total equity 773,097,870 771,767,021 790,732,240 463,936,948 489,650,621 536,418,448 Non-current liability Deferred tax liabilities 23 33,375,819 36,385,607 40,905,288 - - - (Forward) 12
The Group The Company December 31, 2012 December 31, 2011 January 1, 2011 December 31, 2012 December 31, 2011 January 1, 2011 Note RM RM RM RM RM RM Current liabilities Trade payables 24 3,255,769 3,623,695 24,646,483 - - - Other payables and accrued expenses 24 37,060,205 31,609,053 25,715,578 529,241 506,610 621,628 Amount due to ultimate holding company 18-269,570 - - - - Amount due to other related companies 18 788,477 2,628,736 190,007 - - - Short-term borrowing (secured) 25 - - 258,470 - - - Tax liabilities - 311 - - - - Total current liabilities 41,104,451 38,131,365 50,810,538 529,241 506,610 621,628 Total liabilities 74,480,270 74,516,972 91,715,826 529,241 506,610 621,628 Total Equity and Liabilities 847,578,140 846,283,993 882,448,066 464,466,189 490,157,231 537,040,076 The accompanying Notes form an integral part of the Financial Statements. 13
CSC STEEL HOLDINGS BERHAD (Incorporated in Malaysia) AND ITS SUBSIDIARY COMPANIES STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2012 Non-distributable reserves Distributable Investment reserve- Issued Treasury Share revaluation Retained The Group Note capital shares premium reserve earnings Total RM RM RM RM RM RM Balance as of January 1, 2011 380,000,000 (7,415,698) 32,441,139-385,706,799 790,732,240 Total comprehensive income for the year - - - 29,550,781 29,550,781 Dividends 26 - - - - (48,516,000) (48,516,000) Balance as of December 31, 2011/January 1, 2012 380,000,000 (7,415,698) 32,441,139-366,741,580 771,767,021 Profit for the year - - - - 28,007,704 28,007,704 Other comprehensive income for the year - - - 23,666-23,666 Total comprehensive income for the year - - - 23,666 28,007,704 28,031,370 Dividends 26 - - - - (26,124,000) (26,124,000) Shares buy-back 21 - (576,521) - - - (576,521) Balance as of December 31, 2012 380,000,000 (7,992,219) 32,441,139 23,666 368,625,284 773,097,870 (Forward) 14
Non-distributable reserves Distributable Investment reserve- Issued Treasury Share revaluation Retained The Company Note capital shares premium reserve earnings Total RM RM RM RM RM RM Balance as of January 1, 2011 380,000,000 (7,415,698) 32,441,139-131,393,007 536,418,448 Total comprehensive income for the year - - - - 1,748,173 1,748,173 Dividends 26 - - - - (48,516,000) (48,516,000) Balance as of December 31, 2011/January 1, 2012 380,000,000 (7,415,698) 32,441,139-84,625,180 489,650,621 Profit for the year - - - - 963,182 963,182 Other comprehensive income for the year - - - 23,666-23,666 Total comprehensive income for the year - - - 23,666 963,182 986,848 Dividends 26 - - - - (26,124,000) (26,124,000) Shares buy-back 21 - (576,521) - - - (576,521) Balance as of December 31, 2012 380,000,000 (7,992,219) 32,441,139 23,666 59,464,362 463,936,948 The accompanying Notes form an integral part of the Financial Statements. 15
CSC STEEL HOLDINGS BERHAD (Incorporated in Malaysia) AND ITS SUBSIDIARY COMPANIES STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2012 The Group The Company 2012 2011 2012 2011 RM RM RM RM Cash flows from operating activities Profit for the year 28,007,704 29,550,781 963,182 1,748,173 Adjustments for: Income taxes 9,505,252 9,012,621 404,644 449,809 Depreciation of property, plant and equipment 38,454,939 40,124,991 82,128 81,987 Provision for onerous contracts 4,846,952 6,054,583 - - Impairment loss on other investments 249,200-249,200 - Amortisation of prepaid lease payments 237,169 237,386 - - Property, plant and equipment written off 18,337 51,264 - - Finance costs 144 542 - - Write-down of inventories 12,662,632 20,982,332 - - Interest income (7,606,864) (7,501,243) (371,086) (599,319) Gain on disposal of property, plant and equipment (3,100) (19,400) - - Dividend income (588) (53,830) (588) (53,830) Unrealised gain on foreign exchange - (219,879) - - Movements in working capital: 86,371,777 98,220,148 1,327,480 1,626,820 Increase in inventories (7,899,811) (41,322,057) - - (Increase)/Decrease in trade receivables (9,968,445) 4,364,265 - - Decrease/(Increase) in other receivables and prepaid expenses 22,911,987 (20,872,454) (893,457) 4,083 (Increase)/Decrease in amount due from ultimate holding company (20,041,177) 1,828,665 - - Decrease in trade payables (367,926) (21,033,763) - - (Forward) 16
