Reports and Financial Statements For the year ended 31 December 2013
REPORTS AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2013 CONTENTS PAGE(S) MANAGEMENT AND ADMINISTRATION 1 TRUSTEE'S REPORT 2 INDEPENDENT AUDITOR'S REPORT 3 & 4 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 5 STATEMENT OF FINANCIAL POSITION 6 STATEMENT OF CHANGES IN NET ASSET ATTRIBUTABLE TO UNITHOLDERS 7 STATEMENT OF CASH FLOWS 8 NOTES TO THE FINANCIAL STATEMENTS 9-27 INVESTMENT PORTFOLIO 28 & 29 PERFORMANCE TABLE 30 STATEMENT OF MOVEMENTS IN PORTFOLIO HOLDINGS 31
MANAGEMENT AND ADMINISTRATION MANAGER GF Asset Management (Hong Kong) Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong RQFII HOLDER GF Holdings (Hong Kong) Corporation Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong TRUSTEE AND REGISTRAR BOCI-Prudential Trustee Limited 12/F & 25/F, Citicorp Centre 18 Whitfield Road Causeway Bay Hong Kong CUSTODIAN Bank of China (Hong Kong) Limited 14/F, Bank of China Tower 1 Garden Road Hong Kong RQFII CUSTODIAN Bank of China Limited No. 1, Fuxingmen Nei Dajie Beijing 100818 China AUDITOR Deloitte Touche Tohmatsu 35/F, One Pacific Place 88 Queensway Hong Kong - 1 -
TRUSTEE'S REPORT GF INVESTMENT FUNDS (the "Fund") We hereby confirm that, in our opinion, the Manager of GF China Fixed Income Fund (the "Sub- Fund") of the Fund has, in all material respects, managed the Sub-Fund for the year ended 31 December 2013 in accordance with the provisions of the Trust Deed dated 5 January 2012. For and on behalf of BOCI-Prudential Trustee Limited 24 April 2014-2 -
INDEPENDENT AUDITOR'S REPORT TO THE UNITHOLDERS OF GF CHINA FIXED INCOME FUND Report on the Financial Statements We have audited the accompanying financial statements of GF China Fixed Income Fund (the "Sub-Fund"), the Sub-Fund of GF Investment Funds (the "Fund"), set out on pages 5 to 27, which comprise the statement of financial position as at 31 December 2013, and the statement of profit or loss and other comprehensive income, statement of changes in net assets attributable to unitholders and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Manager's and Trustee's Responsibility for the Financial Statements The Manager and the Trustee of the Sub-Fund are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards, and for such internal control as the Manager and the Trustee determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In addition, the Manager and the Trustee are also responsible for preparing the financial statements in accordance with the relevant disclosure provisions of the Fund's Trust Deed dated 5 January 2012 (the "Trust Deed") and the relevant financial statement disclosure requirements specified in Appendix E of the Code on Unit Trusts and Mutual Funds (the "Code") issued by the Hong Kong Securities and Futures Commission (the "SFC"). Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit and to report our opinion solely to you, as a body, in accordance with our agreed terms of engagement, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. We are also required to assess whether the financial statements have been prepared, in all material respects, in accordance with the relevant disclosure provisions of the Trust Deed and the relevant financial statement disclosure requirements specified in Appendix E of the Code. - 3 -
INDEPENDENT AUDITOR'S REPORT TO THE UNITHOLDERS OF GF CHINA FIXED INCOME FUND - continued Report on the Financial Statements - continued Auditor's Responsibility - continued An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Sub- Fund'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 Sub-Fund's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Manager and the Trustee, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements give a true and fair view of the financial position of the Sub- Fund as at 31 December 2013, and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards. Report on matters under the relevant disclosure provisions of the Trust Deed and the relevant financial statement disclosure requirements specified in Appendix E of the Code issued by the SFC In our opinion, the financial statements of the Sub-Fund have been properly prepared, in all material respects, in accordance with the relevant disclosure provisions of the Trust Deed and the relevant financial statement disclosure requirements specified in Appendix E of the Code issued by the SFC. Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong 24 April 2014-4 -
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2013 1.1.2013 2.3.2012 to to NOTES 31.12.2013 31.12.2012 INCOME Dividend income 3,863,718 1,764,981 Interest income 7(c) 28,234,587 25,477,446 32,098,305 27,242,427 EXPENDITURE Management fee 7(d) (6,613,320) (6,265,399) Trustee fee 7(e) (1,106,565) (1,090,005) Custodian fee 7(f) (529,134) (429,871) Audit fee (198,109) (146,433) Other expenses (1,343,225) (458,564) (9,790,353) (8,390,272) NET INCOME BEFORE GAINS ON INVESTMENTS AND FOREIGN EXCHANGE 22,307,952 18,852,155 NET REALISED GAINS ON SALE OF INVESTMENTS 2,510,431 1,650,997 NET CHANGES IN UNREALISED (LOSSES) GAINS IN VALUE OF INVESTMENTS (11,229,865) 4,707,472 NET REALISED AND UNREALISED GAINS ON FOREIGN EXCHANGE 4,721 2,011 PROFIT BEFORE TAX AND DIVIDEND DISTRIBUTION 13,593,239 25,212,635 Dividend distribution 13 (19,037,366) (13,815,119) Taxation 6 (3,535,056) (4,074,222) (LOSS) PROFIT AND TOTAL COMPREHENSIVE (EXPENSE) INCOME FOR THE YEAR/PERIOD (8,979,183) 7,323,294-5 -
