Assets sold under agreements to repurchase at a specifi ed future date (“repos”) are not derecognised from the balance sheet. The corresponding cash received, including accrued interest, is recognised on the balance sheet as a “repurchase agreement”, refl ecting its economic substance as a loan to the Group. The difference between the sale and repurchase prices is treated as an interest expense and is accrued over the life of the agreement using the effective interest method.
Notes to Financial Statements
31 December 2007 (In RMB millions, unless otherwise stated)
Conversely, assets purchased under agreements to resell at a specifi ed future date (“reverse repos”) are not recognised on the balance sheet. The corresponding cash paid, including accrued interest, is recognised on the balance sheet as a “reverse repurchase agreement”. The difference between the purchase and resale prices is treated as an interest income and is accrued over the life of the agreement using the effective interest method.
(12) Property and equipment
Property and equipment were stated at cost or valuation less accumulated depreciation and any impairment losses. The cost of an item of property and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after items of property and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefi ts expected to be obtained from the use of the assets, and where the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of the assets or as a replacement.
Fair value is determined by reference to market-based evidence, which is the amount for which the asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm’s length transaction as at the valuation date. Revaluations are performed with suffi cient regularity such that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. Revaluations are performed on items which experience signifi cant and volatile movements in fair value.
Any revaluation surplus is credited to the asset revaluation reserve, except to the extent that it reverses a revaluation defi cit of the same asset previously recognised in the income statement, in which case the surplus is recognised in the income statement. A revaluation defi cit is recognised in the income statement, except that a defi cit directly offsetting a previous surplus on the same asset is directly offset against the surplus in the asset revaluation reserve. Upon disposal of an asset, any asset revaluation reserve relating to the particular asset being sold is transferred to retained profi ts.
Construction in progress comprises the direct costs of construction during the period of construction and is not depreciated. Construction in progress is reclassifi ed to the appropriate category of property and equipment when completed and ready for use.
The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable.
Depreciation is calculated on the straight-line basis to write off the cost or valuation of each asset, less any estimated residual value, over the estimated useful life of each asset as follows:
Estimated useful lives
Properties and buildings 5 to 35 years
Leasehold improvements Over the shorter of the economic useful lives or remaining lease terms Offi ce equipment and computers 3 to 5 years
Motor vehicles 4 to 6 years
Where parts of an item of property and equipment have different useful lives, the cost or valuation of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.
Residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each fi nancial year end.
Notes to Financial Statements
31 December 2007
(In RMB millions, unless otherwise stated)
An item of property and equipment is derecognised upon disposal or when no future economic benefi ts are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognised.
(13) Land use rights
Land use rights are recognised at cost, being the fair value at the time of injection from the central government of the PRC (the “Government”) or the consideration paid. The rights are amortised using the straight-line basis over the period of the leases. When the prepaid land lease payments cannot be allocated reliably between the land and buildings elements, the entire lease payments are included in the cost of properties and buildings as fi nance leases in property and equipment.
(14) Repossessed assets
Collateral assets for loans and advances are repossessed by the Group when the borrowers are unable to honour their repayments, and would be realised in settlement of the related outstanding debts. Repossessed assets are initially recognised at the carrying amount of the related loan principal and interest receivable, net of allowance for impairment losses. The Group’s repossessed assets are reviewed at each balance sheet date by management to assess whether they are recorded in excess of their recoverable amount, and if their carrying value exceeds the recoverable amount, the assets are written down. Impairment loss, being the difference between the estimated net recoverable amount and the carrying value, is charged to the income statement.