The Group The Company 2012 2011 2012 2011 RM RM RM RM Increase/(Decrease) in other payables and accrued expenses 6,658,783 2,940,389 22,631 (115,018) (Decrease)/Increase in amount due to ultimate holding company (269,570) 269,570 - - (Decrease)/Increase in amount due to other related companies (1,840,259) 2,438,729 - - Cash from operations 75,555,359 26,833,492 456,654 1,515,885 Income tax paid (6,259,942) (21,067,608) (556,410) (654,600) Provision for onerous contracts utilised (6,054,583) (3,112,497) - - Interest paid (144) (542) - - Net cash generated from/(used in) operating activities 63,240,690 2,652,845 (99,756) 861,285 Cash flows from investing activities Purchase of property, plant and equipment (39,114,475) (18,851,747) - (32,588) Proceeds from disposal of property, plant and equipment 3,100 19,400 - - Proceeds from compulsory land acquisition by government 38,636 - - - Additions to investment in subsidiary company (Note 14) - - - (1,000,000) Acquisition of subsidiary company, net of cash and cash equivalents (Note 14) - (737,900) - - Additions to other investments (Note 15) (1,121,542) - (1,121,542) - Interest received 7,339,841 7,528,460 290,078 617,593 Repayment from/(advances to) subsidiary company - - 88,100,000 (17,100,000) Increase in amount due from other related company (43,886) Dividend received 588 53,830 588 53,830 Net cash (used in)/from investing activities (32,897,738) (11,987,957) 87,269,124 (17,461,165) (Forward) 17
The Group The Company 2012 2011 2012 2011 Note RM RM RM RM Cash flows from financing activities Shares buy-back (576,521) - (576,521) - Dividends paid (26,124,000) (48,516,000) (26,124,000) (48,516,000) Net cash used in financing activities (26,700,521) (48,516,000) (26,700,521) (48,516,000) Net increase/(decrease) in cash and cash equivalents 3,642,431 (57,851,112) 60,468,847 (65,115,880) Cash and cash equivalents at beginning of year 233,190,534 290,810,792 11,350,894 76,466,774 Effect of exchange rate differences - 230,854 - - Cash and cash equivalents at end of year 29 236,832,965 233,190,534 71,819,741 11,350,894 The accompanying Notes form an integral part of the Financial Statements. 18
CSC STEEL HOLDINGS BERHAD (Incorporated in Malaysia) AND ITS SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS 1. GENERAL INFORMATION The Company is a public limited liability company, incorporated and domiciled in Malaysia and listed on the Main Market of Bursa Malaysia Securities Berhad. The Company is principally involved in investment holding and provision of management services. The principal activities of its subsidiary companies are as disclosed in Note 14. There have been no significant changes in the nature of the principal activities of the Company and its subsidiaries during the financial year. The registered office of the Company is located at 49-B, Jalan Melaka Raya 8, Taman Melaka Raya, 75000 Melaka. The principal place of business of the Company is located at 180, Kawasan Perindustrian Ayer Keroh, Ayer Keroh, 75450 Melaka. The financial statements of the Group and of the Company were authorised by the Board of Directors for issuance in accordance with a resolution of the directors on April 8, 2013. 2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENT The financial statements of the Group and the Company have been prepared in accordance with the Malaysian Financial Reporting Standards ( MFRS ), International Financial Reporting Standards and the requirements of the Companies Act, 1965 in Malaysia. Adoption of Malaysian Financial Reporting Standards The Group and the Company s financial statements for the financial year ended December 31, 2012 have been prepared in accordance with MFRSs for the first time. In the previous years, these financial statements were prepared in accordance with Financial Reporting Standards ( FRSs ). 19
The transition to MFRSs is accounted for in accordance with MFRS 1 First-time Adoption of Malaysian Financial Reporting Standards, with January 1, 2011 as the date of transition. The transition to MFRSs does not have any impact on the reported financial position, financial performance and cash flows of the Group and the Company. Standards in issue but not yet effective At the date of authorisation for issue of these financial statements, the new and revised Standards which were in issue but not yet effective and not early adopted by the Group and the Company are as listed below: MFRS 7 MFRS 7 Financial Instruments: Disclosures [Amendments relating to Mandatory Effective Date of MFRS 9 and Transition Disclosures (IFRS 9 issued by IASB in November 2009 and October 2010 respectively)] 1 Financial Instruments: Disclosures (Amendments relating to Disclosures - Offsetting Financial Assets and Liabilities) 2 MFRS 9 Financial Instruments (IFRS 9 issued by IASB in November 2009) 3 MFRS 9 Financial Instruments (IFRS 9 issued by IASB in October 2010) 3 MFRS 10 Consolidated Financial Statements 2 MFRS 10 Consolidated Financial Statements (Amendments relating to Transition Guidance) 2 MFRS 13 Fair Value Measurement 2 MFRS 101 Presentation of Financial Statements (Amendments relating to Presentation of Items of Other Comprehensive Income) 4 MFRS 132 Financial Instruments: Presentation (Amendments relating to Offsetting Financial Assets and Financial Liabilities) 5 Amendments to MFRSs contained in the document entitled Annual Improvements 2009-2011 cycle 2 1 2 3 4 5 Effective immediately on issuance date of March 1, 2012 Effective for annual periods beginning on or after January 1, 2013 Effective for annual periods beginning on or after January 1, 2015 instead of 1 January 2013 immediately upon the issuance of Amendments to MFRS 9 (IFRS 9 issued by IASB in November 2009 and October 2010 respectively) and MFRS 7 relating to Mandatory Effective Date of MFRS 9 and Transition Disclosures on March 1, 2012 Effective for annual periods beginning on or after July 1, 2012 Effective for annual periods beginning on or after January 1, 2014 The directors anticipate that the abovementioned Standards will be adopted in the annual financial statements of the Group and of the Company when they become effective and that the adoption of these Standards will have no material impact on the financial statements of the Group and of the Company in the period of initial application. 20
