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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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