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2013 NOTES 2013 2012 NON-CURRENT ASSET Deposit reserve 11 _ 252,000 _ 252,000 CURRENT ASSETS Financial assets at fair value through profit or loss 9 380,156,844 784,559,453 Interest receivables 12,096,778 23,888,431 Receivables on subscriptions 9,900 2,255,167 Amount due from a broker 965,000 - Prepayments and other receivables 784,019 990,021 Bank balances 7(c), 10 _ 23,196,499 _ 66,336,201 _ 417,209,040 _ 878,029,273 TOTAL ASSETS _ 417,461,040 _ 878,281,273 LIABILITIES Amounts payable on redemptions 14,795,921 18,346,467 Other payables and accruals 7 1,616,437 2,399,748 Tax payable _ 6,965,717 _ 3,920,398 TOTAL LIABILITIES (EXCLUDING NET ASSETS ATTRIBUTABLE TO UNITHOLDERS) _ 23,378,075 _ 24,666,613 NET CURRENT ASSETS _ 393,830,965 _ 853,362,660 NET ASSET ATTRIBUTABLE TO UNITHOLDERS 394,082,965 _ 853,614,660 _ Net asset value per unit - Class A 98.006 100.677 - Class I 98.850 _ 101.069 _ Number of units in issue - Class A 12 3,033,824.378 3,390,877.674 - Class I 12 978,747.557 _ 5,068,119.795 _ The financial statements on pages 5 to 27 were approved by the Trustee and Manager on 24 April 2014. TRUSTEE MANAGER - 6 -
STATEMENT OF CHANGES IN NET ASSET ATTRIBUTABLE TO UNITHOLDERS FOR THE YEAR ENDED 31 DECEMBER 2013 1.1.2013 2.3.2012 to to 31.12.2013 31.12.2012 Balance at beginning of the year/period 853,614,660 - Subscription of units 122,455,034 948,068,463 Redemption of units (573,007,546) _ (101,777,097) 403,062,148 846,291,366 (Loss) profit and total comprehensive income (expense) for the year/period (8,979,183) _ 7,323,294 Balance at end of the year/period 394,082,965 853,614,660 _ Number of units Number of units At beginning of the year/period 8,458,997.469 - Issued during the year/period - Class A 750,385.281 3,641,066.162 - Class I 450,838.053 5,822,795.680 Redeemed during the year/period - Class A (1,107,438.577) (250,188.488) - Class I (4,540,210.291) (754,675.885) At end of the year/period 4,012,571.935 8,458,997.469-7 -
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2013 1.1.2013 2.3.2012 to to 31.12.2013 31.12.2012 OPERATING ACTIVITIES Profit and total comprehensive income before tax 13,593,239 25,212,635 Adjustments for: Interest income (28,234,587) (25,477,446) Dividend income (3,863,718) (1,764,981) Operating cash flows before movements in working capital (18,505,066) (2,029,792) Increase in deposit reserve - (252,000) Decrease (increase) in financial asset at fair value through profit or loss 404,402,609 (784,559,453) Increase in amount due from a broker (965,000) - Decrease (increase) in prepayments and other receivables 218,438 (924,350) (Decrease) increase in other payables and accruals (783,311) 2,399,748 Cash from (used in) operations 384,367,670 (785,365,847) Interest received 40,029,943 1,583,361 Dividend received 3,847,579 1,704,964 Withholding tax paid (489,737) (153,824) NET CASH FROM (USED IN) OPERATING ACTIVITIES 427,755,455 (782,231,346) FINANCING ACTIVITIES Subscription proceeds 124,700,301 945,813,296 Redemption payments (576,558,092) (83,430,630) Dividend distribution to unitholders (19,037,366) (13,815,119) NET CASH (USED IN) FROM FINANCING ACTIVITIES (470,895,157) 848,567,547 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (43,139,702) 66,336,201 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR/PERIOD 66,336,201 - CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR/PERIOD 23,196,499 66,336,201 Represented by bank balances 23,196,499 66,336,201-8 -
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2013 1. GENERAL GF Investment Funds (the "Fund") is an open-ended unit trust established as an umbrella fund constituted by a trust deed dated 5 January 2012 (the "Trust Deed"). The Trust Deed is governed by the laws of the Hong Kong Special Administrative Region of the People's Republic of China. As at the reporting date, the Fund consists of one Sub-Fund in which the contributions can be invested: GF CHINA FIXED INCOME FUND (the "Sub-Fund") The Sub-Fund has been authorised as unit trust by the Hong Kong Securities and Futures Commission under the Hong Kong Securities and Futures Ordinance of Hong Kong. Under the Trust Deed, BOCI-Prudential Trustee Limited is appointed as the trustee (the "Trustee") of the Fund and its Sub-Fund since 2 March 2012. The Sub-Fund's investment activities are managed by GF Asset Management (Hong Kong) Limited (the "Manager") with the administration delegated to the Trustee. The investment objective of the Sub-Fund is to provide long term capital growth and income in terms through investment primarily in fixed income securities issued within Mainland China (i.e. not less than 80% of the Sub-Fund's net asset value) and China A-Shares (i.e. not more than 20% of the Sub-Fund's net asset value) through the Qualified Foreign Institutional Investor ("RQFII") quota of the RQFII Holder. The RQFII Holder is the holding company of the Manager acting through the Manager as its asset management arm. The financial statements are presented in Renminbi (""), which is the same as the functional currency of the Sub-Fund. 2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRSs") In the current year, the Sub-Fund has applied a number of new and revised standards, amendments and interpretations ("new and revised IFRSs") issued by the International Accounting Standards Board (the "IASB") and the International Financial Reporting Interpretations Committee ("IFRIC") of the IASB. Except as described below, the new and revised IFRSs effective in the current year do not have a material impact on the Sub-Fund's financial statements. - 9 -