3. SIGNIFICANT ACCOUNTING POLICIES Basis of accounting The financial statements of the Group and the Company have been prepared under the historical cost convention, unless otherwise indicated in this summary of significant accounting policies. 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. Revenue Revenue from sales of goods is measured at the fair value of the consideration received or receivable and is recognised when goods are delivered and title has passed to the customers. Sales represent amounts receivable for goods sold in the normal course of business, net of returns and trade discounts. Dividend income represents gross dividend from unquoted investments and is recognised when the shareholder s right to receive payment is established. Management fee is recognised on time basis, in respect of services rendered and by reference to the agreements entered into. Foreign currencies The financial statements of the Group and the Company are presented in Ringgit Malaysia, the currency of the primary economic environment in which the Group and the Company operates (its functional currency). In preparing the financial statements of the Group and the Company, transactions in currencies other than the Group s and the Company s functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the date of transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing on that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. 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 profit or loss for the year. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the year except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised in other comprehensive income. For such non-monetary items, any exchange component of that gain or loss is also recognised in other comprehensive income. 21
Employee benefits (a) Short term benefits Wages, salaries, paid leave and bonuses are recognised in the year in which the associated services are rendered by employees of the Group and of the Company. (b) Defined contribution plan Income taxes The Group and the Company are required by law to make monthly contributions to the Employees Provident Fund ( EPF ), a statutory defined contribution plan for all their eligible employees based on certain prescribed rates of the employees salaries. Once the contributions have been paid, the Group and the Company have no further payment obligations. The Group s and the Company s contribution to EPF are disclosed separately. The employees contributions to EPF are included in staff costs. Income tax expense represents the sum of the tax currently payable and deferred tax. (a) Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group s and the Company s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. (b) Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profits will be available against which those deductible temporary differences, unused tax losses and unused tax credits can be utilised. 22
The carrying amount of deferred tax assets is reviewed at the end of each 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 realised, based on tax rates (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 and the Company expect, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group and the Company intend to settle its current tax assets and liabilities on a net basis. (c) Current and deferred tax for the period Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate to items that are recognised outside profit or loss (whether in other comprehensive income or directly in equity), in which case the tax is also recognised outside profit or loss. 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. The subsidiary companies are consolidated using the acquisition method of accounting whereby, on acquisition, the assets acquired and liabilities and contingent liabilities assumed of the subsidiary companies are measured at their fair values at the date of acquisition. Any excess of the cost of the acquisition over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities represents goodwill. Any excess of the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition is recognised immediately in profit or loss. The results 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. 23
