Notes to the Financial Statements
1 ACTIVITIES AND CORPORATE
AFFILIATION
The Bank, through its branches and subsidiaries, provides
a range of banking, financial and related services. The
Directors consider the Group's ultimate holding company
at 31 December 2005 to be Fubon Financial Holding Co.
Ltd. which is incorporated in the Republic of China and
operates as a financial conglomerate.
2 SIGNIFICANT ACCOUNTING
POLICIES
Fubon Bank (Hong Kong) Limited (the "Bank") is a
licensed bank incorporated and domiciled in Hong Kong
and has its registered office at 38 Des Voeux Road 38
Central, Hong Kong. The consolidated financial statements
for the year ended 31 December 2005 comprise those of
the Bank and its subsidiaries (together referred to as the
"Group") and the Group's interest in an associate.
(a) Statement of compliance (a)
These financial statements have been prepared in
accordance with all applicable Hong Kong Financial
Reporting Standards ("HKFRSs", which collective
term includes all applicable individual Hong Kong
Financial Repor ting Standards, Hong Kong
Accounting Standards ("HKASs"), Statements of
Standard Accounting Practice and Interpretations)
issued by the Hong Kong Institute of Certified
Public Accountants ("HKICPA"), accounting principles
generally accepted in Hong Kong and the
requirements of the Hong Kong Companies
Ordinance. These financial statements also comply
with the applicable disclosure provisions of the
Listing Rules and the recommendations in the
Supervisory Policy Manual "Financial Disclosures by
Locally Incorporated Authorised Institutions" issued
by the HKMA. A summar y of the significant
accounting policies adopted by the Group is set out
below.
Fubon Bank Annual Report 2005
73
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(a) Statement of compliance (continued) (a)
The HKICPA has issued a number of new and
revised HKFRSs that are effective or available for
early adoption for accounting periods beginning on
or after 1 January 2005. Information on the
changes in accounting policies resulting from initial
application of these new and revised HKFRSs for
the current and prior accounting periods reflected 3
in these financial statements is provided in Note 3.
(b) Basis of preparation of the financial statements (b)
The measurement basis used in the preparation of
the financial statements is historical cost except
that the following assets and liabilities are stated
at their fair value as explained in the accounting
policies set out below:
financial instruments classified as trading,
designated as at fair value through profit or
loss and available-for-sale (see Note 2(e)); 2(e)
derivative financial instruments (see Note 2(e)
2(e)); and
certain of the Group's owned property (see 2(h)
Note 2(h)).
The preparation of financial statements in conformity
with HKFRSs requires management to make
judgements, estimates and assumptions that affect
the application of policies and reported amounts of
assets and liabilities, income and expenses. The
estimates and associated assumptions are based
on historical experience and various other factors
that are believed to be reasonable under the
circumstances, the results of which form the basis
of making the judgements about carrying values of
assets and liabilities that are not readily apparent
from other sources. Actual results may differ from
these estimates.
Fubon Bank Annual Report 2005
74
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(b) Basis of preparation of the financial statements (b)
(continued)
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.
Judgements made by management in the application
of HKFRSs that have a significant effect on the
financial statements and estimates with a significant 44
risk of material adjustment in the next year are
discussed in Note 44.
(c) Investment in subsidiaries (c)
A subsidiary, in accordance with the Hong Kong
Companies Ordinance, is a company in which the
Group, directly or indirectly, holds more than half of
the issued share capital, or controls more than half
the voting power, or controls the composition of the
Board of Directors. Subsidiaries are considered to
be controlled if the Bank has the power, directly or
indirectly, to govern the financial and operating
policies, so as to obtain benefits from their
activities. In assessing control, potential voting
rights that are presently exercisable or convertible
are taken into account.
An investment in a controlled subsidiar y is
consolidated into the consolidated financial
statements from the date that control commences
until the date that control ceases.
Intra-group balances and transactions, and any
unrealised profits arising from intra-group
transactions, are eliminated in full in preparing the
consolidated financial statements. Unrealised losses
resulting from intra-group transactions are eliminated
in the same way as unrealised gains, but only to
the extent that there is no evidence of impairment.
Fubon Bank Annual Report 2005
75
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(c) Investment in subsidiaries (continued) (c)
In the Bank's balance sheet, an investment in a
subsidiar y is stated at cost less impairment
losses.
(d) Associated companies (d)
An associate is an entity over which the Group or
Bank has significant influence, but not control or
joint control, over its management, including
participation in the financial and operating policy
decisions.
The investment in the associated company is not
equity accounted for in the consolidated financial
statements as it is considered by the Directors to
be immaterial to the Group. It is stated at cost less
impairment losses in the Group's and the Bank's
balance sheet. The results of the associated
company are included in the Group's and the
Bank's income statement to the extent of dividends
received and receivable.
(e) Financial instruments (e)
(i) Initial recognition (i)
The Group classifies its financial instruments
into different categories at inception,
depending on the purpose for which the
assets were acquired or the liabilities were
incurred. The categories are: fair value through
profit or loss, loans and receivables and
available-for-sale.
