Annual Report 2019

NOTESTOTHE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2019 85 The United Laboratories International Holdings Limited Annual Report 2019 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (Continued) Key sources of estimation uncertainty (Continued) Estimated write-down of inventories to net realisable value The Group writes down inventories based on assessments of the net realisable value of existing inventories. Write-down to inventories is made where events or changes in circumstances indicate that the net realisable value of certain items are lower than the costs of those items. The identification of obsolete inventories requires the use of estimation of the net realisable value of items of inventory and estimates on the conditions and usefulness of items of inventories. Where the expectation on the net realisable value is lower than the cost for certain items, an impairment may arise. During the year ended 31 December 2019, write-down of inventories of RMB8,825,000 (2018: reversal of write-down of inventories of RMB7,797,000) has been recognised. The carrying amount of inventories is disclosed in Note 24. Valuation of the embedded derivatives in convertible bonds The fair value for the embedded derivatives in convertible bonds are established by using valuation techniques. The Group has established a process to ensure that valuation techniques are developed by qualified personnel and are validated and reviewed by personnel independent of the personnel that developed the valuation techniques. Valuation techniques are certified before being implemented for valuation and are calibrated to ensure that outputs reflect actual market conditions. The valuation model is sensitive to changes in certain key inputs including volatility of share prices and dividend yield that require significant management estimates. Any changes in the estimates and assumptions will affect the fair values of the embedded derivatives in convertible bonds. The carrying amount of embedded derivatives is disclosed in Note 32.