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. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation of property, plant and equipment, except for freehold land and plant and machinery under installation which are not depreciated, is computed on the straightline method at the following annual rates based on the estimated useful lives of the various assets. The annual depreciation rates are as follows: Buildings under long leases 2% - 4% Plant and machinery 5% - 66.67% Motor vehicles 10% - 20% Equipment, furniture, fixture and fittings 6.67% - 50% The residual value, useful life and depreciation method are reviewed at the end of each reporting period to ensure that the amount, method and period of depreciation are consistent with previous estimates and the expected pattern of consumption of future economic benefits embodied in the property, plant and equipment. A gain or loss arising from the disposal of an asset is determined as the difference between the estimated net disposal proceeds and the carrying amount of the asset, and is recognised in profit or loss. Prepaid lease payments Lease of land with title not expected to pass to the lessee by the end of the lease term is treated as operating lease as land normally has an indefinite economic life. The upfront payments made on entering into a lease or acquiring a leasehold land that is accounted for as an operating lease are accounted for as prepaid lease payments that are amortised over the lease term on a straight-line basis and charged to the profit or loss for the period. Investments Investment in unquoted shares of subsidiary companies and other investments in unquoted shares are stated at cost. Where there is an indication of impairment in the value of the assets, the carrying amounts of the investments are assessed and written down immediately to its recoverable amount. 24
Inventories Inventories are valued at the lower of cost and net realisable value. Cost is determined on the weighted average method. The cost of raw materials comprises the original purchase price plus the cost of bringing the inventories to their present location and condition. The costs of work-in-progress and finished goods include the cost of raw materials, direct labour and a proportion of the manufacturing overheads. Net realisable value represents the estimated selling price in the ordinary course of business less selling and distribution costs and all other estimated costs to completion. In arriving at net realisable values, due allowance is made for all obsolete and slow moving inventories. Provisions Provisions are recognised when the Group and the Company have a present obligation (legal or constructive) as a result of a past event, it is probable that the Group and the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Present obligations arising under onerous contracts are recognised and measured as provisions. An onerous contract is considered to exist where the Company has a contract under which the avoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. Financial instruments (a) Initial recognition and measurement A financial instrument is recognised in the financial statements when, and only when, the Group and the Company become a party to the contractual provisions of the instrument. 25
A financial instrument is recognised initially, at its fair value plus, in the case of a financial instrument not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial instrument. An embedded derivative is recognised separately from the host contract and accounted for as a derivative if, and only if, it is not closely related to the economic characteristics and risks of the host contract and the host contract is not categorised at fair value though profit or loss. The host contract, in the event an embedded derivative is recognised separately, is accounted for in accordance with policy applicable to the nature of the host contract. (b) Financial instrument categories and subsequent measurement The Group and the Company categorise and measure financial instruments as follows: Financial assets (i) Financial assets at fair value through profit or loss Fair value through profit or loss category comprises financial assets that are held for trading, including derivatives or financial assets that are specifically designated into this category upon initial recognition. Financial assets categorised as fair value through profit or loss are subsequently measured at their fair values with the gain or loss recognised in profit or loss. (ii) Held-to-maturity investments Held-to-maturity investments category comprises debt instruments that are quoted in an active market and the Group and the Company have the positive intention and ability to hold to maturity. Financial assets categorised as held-to-maturity investments are subsequently measured at amortised cost using the effective interest method. (iii) Loans and receivables Loans and receivables category comprises debt instruments that are not quoted in an active market. Financial assets categorised as loans and receivables are subsequently measured at amortised cost using the effective interest method. 26