Financial instruments are measured initially
at fair value, which normally will be equal to
the transaction price, plus, in case of a
financial asset or financial liability not held at
fair value through profit or loss, transaction
costs that are directly attributable to the
acquisition or issue of the financial asset
or financial liability. Transaction costs on
financial assets and financial liabilities at
fair value through profit or loss are expensed
immediately.
Fubon Bank Annual Report 2005
76
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(e) Financial instruments (continued) (e)
(i) Initial recognition (continued) (i)
The Group recognises financial assets and
financial liabilities on the date it becomes a
party to the contractual provisions of the
instrument. A regular way purchase or sale of
financial assets is recognised using trade
date accounting. From this date, any gains
and losses arising from changes in fair value
of the financial assets or financial liabilities
are recorded.
(ii) Categorisation (ii)
Fair value through profit or loss
This category comprises financial assets and
financial liabilities held for trading, and those
designated as at fair value through profit or
loss upon initial recognition, but exclude
those investments in equity instruments that
do not have a quoted market price and whose
fair value cannot be reliably measured.
Trading financial instruments are financial
assets or financial liabilities which are acquired
or incurred principally for the purpose of
trading, or are part of a portfolio of identified
financial instruments that are managed
together and for which there is evidence of a
recent actual pattern of short-term profit-
taking. Derivatives that do not qualify for
hedge accounting are accounted for as trading
instruments.
Financial instruments designated as at fair
value through profit or loss primarily consist
of financial instruments that do not qualify for
hedge accounting but are managed and
whose performance is evaluated on a fair
value basis in accordance with a documented
risk management or investment strategy.
Fubon Bank Annual Report 2005
77
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(e) Financial instruments (continued) (e)
(ii) Categorisation (continued) (ii)
Financial assets and liabilities under this
category are carried at fair value. Changes in
the fair value are included in the income
statement in the period in which they arise.
Upon disposal or repurchase, the difference
between the net sale proceeds or the net
payment and the carrying value is included in
the income statement.
Loans and receivables
Loans and receivables are non-derivative
financial assets with fixed or determinable
payments that are not quoted in an active (a)
market, other than (a) those that the Group (b)
intends to sell immediately or in the near
term, which will be classified as held for (c)
trading; (b) those that the Group, upon initial
recognition, designates as at fair value through
profit or loss or as available-for-sale; or (c)
those where the Group may not recover
substantially all of its initial investment, other
than because of credit deterioration, which
will be classified as available-for-sale. Loans
and receivables mainly comprise loans and
advances to customers and placements with
banks and financial institutions.
Loans and receivables and securities classified
as loans and receivables are carried at
amortised cost using the effective interest
method, less impairment losses, if any. Cash
rebates granted in relation to residential
mortgage loans are capitalised and amortised
to the income statement over their expected
life.
Fubon Bank Annual Report 2005
78
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(e) Financial instruments (continued) (e)
(ii) Categorisation (continued) (ii)
Available-for-sale financial assets
Available-for-sale financial assets are non-
derivative financial assets that are either
designated as available-for-sale or are not
classified in any of the other three categories
above. They include financial assets intended
to be held for an indefinite period of time, but
which may be sold in response to needs for
liquidity or changes in the market environment.
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
such unquoted equity instruments are carried
at cost less impairment losses, if any.
Available-for-sale financial assets are carried
at fair value. Unrealised gains and losses
arising from changes in the fair value are
recognised directly in the available-for-sale
investment revaluation reserve, except for
foreign exchange gains and losses on
monetary items such as debt securities which
are recognised in the income statement.
Where available-for-sale financial assets are
sold, the difference between the net sale
proceeds and the carrying value, and the
accumulated fair value adjustments in equity
are treated as gains or losses on disposal.
Other financial liabilities
Financial liabilities, other than those at fair
value through profit or loss, are measured at
amortised cost using the effective interest
method.
Fubon Bank Annual Report 2005
79
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(e) Financial instruments (continued) (e)
(iii) Fair value measurement principles (iii)
The fair value of financial instruments is
based on their quoted market prices at the
balance sheet date without any deduction for
estimated future selling costs. Financial assets
are priced at current bid prices, while financial
liabilities are priced at current asking prices.
If there is no publicly available latest traded
price nor a quoted market price on a
recognised stock exchange or a price from a
broker/dealer for non-exchange-traded financial
instruments, or if the market for it is not
active, the fair value of the instrument is
estimated using valuation technique that
provide a reliable estimate of prices which
could be obtained in actual mar ket
transactions.
Where discounted cash flow techniques are
used, estimated future cash flows are based
on management's best estimates and the
discount rate used is a market rate at the
balance sheet date applicable for an
instrument with similar terms and conditions.
Where other pricing models are used, inputs
are based on market data at the balance
sheet date.
(iv) Derecognition (iv)
A financial asset is derecognised when the
contractual rights to receive the cash flows
from the financial asset expire, or where the
financial asset together with substantially all
the risks and rewards of ownership, have
been transferred.
The Group uses the weighted average method
to determine realised gains and losses to be
recognised in profit or loss on derecognition.