2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRSs") - continued Amendments to IAS 1 Presentation of items of other comprehensive income The Sub-Fund has applied the amendments to IAS 1 "Presentation of items of other comprehensive income". Upon the adoption of the amendments to IAS 1, the Sub-Fund's "statement of comprehensive income" is renamed as the "statement of profit or loss and other comprehensive income". Furthermore, the amendments to IAS 1 require additional disclosures to be made in the other comprehensive income section such that items of other comprehensive income are grouped into two categories: (a) items that will not be reclassified subsequently to profit or loss and (b) items that may be reclassified subsequently to profit or loss when specific conditions are met. Income tax on items of other comprehensive income is required to be allocated on the same basis - the amendments do not change the option to present items of other comprehensive income either before tax or net of tax. The amendments have been applied retrospectively, and hence the presentation of items of other comprehensive income has been modified to reflect the changes. Other than the above mentioned presentation changes, the application of the amendments to IAS 1 does not result in any impact on profit or loss, other comprehensive income and total comprehensive income. IFRS 13 Fair Value Measurement The Sub-Fund has applied IFRS 13 for the first time in the current year. IFRS 13 establishes a single source of guidance for, and disclosures about, fair value measurements. The scope of IFRS 13 is broad: the fair value measurement requirements of IFRS 13 apply to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements. IFRS 13 defines the fair value of an asset as the price that would be received to sell an asset (or paid to transfer a liability, in the case of determining the fair value of a liability) in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under IFRS 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. Also, IFRS 13 includes extensive disclosure requirements, and these are provided in note 5 to the financial statements. Other than the additional disclosures, the application of IFRS 13 has not had any material impact on the amounts recognised in the financial statements. The Sub-Fund has not early applied the following new and revised IFRSs that have been issued but are not yet effective: IFRSs Amendments to IFRS 10, Investment entities 1 IFRS 12 and IAS 27 Amendments to IAS 19 Defined benefit plans: Employee contributions 2 Amendments to IFRS 9 and Mandatory effective date of IFRS 9 and transition IFRS 7 disclosures 3 IFRS 9 Financial instruments 3 Amendments to IAS 32 Offsetting financial assets and financial liabilities 1 Amendments to IAS 36 Recoverable amount disclosures for non-financial assets 1 Amendments to IAS 39 Novation of derivatives and continuation of hedge accounting 1 Amendments to IFRSs Annual improvements to IFRSs 2010-2012 cycle 4 Amendments to IFRSs Annual improvements to IFRSs 2011-2013 cycle 2 IFRS 14 Regulatory deferral accounts 5 IFRIC 21 Levies 1-10 -
2. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRSs") - continued 1 2 3 4 5 Effective for annual periods beginning on or after 1 January 2014. Effective for annual periods beginning on or after 1 July 2014. Available for application - the mandatory effective date will be determined when the outstanding phases of IFRS 9 are finalised. Effective for annual periods beginning on or after 1 July 2014, with limited exceptions. Effective for first annual IFRS financial statements beginning on or after 1 January 2016. The Manager and the Trustee of the Sub-Fund anticipate that the application of the new and revised IFRSs in the current year has had no material impact on the Sub-Fund's financial performance and positions for the current and prior years and/or on the disclosures set out in these financial statements. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with International Financial Reporting Standards and on the historical cost basis except for certain financial instruments, which are measured at fair values, as explained in the accounting policies set out below. Revenue recognition Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to the Sub-Fund and the amount of income can be measured reliably. 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 the estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition. Dividend income from investments is recognised in the statement of profit or loss and other comprehensive income when the right to receive payment has been established. Financial instruments Financial assets and financial liabilities are recognised on the statement of financial position when the Sub-Fund become a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs directly attributable to the acquisition or issue of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in statement of profit or loss and other comprehensive income. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and 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 recognised immediately in profit or loss. Financial assets The Sub-Fund's financial assets are mainly financial assets at fair value through profit or loss ("FVTPL") and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised 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 marketplace. - 11 -