(iv) Available-for-sale financial assets Available-for-sale category comprises non-derivative financial assets that are either designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of unquoted equity instruments are measured at cost. Other financial assets categorised as available-for-sale are subsequently measured at their fair values with the gain or loss recognised in other comprehensive income, except for impairment losses, foreign exchange gains and losses arising from monetary items and interest calculated using the effective interest method which are recognised in profit or loss. On derecognition, the cumulative gain or loss recognised in other comprehensive income is reclassified from equity into statement of comprehensive income. All financial assets, except for those measured at fair value through profit or loss, are subject to review for impairment. Financial liabilities All financial liabilities are initially measured at fair value and subsequently measured at amortised cost other than those categorised as fair value through profit or loss. Fair value through profit or loss category comprises financial liabilities that are held for trading, derivatives or financial liabilities that are specifically designated into this category upon initial recognition. Derivatives that are linked to and must be settled by delivery of unquoted equity instruments whose fair values cannot be reliably measured are measured at cost. Other financial liabilities categorised as fair value through profit or loss are subsequently measured at their fair values with the gain or loss recognised in profit or loss. 27
(c) Derecognition A financial asset or part of it is derecognised when, and only when the contractual rights to the cash flows from the financial asset expire or the financial asset is transferred to another party without retaining control or substantially all risks and rewards of the asset. On derecognition of a financial asset, the difference between the carrying amount and the sum of the consideration received (including any new asset obtained less any new liability assumed) and any cumulative gain or loss that had been recognised in equity is recognised in profit or loss. A financial liability or a part of it is derecognised when, and only when, the obligation specified in the contract is discharged or cancelled or expires. On derecognition of a financial liability, the difference between the carrying amount of the financial liability extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss. Impairment of financial assets All financial assets (except for financial assets categorised as fair value through profit or loss, and fixed and call deposits) are assessed at each reporting date whether there is any objective evidence of impairment as a result of one or more events having an impact on the estimated future cash flows of the asset. Losses expected as a result of future events, no matter how likely, are not recognised. For an equity investment classified as available for sale, a significant or prolonged decline in the fair value below its cost is an objective evidence of impairment. An impairment loss in respect of loans and receivables and held-to-maturity investments is recognised in profit or loss and is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the asset s original effective interest rate. The carrying amount of the assets is reduced by the impairment loss directly except for trade receivables where the carrying amount is reduced through the use of an allowance account. An impairment loss in respect of available-for-sale financial assets is recognised in profit or loss. Where a decline in the fair value of an available-for-sale financial asset has been recognised in other comprehensive income, the cumulative loss in other comprehensive income is reclassified from equity and recognised in profit or loss. Impairment losses recognised in other comprehensive income for an investment in an equity instrument is not reversed through profit or loss. 28
With the exception of available for sale equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, to the extent that the asset s carrying amount does not exceed what the carrying amount would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal is recognised in profit or loss. Impairment of non-financial assets At the end of each reporting period, the Group and the Company review the carrying amounts of the non-financial 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 it is not possible to estimate the recoverable amount of an individual asset, the Group and the Company estimate 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. 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 (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating 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 (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss. Treasury shares Shares bought back held as treasury shares are accounted for on the cost method and presented as a deduction from equity. Should such shares be cancelled, their nominal amounts will be eliminated, and the differences between their cost and nominal amounts will be taken to reserves as appropriate. 29