A financial liability is derecognised when the
obligation specified in the contract is
discharged, cancelled or expires.
Fubon Bank Annual Report 2005
80
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(e) Financial instruments (continued) (e)
(v) Offsetting (v)
Financial assets and financial liabilities are
offset and the net amount reported in the
balance sheet where there is a legally
enforceable right to offset the recognised
amounts and there is an intention to settle
on a net basis, or realise the asset and settle
the liability simultaneously.
(vi) Embedded derivatives (vi)
An embedded derivative is a component of a
combined instrument that includes both the
derivative and a host contract with the effect
that some of the cash flows of the combined
instrument vary in a way similar to a stand-
alone derivative. The embedded derivatives
are separated from the host contract and (i)
accounted for as a derivative when (i) the
economic characteristics and risks of the (ii)
embedded derivative are not closely related
to the economic characteristics and risks of
the host contract; and (ii) the combined
instrument is not measured at fair value with
changes in fair value recognised in the
income statement.
When the embedded derivative is separated,
the host contract is accounted for in
accordance with the accounting policies for
financial instruments. The embedded derivative
is classified as a derivative financial instrument
in the financial statements.
(f) Repurchase transactions (f)
Securities sold subject to a simultaneous agreement
to repurchase these securities at a certain later
date at a fixed price (repurchase agreements) are
retained in the financial statements and measured
in accordance with their original measurement
principles. The proceeds of the sale are reported
as liabilities and are carried at amortised cost.
Fubon Bank Annual Report 2005
81
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(f) Repurchase transactions (continued) (f)
Interest incurred on repurchase agreements is
recognised as interest expense, over the life of
each agreement using the effective interest method.
(g) Hedging (g)
Hedge accounting recognises the offsetting effects
on profit or loss of changes in the fair values of the
hedging instrument and the hedged item. If hedge
accounting is adopted, the Group will assess and
document whether the financial statements that
are used in hedging transactions are highly effective
in offsetting changes in fair values or cash flows of
hedged items attributable to the hedged risks both (a)
at hedge inception and on an on-going basis. The (b)
Group will discontinue prospectively hedge (c)
accounting when (a) the hedging instrument expires 39
or is sold, terminated or exercised; (b) the hedge (a) (b) (c)
no longer meets the criteria for hedge accounting;
or (c) the Group revokes the designation. Hedge
accounting is classified into three categories under
HKAS 39, including (a) fair value hedges; (b) cash
flow hedge; (c) net investment hedge.
During the year, the Group has not applied hedge
accounting to its financial instruments held.
(h) Other property and equipment (h)
Owned assets
The Group's leasehold land and buildings are held
under operating lease and, in the absence of
reliable information to allow separation of the land
and buildings components under the leases, the 16
land and buildings are accounted for as properties
under HKAS 16, `Property, Plant and Equipment'
issued by the HKICPA.
Fubon Bank Annual Report 2005
82
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(h) Other property and equipment (continued) (h)
Owned assets (continued)
In addition, certain of the Group's leasehold land
and premises have been included at Directors'
valuation made having regard to independent
professional valuations carried out in November
1989. The surplus arising on revaluation was
credited to the revaluation reserve. Additions to
revalued premises made subsequent to the A B
revaluation are included at cost. Premises which
have not been the subject of revaluation are
included at cost. The revaluation reserve arising
from the November 1989 revaluation was transferred
to the capital redemption reserve when the Bank
redeemed its "A" and "B" preference shares in
June 1991.
In preparing these financial statements, advantage
has been taken of the transitional provisions in 16 80A
paragraph 80A of the HKAS 16 with the effect that
premises have not been revalued to fair value at
the balance sheet date. It is not the Directors'
present intention to revalue the premises in the
future.
Subsequent expenditure relating to a fixed asset
that has already been recognised is added to the
carrying amount of the assets when it is probable
that future economic benefits, in excess of the
originally assessed standard of performance of the
existing asset, will flow to the Group. All other
subsequent expenditure is recognised as an expense
in the period in which it is incurred.
Gains or losses arising from the retirement or
disposal of fixed assets are determined as the
difference between the estimated net disposal
proceeds and the carrying amount of the assets
and are recognised in the income statement on the
date of retirement or disposal.
Fubon Bank Annual Report 2005
83
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(h) Other property and equipment (continued) (h)
Owned assets (continued)
Depreciation is calculated to write off the cost or
valuation of items of property and equipment using
the straight line method over the estimated useful
lives as follows:
Buildings situated on leasehold land are
depreciated over the shorter of the unexpired
term of the lease and their estimated useful 2%
lives, being no less than 2% per annum after
the date of completion.
Furniture and equipment are generally
depreciated over between three to ten years.
Where parts of an item of property and equipment
have different useful lives, each part is depreciated
separately. Both the useful life of an asset and its
residual value, if any, are reviewed annually.
(i) Leases and hire purchase contracts (i)
(i) Classification of leased assets (i)
Leases which transfer substantially all the
risks and rewards of ownership are classified
as finance leases. Leases which do not
transfer substantially all the risks and rewards
of ownership to the lessee are classified as
operating leases.