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Financial instruments - continued Financial assets - continued Effective interest method The effective interest method is a method of calculating the amortised cost of a debt instrument 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 and points 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 recognised on an effective interest basis for loans and receivables. Financial assets at fair value through profit or loss Financial assets at FVTPL has two subcategories, including financial assets held for trading and those designated at fair value through profit or loss on initial recognition. A financial asset is classified as held for trading if: it has been acquired principally for the purpose of selling in the near future; or on initial recognition it is a part of a portfolio of identified portfolio of financial instruments that the Manager of the Sub-Fund manages and has a recent actual pattern of short-term profit-taking; or it is a derivative that is not designated and effective as a hedging instrument. All investments of the Sub-Fund are classified as financial assets held for trading with any gains or losses arising from remeasurement recognised directly in profit or loss in the period in which they arise. The net gain or loss recognised in profit or loss excludes any dividend or interest earned on the financial assets. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including interest receivable, receivables on subscriptions, amount due from a broker, other receivables and bank balances) are measured at amortised cost using the effective interest method, less any identified impairment (see accounting policy on impairment of financial assets below). - 12 -
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Financial instruments - continued Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, the estimated future cash flows of the financial assets have been affected. For all other financial assets 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; it becoming probable that the borrower will enter bankruptcy or financial re-organisation; or disappearance of an active market for that financial asset because of financial difficulties. For loans and receivables carried at amortised cost, the amount of impairment loss recognised is as the difference between the asset's carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognized. Financial liabilities Financial liabilities and equity instruments issued by the Sub-Fund are classified in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. The Sub-Fund's financial liabilities are generally classified into other financial liabilities. Net assets attributable to unitholders Puttable financial instruments that meet the definition of a financial liability are classified as equity where certain strict criteria are met. Those criteria include: the puttable instruments shall entitle the holder to a pro-rata share of net assets in the event of liquidation; the puttable instruments must be the most subordinated class and that class's features must be identical; there shall be no contractual obligations to deliver cash or another financial asset other than the obligation on the issuer to repurchase; the total expected cash flows from the puttable instrument over its life must be based substantially on the profit or loss of the issuer; and there are no other financial instruments or contracts whose total cash flows are based substantially on profit or loss, and changes in recognised net assets or changes in fair value of recognised and unrecognised net assets of the entity have the effect of substantially restricting or fixing residual return to the puttable instrument holders. - 13 -
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Financial instruments - continued Financial liabilities - continued Net assets attributable to unitholders - continued There are two classes of units issued as at reporting date for the Sub-Fund with different terms as set out in the explanatory memorandum, including management fees. As the unitholders for each class are not entitled to an identical pro-rata share of net assets in the event of liquidation, the units issued by the Sub-Fund are classified as liabilities as net assets attributable to unitholders. Distributions to holders of redeemable units are recognised in the statement of profit or loss and other comprehensive income as finance costs. Effective interest method The effective interest method is a method of calculating the amortised 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 and points paid or received that form an integral part of the effective interest rate, transaction costs and other premium discounts) through the expected life of the financial liability, or, where appropriate, a shorter period to the net carrying amount on initial recognition. Interest expense is recognised on an effective interest basis. Other financial liabilities Other financial liabilities, including amounts payable on redemptions and other payables, are subsequently measured at amortised cost, using the effective interest method. Derecognition Financial assets are derecognised when the contractual rights to receive cash flows from the assets expire or when the Sub-Fund transfers the financial assets and substantially all the risks and rewards of the assets to another entity. 