(ii) Finance leases (ii)
Where the Group is a lessor under finance
leases, an amount representing the net
investment in the lease is included in the
balance sheet as loans and advances to
customers. Hire purchase contracts having
the characteristics of finance leases are
accounted for in the same manner as finance
leases. Impairment losses are accounted for
in accordance with the accounting policy for
impairment.
Fubon Bank Annual Report 2005
84
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(i) Leases and hire purchase contracts (continued) (i)
(iii) Operating leases (iii)
Where the Group has the use of assets held
under operating leases, payments made under
the leases are charged to the income
statement in equal instalments over the
accounting periods covered by the lease
terms, except where an alternative basis is
more representative of the pattern of benefits
to be delivered from the leased asset. Lease
incentives received are recognised in the
income statement as an integral part of the
aggregated net lease payments made.
Contingent rentals are charged to the income
statement in the accounting period in which
they are incurred.
(j) Repossessed assets (j)
In the recovery of impaired loans and advances, the
Group may take repossession of the collateral
assets through court proceedings or voluntary
delivery of possession by the borrowers. Where it is
intended to achieve an orderly realisation and the
Group is no longer seeking repayment from the
borrower, repossessed assets are reported in
"Other assets".
Repossessed assets are recorded at the lower of
the amount of the related loans and advances and
fair value less costs to sell at the date of
exchange.
Impairment losses on initial classification and
subsequent remeasurement are recognised in the
income statement.
Fubon Bank Annual Report 2005
85
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(k) Impairment of assets (k)
The carrying amount of the Group's assets are
reviewed at each balance sheet date to determine
whether there is objective evidence of impairment.
If any such evidence exists, the carrying amount is
reduced to the estimated recoverable amount by
means of a charge to the income statement.
(i) Loans and receivables (i)
For loans and receivables, the impairment
losses are 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. Receivables with a short duration
are not discounted if the effect of discounting
is immaterial.
The total allowance for credit losses consists
of two components: individual impairment
allowances, and collective impairment
allowances.
The Group first assesses whether any objective
evidence of impairment exists individually for
financial assets that are individually significant,
and individually or collectively for financial
assets that are not individually significant. If
the Group determines that no objective
evidence of impairment exists for individually
assessed financial asset, whether significant
or not, it includes the asset in a group of
financial assets with similar credit risk
characteristics and collectively assesses them
for impairment. Assets that are individually
assessed for impairment and for which an
impairment loss is or continues to be
recognised are not included in a collective
assessment of impairment.
Fubon Bank Annual Report 2005
86
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(k) Impairment of assets (continued) (k)
(i) Loans and receivables (continued) (i)
The individual impairment allowance is based
upon management's best estimate of the
present value of cash flows which are expected
to be received discounted at the original
effective interest rate. In estimating these
cash flows, management makes judgments
about the borrower's financial situation and
the net realisable value of any underlying
collateral or guarantees in favour of the
Group. Each impaired asset is assessed on
its merits.
In assessing the need for collective loan loss
allowances, management considers factors
such as credit quality, por tfolio size,
concentrations, and economic factors. In
order to estimate the required allowance, the
Group makes assumptions both to define the
way the Group models inherent losses and to
determine the required input parameters,
based on historical experience and current
economic conditions.
The accuracy of the impairment allowances
the Group makes depends on how well the
Group can estimate future cash flows for
individually assessed impairment allowances
and the model assumptions and parameters
used in determining collective impairment
allowances. While this necessarily involves
judgment, the Group believes that the
impairment allowances on advances to
customers are reasonable and supportable.
Any subsequent changes to the amounts and
timing of the expected future cash flows
compared to the prior estimates that can be
linked objectively to an event occurring after
the write-down, will result in a change in the
impairment allowances on loans and
receivables and be charged or credited to the
income statement.
Fubon Bank Annual Report 2005
87
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(k) Impairment of assets (continued) (k)
(i) Loans and receivables (continued) (i)
When the loan has no reasonable prospect of
recovery, the loans and the related interest
receivables are written off.
(ii) Impairment of available-for-sale financial assets (ii)
Where there is objective evidence that an
available-for-sale financial asset is impaired,
the cumulative loss that had been recognised
directly in equity is removed from equity and
is recognised in the income statement. The
amount of the cumulative loss that is
recognised in the income statement is the
difference between the acquisition cost (net
of any principal repayment and amortisation)
and current fair value, less any impairment
loss on that asset previously recognised in
the income statement.
The impairment loss is measured as the
difference between the carrying amount of the
financial asset and the present value of
estimated future cash flows discounted at the
current market rate of return for a similar
financial asset. Impairment losses recognised
in the income statement in respect of available-
for-sale equity securities are not reversed
through the income statement. Any subsequent
increase in fair value of such assets is
recognised directly in equity. Impairment losses
are not reversed for unquoted available-for-
sale equity securities that are carried at cost.
Impairment losses in respect of available-for-
sale debt securities are reversed if the
subsequent increase in fair value can be
objectively related to an event occurring after
the impairment loss was recognised. Reversals
of impairment losses in such circumstances
are recognised in the income statement.
Fubon Bank Annual Report 2005
88
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(k) Impairment of assets (continued) (k)
(iii) Other assets (iii)
Internal and external sources of information
are reviewed at each balance sheet date to
identify indications that the following assets
may be impaired or, except in the case of
goodwill, an impairment loss previously
recognised no longer exists or may have
decreased:
property and equipment;
pre-paid interests in leasehold land
classified as being held under an
operating lease; and
investments in subsidiaries and
associates.
If any such indication exists, the asset's
recoverable amount is estimated.
Calculation of recoverable amount
The recoverable amount of an asset is the
greater of its net selling price 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. Where an asset does not
generate cash inflows largely independent of
those from other assets, the recoverable
amount is determined for the smallest group
of assets that generate cash inflows
independently.
Fubon Bank Annual Report 2005
89
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(k) Impairment of assets (continued) (k)
(iii) Other assets (continued) (iii)
Recognition of impairment losses
An impairment loss is recognised in the
income statement whenever the carrying
amount of an asset, or the cash-generating
unit to which it belongs, exceeds its
recoverable amount. Impairment losses
recognised in respect of cash-generating units
are allocated first to reduce the carrying
amount of any goodwill allocated to the cash-
generating unit (or group of units) and then,
to reduce the carrying amount of the other
assets in the unit (or group of units) on a pro
rata basis, except that the carrying value of
an asset will not be reduced below its
individual fair value less costs to sell, or
value in use, if determinable.
Reversals of impairment losses
In respect of assets other than goodwill, an
impairment loss is reversed if there has been
a favourable change in the estimates used to
determine the recoverable amount. An
impairment loss in respect of goodwill is not
reversed.
A reversal of impairment losses is limited to
the asset's carrying amount that would have
been determined had no impairment loss
been recognised in prior years. Reversals of
impairment losses are credited to the income
statement in the year in which the reversals
are recognised.
(l) Cash equivalents (l)
Cash equivalents are short-term highly liquid
investments that are readily convertible into known
amounts of cash and which are subject to an
insignificant risk of changes in value, having been
within three months of maturity at acquisition.
Fubon Bank Annual Report 2005
90
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(m) Employee benefits (m)
Short term employee benefits include salaries,
annual bonuses, paid annual leave, leave passage,
contributions to defined contribution plans and the
cost of non-monetary benefits are accrued in the
year in which the associated services are rendered
by employees of the Group. Where payment or
settlement is deferred and the effect would be
material, these amounts are stated at their present
values.
(n) Income tax (n)
Income tax for the year comprises current tax and
movements in deferred tax assets and liabilities.
Current tax and movements in deferred tax assets
and liabilities are recognised in the income
statement except to the extent that they relate to
items recognised directly in equity, in which case
they are recognised in equity.
Current tax is the expected tax payable on the
taxable income for the year, using tax rates enacted
or substantively enacted at the balance sheet date,
and any adjustment to tax payable in respect of
previous years.
Deferred tax assets and liabilities arise from
deductible and taxable temporary differences
respectively, being the differences between the
carr ying amounts of assets and liabilities for
financial reporting purposes and their tax bases.
Deferred tax assets also arise from unused tax
losses and unused tax credits.
Fubon Bank Annual Report 2005
91
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(n) Income tax (continued) (n)
Apart from certain limited exceptions, all deferred
tax liabilities, and all deferred tax assets to the
extent that it is probable that future taxable profits
will be available against which the asset can be
utilised, are recognised. Future taxable profits that
may support the recognition of deferred tax assets
arising from deductible temporary differences include
those that will arise from the reversal of existing
taxable temporary differences, provided those
differences relate to the same taxation authority
and the same taxable entity, and are expected to
reverse either in the same period as the expected
reversal of the deductible temporary difference or
in periods into which a tax loss arising from the
deferred tax asset can be carried back or forward.
The same criteria are adopted when determining
whether existing taxable temporary differences
support the recognition of deferred tax assets
arising from unused tax losses and credits, that is,
those differences are taken into account if they
relate to the same taxation authority and the same
taxable entity, and are expected to reverse in a
period, or periods, in which the tax loss or credit
can be utilised.
The limited exceptions to recognition of deferred
tax assets and liabilities are those temporary
differences arising from goodwill not deductible for
tax purposes, the initial recognition of assets or
liabilities that affect neither accounting nor taxable
profit (provided they are not part of a business
combination), and temporary differences relating to
investments in subsidiaries to the extent that, in
the case of taxable differences, the Group controls
the timing of the reversal and it is probable that the
differences will not reverse in the foreseeable
future, or in the case of deductible differences,
unless it is probable that they will reverse in the
future.
Fubon Bank Annual Report 2005
92
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(n) Income tax (continued) (n)
The amount of deferred tax recognised is measured
based on the expected manner of realisation or
settlement of the carrying amount of the assets
and liabilities, using tax rates enacted or
substantively enacted at the balance sheet date.
Deferred tax assets and liabilities are not
discounted.