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 is recognised in the statement of profit or loss and other comprehensive income. The Sub-Fund derecognises financial liabilities when, and only when the obligations are discharged, cancelled or expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in the statement of profit or loss and other comprehensive income. - 14 -
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Taxation Taxation comprises current tax and deferred tax. Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the date of the statement of financial position. Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Expenses All expenses are recognised in the statement of profit or loss and other comprehensive income on an accrual basis. Foreign currencies Transactions in currencies other than the functional currency of the Sub-Fund (foreign currencies) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the Sub-Fund operates) at the rates of exchanges prevailing on the dates of the transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at 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. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period. Proceeds and payments on issue and redemption of units Subscription proceeds from units issued and redemption from units redeemed are accounted for on a transaction date basis. 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Sub-Fund's accounting policies, which are described in note 3, the Manager and the Trustee is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. - 15 -
4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY - continued Critical accounting estimates and assumptions Taxation There are currently no specific PRC tax laws, regulations or practice in respect of capital gains realised by RQFIIs on their investments in the PRC. Nevertheless, the Sub-Fund is considered to be exposed to PRC tax on the realised gains relating to the disposal of investments by reference to current tax principle. The Manager has at present made a provision of 10% for the account of the Sub-Fund in respect of any potential tax liability on capital gains. In case of any new specific regulations announced by PRC tax authorities with retrospective application, there may be a significant difference between the provision and actual tax liabilities, which will be adjusted from the Sub-Fund's net assets and the Sub-Fund's net asset value might be adversely affected. The tax implication in relation to realised and unrealised gains has been disclosed in note 6 to the financial statements. 5. FINANCIAL INSTRUMENTS Categories of financial instruments 2013 2012 Financial assets Fair value through profit or loss Held-for-trading investments 380,156,844 784,559,453 Loans and receivables 36,346,284 92,545,470 Financial liabilities At amortised cost 16,412,358 20,729,630 Net asset attributable to unitholders 394,082,965 853,614,660 Financial risk management objectives and policies The objectives of the Sub-Fund is to provide long term capital growth and income in terms through investment primarily in fixed income securities issued within the Mainland China. The Sub-Fund's investing activities expose them to various types of risks that are associated with financial instruments and markets in which they invest. Investments of the Sub-Fund are subject to normal market fluctuations and other risks inherent in investing in securities and there can be no assurance that any appreciation in value will occur. The value of investments and the income from them fluctuate and therefore the value of the redeemable units can fall as well as rise. The risk exposures inherent in the Sub-Fund and the risk management policies employed by the Sub-Fund are discussed below. - 16 -
5. FINANCIAL INSTRUMENTS - continued Financial risk management objectives and policies - continued Market risk Market risk is the risk that the fair value or future cash flows of the financial instruments will fluctuate because of changes in market prices. Market risk comprises three types of risk: foreign exchange risk, interest rate risk and other price risk. Market risk includes such factors as changes in economic environment, consumption pattern and investors' expectation, etc. which may have a significant impact on the value of the investments. Market movement may therefore result in substantial fluctuation in the net asset value per redeemable unit of the Sub-Fund. The Sub-Fund's activities expose them primarily to the market risk of changes in market prices, interest rates and foreign exchange rates. Price risk Price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. The Sub-Fund is exposed to market price risk arising from the investments in securities, primarily equity securities. The Manager manages the Sub-Fund's market price risk on a daily basis in accordance with the Sub-Fund's investment objectives and policies. The Sub-Fund's price risk is managed through diversification of the investment portfolio as well as investing in equity securities with strong fundamentals. At the end of the reporting period, the overall market exposure and sensitivity analysis for the Sub-Fund, based on a 10% increase or decrease for the Sub-Fund is summarised below. The 10% increase or decrease for the Sub-Fund is used when reporting price risk internally to key management personnel and represents management's assessment of the reasonably possible change in market prices. The Manager has used its view of what would be a "reasonable shift" in each key market to estimate the change for use in the market sensitivity analysis below. However, this does not represent a prediction of the future movement in the corresponding key markets. Changes in fair value % of and effect increase/ on profit decrease Fair value for the period 2013 Held-for-trading investments (other than debt securities) ±10% 61,545,724 6,154,572 2012 Held-for-trading investments (other than debt securities) ±10% 80,601,696 8,060,170-17 -
5. FINANCIAL INSTRUMENTS - continued Financial risk management objectives and policies - continued Market risk - continued Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. As the Sub-Fund may invest in debt securities whose value is driven significantly by changes in interest rates, the Sub-Funds are subject to fair value interest rate risk. When interest rates rise, the value of previously issued debt securities will normally fall because debt securities issued will pay a higher rate of interest. In contrast, if interest rates fall, then the value of the previously issued debt securities will normally rise. In a rising interest rate environment, the Sub-Fund will acquire debts with a shorter maturity profile to minimise the negative impact to the portfolio. The Sub-Fund is also subject to cash flow interest rate risk from bank balances at variable interest rates. The table below summarises the Sub-Fund's exposure and sensitivity analysis to interest rate risk. 10 basis point is the sensitivity rate used when reporting interest rate risk internally to key management personnel and represents management's assessment of the reasonably possible change in interest rates. Change in assumption +/-10 basis point At 31 December 2013 Assets Held-for-trading investments in debt securities 318,611,120 +/-786,326 Bank balances 23,196,499 +/-23,196 341,807,619 At 31 December 2012 Assets Held-for-trading investments in debt securities 703,957,757 +/-2,085,840 Bank balances 66,336,201 +/-66,336 770,293,998-18 -
5. FINANCIAL INSTRUMENTS - continued Financial risk management objectives and policies - continued Market risk - continued Currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Financial assets and liabilities of the Sub-Fund are mainly denominated in its functional currency. Accordingly, the currency risk of the Sub-Fund is not considered material. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Sub-Fund. The Sub-Fund's financial assets which are potentially subject to concentrations of credit risk consist principally of held-for-trading investments, interest receivables, receivables on subscriptions, other receivables and bank balances. In the opinion of the Manager, the carrying amounts of these financial assets shown in the statement of financial position represent the maximum credit risk exposure at the end of the reporting period. The Manager has a documented policy in place of spreading the aggregate value of transactions concluded amongst approved counterparties with an appropriate credit quality. The Sub-Fund's exposure and the credit ratings of its counterparties are continuously monitored by the Manager. The following table details the aggregate investment grade of the debt instruments in the debt investments portfolio, as rated by well known rating agencies. Portfolio by rating category 2013 2012 Rating AAA 114,639,200 183,567,727 AA+ 117,241,890 218,823,080 AA 86,730,030 171,613,080 A-1-129,953,870 318,611,120 703,957,757 The Sub-Fund has deposits with Bank of China (HK and PRC) and investments held by Bank of China Limited, which are financial institutions with high credit qualify. Thus, the Manager considers that the credit risk from bank and custodian is not significant. - 19 -
5. FINANCIAL INSTRUMENTS - continued Financial risk management objectives and policies - continued Liquidity risk Liquidity risk is the risk that the Sub-Fund will encounter difficulty in meeting obligations associated with its financial liabilities. The Sub-Fund's units are redeemable at the option of the unitholders, subject to the limitation below, for cash equal to a proportionate share of the Sub-Fund's net asset values. The Sub-Fund is therefore potentially exposed to cash redemptions of redeemable units. As such, the Sub-Fund invests most of the assets in short-term bank deposits and debt securities, which can be liquidated quickly in order to meet redemption payment requests. The Manager monitors the Sub-Fund's liquidity position on a daily basis. In accordance with the Sub-Fund's offering memorandum, the Manager may, with the approval of the Trustee, limit the total number of units redeemable on any dealing day to 10% of the total number of units in issue. Any units not allowed to be redeemed will be carried forward to the following dealing day subject to the same limitation. The table below analyses the Sub-Fund's financial liabilities into relevant maturity groupings based on the remaining period at the end of the reporting period to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant. Repayable Within 1-3 on demand 1 month months Total At 31 December 2013 Amount payable on redemptions - 14,795,921-14,795,921 Other payables - 1,322,618 293,819 1,616,437 Net asset attributable to unitholders 394,082,965 - - 394,082,965 394,082,965 16,118,539 293,819 410,495,323 At 31 December 2012 Amount payable on redemptions - 18,346,467-18,346,467 Other payables - 2,188,078 195,085 2,383,163 Net asset attributable to unitholders 853,614,660 - - 853,614,660 853,614,660 20,534,545 195,085 874,344,290-20 -