The carrying amount of a deferred tax asset is
reviewed at each balance sheet date and is
reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to
allow the related tax benefit to be utilised. Any such
reduction is reversed to the extent that it becomes
probable that sufficient taxable profit will be
available.
Additional income taxes that arise from the
distribution of dividends are recognised when the
liability to pay the related dividends is recognised.
Current tax balances and deferred tax balances,
and movements therein, are presented separately
from each other and are not offset. Current tax
assets are offset against current tax liabilities, and
deferred tax assets against deferred tax liabilities
if, and only if, the Bank or the Group has the legally
enforceable right to set off current tax assets
against current tax liabilities and the following
additional conditions are met:
in the case of current tax assets and
liabilities, the Bank or the Group intends
either to settle on a net basis, or to realise
the asset and settle the liability
simultaneously; or
in the case of deferred tax assets and
liabilities, if they relate to income taxes levied
by the same taxation authority on either;
the same taxable entity; or
Fubon Bank Annual Report 2005
93
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(n) Income tax (continued) (n)
different taxable entities, which, in each
future period in which significant amounts of
deferred tax liabilities or assets are expected
to be settled or recovered, intend to realise
the current tax assets and settle the current
tax liabilities on a net basis or realise and
settle simultaneously.
(o) Provisions and contingent liabilities (o)
Provisions are recognised for liabilities of uncertain
timing or amount when the Group or the Bank has
a legal or constructive obligation arising as a result
of a past event, it is probable that an outflow of
economic benefits will be required to settle the
obligation and a reliable estimate can be made.
Where the time value of money is material,
provisions are stated at the present value of the
expenditures expected to settle the obligation.
Where it is not probable that an outflow of
economic benefits will be required, or the amount
cannot be estimated reliably, the obligation is
disclosed as a contingent liability, unless the
probability of outflow of economic benefits is
remote. Possible obligations, whose existence will
only be confirmed by the occurrence or non-
occurrence of one or more future events are also
disclosed as contingent liabilities unless the
probability of outflow of economic benefits is
remote.
(p) Revenue recognition (p)
Provided it is probable that the economic benefits
will flow to the Group and the revenue and costs, if
applicable, can be measured reliably, revenue is
recognised in the income statement as follows:
(i) Interest income (i)
Interest income from all interest-bearing
financial instruments is recognised in the
income statement using the effective interest
rates method.
Fubon Bank Annual Report 2005
94
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(p) Revenue recognition (continued) (p)
(i) Interest income (continued) (i)
The effective interest method is a method of
calculating the amortised cost of a financial
asset and of allocating the interest income
over the relevant period. The effective interest
rate is the rate which exactly discounts
estimated future cash payments or receipts
through the expected life of the financial
instrument or, when appropriate, a shorter
period to the net carrying amount of the
financial asset. When calculating the effective
interest rate, the Group estimates cash flows
considering all contractual terms of the
financial instrument (for example, prepayment,
call and similar option) but does not consider
future credit losses. The calculation includes
all fees and points paid or received between
parties to the contract that are an integral
part of the effective interest rate, together
with transaction costs and all other premiums
or discounts.
Net income from financial instruments
designated at fair value through profit or loss
and net trading income comprises all gains
and losses from changes in fair value (net of
accrued coupon) of such financial assets and
financial liabilities, together with interest
income and expense and dividend income
attributable to those financial instruments.
Fubon Bank Annual Report 2005
95
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(p) Revenue recognition (continued) (p)
(ii) Fee and commission income (ii)
Fee and commission income arises on financial
services provided by the Group including cash
management services, investment banking
ser vices, project and structured finance
transactions services. Fee and commission
income is recognised when the corresponding
service is provided, except where the fee is
charged to cover the costs of a continuing
service to, or risk borne for, the customer, or
is interest in nature. In these cases, the fee
is recognised as income in the accounting
period in which the costs or risk is incurred or
is accounted for as interest income.
Origination or commitment fees received by
the Group which result in the creation or
acquisition of a financial asset are deferred
and recognised as an adjustment to the
effective interest rate. If the commitment
expires without the Group making a loan, the
fee is recognised as revenue on expiry.
(iii) Finance income from finance lease and hire (iii)
purchase contract
Finance income implicit in finance lease and
hire purchase payments is recognised as
interest income over the period of the leases
so as to produce an approximately constant
periodic rate of return on the outstanding net
investment in the leases for each accounting
period. Contingent rentals receivable are
recognised as income in the accounting
period in which they are receivable.
(iv) Dividend income (iv)
Dividend income from unlisted investments is
recognised when the shareholder's right to
receive payment is established. Dividend
income from listed investments is recognised
when the share price of the investment goes
ex-dividend.
Fubon Bank Annual Report 2005
96
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(q) Translation of foreign currencies (q)
Foreign currency transactions during the year are
translated into Hong Kong dollars at the exchange
rates ruling at the transaction dates. Monetary
assets and liabilities denominated in foreign
currencies are translated into Hong Kong dollars at
the exchange rates ruling at the balance sheet
date. Exchange gains and losses are dealt with in
the income statement.