5. FINANCIAL INSTRUMENTS - continued Capital management The Sub-Fund's capital is represented by the net assets attributable to unitholders. The amount of net assets attributable to unitholders can change significantly on a daily basis as the Sub-Fund is subject to daily subscriptions and redemptions at the discretion of the unitholders. The Sub- Fund's objective when managing capital is to safeguard the Sub-Fund's ability to continue as a going concern in order to provide returns for the unitholders and benefits for other stakeholders and to maintain a strong capital base to support the development of the investment activities of the Sub-Fund. The description of the terms and the restrictions on redemption of units are disclosed in "liquidity risk" above. Fair value measurements recognised in the statement of financial position Fair value hierarchy of an instrument is determined considering the inputs that are significant to the entire measurement of such instrument and the level of fair value hierarchy within which those inputs are categorised. The fair value hierarchy has the following levels: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 inputs are unobservable inputs for the asset or liability. All fair value measurements disclosed are recurring fair value measurements. At 31 December 2013 Level 1 Level 2 Level 3 Total Financial assets at FVTPL Non-derivative financial assets held for trading Equities 31,291,184 - - 31,291,184 Collective investment scheme - 30,254,540-30,254,540 Quoted debt securities 85,924,100 232,687,020-318,611,120 117,215,284 262,941,560-380,156,844-21 -
5. FINANCIAL INSTRUMENTS - continued Fair value measurements recognised in the statement of financial position - continued At 31 December 2012 Level 1 Level 2 Level 3 Total Financial assets at FVTPL Non-derivative financial assets held for trading Equities - - - - Collective investment scheme - 80,601,696-80,601,696 Quoted debt securities 221,713,907 482,243,850-703,957,757 221,713,907 562,845,546-784,559,453 There were no transfers between Levels 1 and 2 in the during the year/period. The fair values of financial assets with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices at the close of trading on the yearend date. These investments are classified as level 1. The Sub-Fund's financial instruments are valued using the last traded prices provided such price is within the bid-ask spread. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. For financial assets that are not traded in an active market and classified as level 2 investments, the fair value is determined using quoted market prices from observable current market transactions. The Manager considers that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate their fair values. 6. TAXATION The Sub-Fund is exempted from Hong Kong Profits Tax on income and capital gains under Section 26A, Part (1A) of the Inland Revenue Ordinance. Under the PRC Enterprise Income Tax Law, the Trust and the Sub-Fund will generally be subject to PRC withholding income tax on interests derived from denominated corporate bonds issued by a PRC resident entity at the rate of 10%. The Sub-Fund invested in denominated securities, the investment gains generated from such PRC related investments could be exposed to capital gains at a rate of 10%. - 22 -
6. TAXATION - continued Breakdown of the taxation recorded in the statement of profit or loss and other comprehensive income is as follows: 1.1.2013 2.3.2012 to to 31.12.2013 31.12.2012 PRC withholding income tax for interest income 1,790,138 3,144,125 PRC withholding tax for dividend from China A-shares 185,634 - PRC capital gains tax 1,559,284 930,097 3,535,056 4,074,222 7. TRANSACTIONS WITH THE INVESTMENT MANAGER, THE FUND AND THEIR CONNECTED PERSONS Connected persons of the Manager are those as defined in the Code on Unit Trusts and Mutual Funds established by the SFC (the "Code"). All transactions entered into during the year/period between the Sub-Fund and the Manager and its connected persons were carried out in the normal course of business and on normal commercial terms. To the best of the Manager's knowledge, the Sub-Fund does not have any other transactions with connected persons except those disclosed below. (a) Holdings in the Sub-Fund As at 31 December 2013, GF Holdings (Hong Kong) Company Limited, the immediate holding company of the Manager, redeemed 4,123,948 units and thus held nil (2012: 4,083,869) units of Class I of the Sub-Fund. (b) Fee payable by unitholders Pursuant to the Sub-Fund's offering memorandum, the Manager is entitled to impose the initial charge on up to 5% of the subscription amount received for both Class A and Class I units. During the year ended 31 December 2013 and period ended 31 December 2012, no initial charges were paid to the Manager as it is waived by the Manager. - 23 -
7. TRANSACTIONS WITH THE INVESTMENT MANAGER, THE FUND AND THEIR CONNECTED PERSONS - continued (c) Bank balances and interest income on bank deposits 2013 2012 The bank balance of the Sub-Fund held with Bank of China (HK and PRC), a connected person of the Trustee 23,196,499 66,336,201 1.1.2013 2.3.2012 to to 31.12.2013 31.12.2012 The interest income on bank deposits held with Bank of China (PRC), a connected person of the Trustee 235,398 1,270,971 (d) Management fee Pursuant to the Sub-Fund's offering memorandum, management fee is charged by the Manager at the rate of 1.2% per annum for Class A and 0.75% per annum for Class I shares, calculated on a daily basis on the respective net asset value ("NAV"). For the year ended 31 December 2013, the total management fee charged was 6,613,320 (for the period ended 31 December 2012: 6,265,399) of which 1,251,920 (2012: 2,071,555) was payable as of 31 December 2013. (e) Trustee fee Trustee fee is charged by the Trustee in the following basis: For the first 200 million NAV per Sub-Fund: 0.175% per annum For the next 200 million NAV per Sub-Fund: 0.15% per annum For the next 200 million NAV per Sub-Fund: 0.125% per annum For the remaining balance of the NAV of the Sub-Fund: 0.11% per annum With monthly minimum fee of 40,000 per Sub-Fund Trustee fee is calculated on a daily basis on the respective NAV of the Sub-Fund. For the year ended 31 December 2013, the total trustee fee charged was 1,106,565 (for the period ended 31 December 2012: 1,090,005), of which 59,105 (2012: 116,523) was payable as of 31 December 2013. (f) Custodian fee Pursuant to the Sub-Fund's offering memorandum, the Bank of China (Hong Kong) Limited, (the "Custodian") and Bank of China Limited, (the "RQFII Custodian"), are entitled to custody fees up to 0.1% per annum of the NAV of the Sub-Fund, including fees payable to Custodian and RQFII Custodian and are connected persons of the Trustee. For the year ended 31 December 2013, the total custodian fee charged and paid was 529,134 (for the period ended 31 December 2012: 429,871). - 24 -
7. TRANSACTIONS WITH THE INVESTMENT MANAGER, THE FUND AND THEIR CONNECTED PERSONS - continued (g) Brokerage commission The Sub-Fund utilised the services of GF Securities (Hong Kong) Brokerage Limited, a fellow subsidiary of the Manager, and Bank of China Limited, a connected person of the Trustee, for the Sub-Fund's purchases and sales of securities. For the year ended 31 December 2013, total brokerage commission 693,510 (for the period ended 31 December 2012: 125,101) were incurred and a sum of 144,406 (2012: 45,050) was payable and included in other payables as at 31 December 2013. Aggregate value Total % of Sub-Fund's Average of purchase and commission total transactions commission sales of securities paid during the year rate % % 2013 647,130,919 549,154 35.78 0.11 2012 104,273,062 80,051 4.57 0.12 8. SOFT COMMISSION ARRANGEMENTS For the year ended 31 December 2013 and period ended 31 December 2012, the Manager did not enter into any soft commission arrangements with brokers relating to dealing in the assets of the Sub-Fund. 9. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 1.1.2013 2.3.2012 to to 31.12.2013 31.12.2012 Collective investment schemes 30,254,540 80,601,696 Fixed interest rate bonds (Note a) 280,030,320 664,522,717 Floating interest rate bonds (Note b) 38,580,800 39,435,040 Listed equity securities 31,291,184-380,156,844 784,559,453-25 -
9. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS - continued Notes: (a) Maturity of the fixed interest rate bonds Within 1 to 3 3 to 5 Over Interest rate 1 year years years 5 years Total 31 December 2013 Fixed interest rate bonds 0.5% - 8.18% 9,941,000 43,906,280 117,106,090 109,076,950 280,030,320 31 December 2012 Fixed interest rate bonds 0.5% - 8.18% 146,523,560 78,947,335 202,941,670 236,110,152 664,522,717 (b) Maturity of floating interest rate bonds Within 1 to 3 3 to 5 Over Interest rate 1 year years years 5 years Total 31 December 2013 Floating interest rate bonds CNDR+1.7% - 38,580,800 - - 38,580,800 31 December 2012 Floating interest rate bonds CNDR+1.7% - 39,435,040 - - 39,435,040 10. BANK BALANCES Bank balances comprise savings and current accounts with banks at market interest rates. 11. DEPOSIT RESERVE The deposit reserve is a deposit placed at the China Securities Depositary and Clearing Corporation Limited ("CSDCC") for the trading of investments through the CSDCC. 12. CLASSES OF UNITS Pursuant to the Trust Deed, multiple classes of units can be issued for the Sub-Fund. The Sub- Fund will be valued per unit of each class in accordance with the Trust Deed. As at 31 December 2013 and 2012, two classes of units, (i) Class A and (ii) Class I, have been issued to unitholders. The details of the investment minima apply to each class of units issued by the Sub-Fund are as follow: Minimum initial subscription Minimum subsequent subscription Minimum holding Minimum redemption amount Class A unit: 10,000 Class I unit: 10,000,000 Class A unit: 10,000 Class I unit: 500,000 Class A unit: 10,000 Class I unit: 10,000,000 Class A unit: 10,000 Class I unit: 500,000-26 -