Non-monetar y assets and liabilities that are
measured in terms of historical cost in a foreign
currency are translated using the exchange rates
ruling at the transaction dates. Non-monetary
assets and liabilities denominated in foreign
currencies that are stated at fair value are
translated into Hong Kong dollars at foreign
exchange rates ruling at the dates the fair value
was determined.
Exchange differences relating to investments at fair
value through profit or loss and derivative financial
instruments are included in gains and losses on
investments and net gain/(loss) on derivatives,
respectively. All other exchange differences relating
to monetary items are presented separately in the
income statement.
(r) Related parties (r)
For the purposes of these financial statements,
parties are considered to be related to the Group if
the Group has the ability, directly or indirectly, to
control the party or exercise significant influence
over the party in making financial and operating
decisions, or vice versa, or where the Group and
the par ty are subject to common control or
common significant influence. Related parties may
be individuals (being members of key management
personnel, significant shareholders and/or their
close family members) or other entities and include
entities which are under the significant influence of
related parties of the Group where those parties
are individuals, and post-employment benefit plans
which are for the benefit of employees of the Group
or of any entity that is a related party of the Group.
Fubon Bank Annual Report 2005
97
Notes to the Financial Statements
2 SIGNIFICANT ACCOUNTING
POLICIES (continued)
(s) Segment reporting (s)
A segment is a distinguishable component of the
Group that is engaged either in providing products
or services (business segment), or in providing
products or services within a particular economic
environment (geographical segment), which is subject
to risks and rewards that are different from those
of other segments.
In accordance with the Group's internal financial
reporting system, the Group has chosen business
segment information as the primary reporting
format and geographical segment information as
the secondary reporting format for the purposes of
these financial statements.
Segment revenue, expenses, results, assets and
liabilities include items directly attributable to a
segment as well as those that can be allocated on
a reasonable basis to that segment. Segment
revenue, expenses, assets, and liabilities are
determined before intra-Group balances and intra-
Group transactions are eliminated as part of the
consolidation process, expect to the extent that
such intra-Group balances and transactions are
between Group entities within a single segment.
Inter-segment pricing is based on similar terms as
those available to other external parties.
Segment capital expenditure is the total cost
incurred during the period to acquire segment
assets (both tangible and intangible) that are
expected to be used for more than one period.
Unallocated items mainly comprise financial and
corporate assets, interest-bearing loans, borrowings,
tax balances, corporate and financing expenses.
Fubon Bank Annual Report 2005
98
Notes to the Financial Statements
3 CHANGES IN ACCOUNTING
POLICIES
The HKICPA has issued a number of new and revised
Hong Kong Financial Reporting Standards ("HKFRSs",
which term collectively includes all applicable Hong Kong
Financial Reporting Standards, Hong Kong Accounting
Standards "HKASs" and Interpretations) that are effective
for accounting periods beginning on or after 1 January
2005.
The changes in the Group's accounting policies resulting
from the adoption of the new and revised HKFRSs are 17
attributable to the adoption of HKAS 17, "Leases", HKAS 24
24, "Related parties disclosures", HKAS 30, "Disclosures 30
in financial statements of banks and similar financial 32
institutions", HKAS 32, "Financial instruments: Disclosure 39
and presentation", and HKAS 39, "Financial instruments:
Recognition and measurement".
The Group has not applied any new standard or
interpretation that is not yet effective for the current
accounting period.
The adoption of HKAS 17 has no material effect on the 17
Group's financial statements. The following sets out 32
further information on the changes in accounting policies 39
for the annual accounting period beginning on 1 January
2005 from the adoption of HKAS 32 and 39 which have
been reflected in this financial report.
(i) Changes in classification and measurement of financial (i)
instruments
In prior years, the accounting policies for certain
financial instruments were as follows:
(a) The Group has applied Statement of Standard (a)
Accounting Practices ("SSAP") No. 24 24
"Accounting for investments in securities" to
investments in securities previously. Under 24
SSAP 24, non-trading securities were stated
at fair value with changes in fair values
recognised net of deferred taxes in the
investment revaluation reserve until the
security was sold, collected, or otherwise
disposed of, or until there was objective
evidence that the security was impaired, at
which time the relevant cumulative gain or
loss was recognised in the income statement;
Fubon Bank Annual Report 2005
99
Notes to the Financial Statements
3 CHANGES IN ACCOUNTING
POLICIES (continued)
(i) Changes in classification and measurement of financial (i)
instruments (continued)
(b) Derivative financial instruments entered into (b)
by management used for asset and liability
management purposes and which qualified as
hedges were valued on an equivalent basis to
the underlying assets and liabilities or net
positions which they were hedging. Any profit
or loss was recognised on the same basis as
that arising from related assets and liabilities
or net positions;
(c) General provisions on loans and advances (c)
were determined by the Directors at a level
deemed appropriate to absorb expected losses
for loans which were impaired at the balance
sheet date but which would not be identified
as such until sometime in the future;
(d) Specific provisions on loans and advances (d)
were determined by the Directors at a level
deemed appropriate to absorb expected
losses from individual accounts after taking
into account of the value of the collateral
held;
(e) In prior years, advances to customers and (e)
trade bills were carried at amounts advanced
less payment collected, any suspended interest
and reserves for credit losses. Cash rebates
granted in relation to residential mortgage
loans were capitalised and amortised to the
income statement over the early prepayment
penalty period;
(f) Fees and commissions arising on project and (f)
structured finance transactions which were in
the nature of interest were recognised as
interest income on a time-apportioned basis.
Fubon Bank Annual Report 2005
100
Notes to the Financial Statements
3 CHANGES IN ACCOUNTING
POLICIES (continued)
(i) Changes in classification and measurement of financial (i)
instruments (continued)
With effect from 1 January 2005, and in accordance with 32 39
HKAS 32 and 39, the following new accounting policies
have been adopted for the items mentioned above:
(A) Financial instruments (A)
With effect from 1 January 2005, and in accordance 39
with HKAS 39, financial assets are recognised
based on the following classifications:
Loans and advances
Loans and advances not intended for trading are
carried at amortised cost taking into account the
unamor tised por tion of fees and costs less
impairment allowances.
Trading securities
Treasury bills, certificate of deposits held, debt
securities, equity investments, derivatives with
positive fair values and investments in investment
funds which have been acquired or incurred
principally for the purpose of selling or repurchasing
in the near term are classified as trading assets.
Trading assets are recognised at fair value and
transaction costs are taken to the income statement.
The changes in fair value are recognised as "Gains
less losses from dealing in trading securities" in
the income statement.
Fubon Bank Annual Report 2005
101
Notes to the Financial Statements
3 CHANGES IN ACCOUNTING
POLICIES (continued)
(A) Financial instruments (continued) (A)
Financial assets designated as at fair value through
profit or loss
A financial instrument is classified in this category
if it meets the following criteria, and is so
designated by management. The Group designates
financial instruments at fair value because the
designation:
(a) eliminates or significantly reduces a (a)
measurement or recognition inconsistency
that would otherwise arise from measuring
assets or liabilities or recognising the gains
and losses on them on different bases; or
(b) applies to a Group of financial assets, (b)
financial liabilities or both that is managed
and its performance evaluated on a fair value
basis, in accordance with Group's documented
risk management or investment strategy, and
where information about the Group is provided
internally on the basis to the Group's key
management personnel; or
(c) relates to financial instruments containing (c)
one or more embedded derivatives which
significantly modify the cash flows resulting
from the financial instruments, and which
would otherwise require separate accounting.
Financial assets so designated are recognised
initially at fair value and transaction costs are
taken directly to the income statement. The changes
in fair value are recognised as "Revaluation gain/
(loss) from financial instruments designated as at
fair value through profit or loss".
Fubon Bank Annual Report 2005
102
Notes to the Financial Statements
3 CHANGES IN ACCOUNTING
POLICIES (continued)
(A) Financial instruments (continued) (A)
Financial assets designated as at fair value through
profit or loss (continued)
Accordingly, a portfolio of non-trading investments
with a value of HK$691,125,000 with associated 691,125,000
interest rate swaps were separated into the
underlying debt securities and derivative financial 39
instruments on 1 January 2005. As a result, the
debt securities were restated at fair value amounting 739,065,000
to HK$739,065,000 and were re-designated on 1
January 2005 as other financial instruments as at
fair value through profit or loss, as permitted by the
transitional arrangements of HKAS 39. In addition, 47,940,000
the interest rate swaps were classified as derivative
financial instruments held for trading purposes
which were measured at an aggregate fair value
liability of HK$47,940,000 on the same date.
There was no net impact to the opening balance of
retained earnings as of 1 January 2005. As a result
of these changes, the Group's net profit before and
after taxation for the year 2005 have increased by 3,430,000 2,830,000
HK$3,430,000 and HK$2,830,000 respectively.
Available-for-sale
Available-for-sale financial assets include treasury
bills held for non-trading purposes, certificates of
deposit held, equity investments, and debt securities
to be held for an indefinite period of time but which
may be sold in response to needs for liquidity or
changes in market environment. These are carried
at fair value, except for 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 such unquoted
equity instruments which are carried at cost less
impairment losses.
Fubon Bank Annual Report 2005
103
Notes to the Financial Statements
3 CHANGES IN ACCOUNTING
POLICIES (continued)
(A) Financial instruments (continued) (A)
Available-for-sale (continued)
Except for the non-trading investments as mentioned
above, all non-trading investments held as of 1
January 2005 were classified as available-for-sale
securities and were carried at fair value.
(B) Derivative financial instruments (B)
Derivative financial instruments include embedded
derivatives and other derivative financial instruments
entered into by the Group with other counterparties
for hedging and trading purposes.
Under HKAS 39, an embedded derivative is 39
separated from the host contract and accounted for
as a derivative when (i) the embedded derivative is (i)
not closely related to the economic characteristics
and risks of the host contract; and (ii) the ; (ii)
combined instrument is not measured at fair value
with changes
pdf2txt : http://www.fubonbank.com.hk/web/doc/fi_2005arpt_18.pdf
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