(1) PRINCIPAL ACCOUNTING POLICIES
(a) Basis of Consolidation
The Group's financial statements include the financial statements of the Company and its subsidiaries, together with the Group's share of post-acquisition profit or loss and reserves of its associated companies under the equity method of accounting. The results of subsidiaries and associated companies acquired or disposed of during the year are consolidated from or to their effective dates of acquisition or disposal. Significant intra-group transactions and balances have been eliminated on consolidation.
(b) Negative Goodwill
Negative goodwill, which represents the excess of the fair value attributable to the separable net assets at the date of acquisition of an associated company over the purchase consideration, is credited to capital reserve.
On disposal of the associated company, the attributable amount of negative goodwill or capital reserve previously credited to reserves is included in the determination of the profit or loss on disposal of the associated company.
(c) Turnover
Turnover mainly represents the following:
(i) The aggregate amount of gross certified value earned from construction contracts, which include various maintenance and decoration projects;
(ii) Gross invoiced sales, net of discounts and returns of construction materials sold; and
(iii) Rental income earned from investment properties.
(d) Revenue Recognition
(i) Construction contracts
To the extent that the outcome of the contract can be estimated reliably, revenue from construction contracts is recognised using the percentage of completion method, measured by reference to the percentage of revenue certified to date to estimated total contract value. When the outcome of a contract cannot be estimated reliably, revenue is recognised only to the extent of contract costs incurred that are probable of recovery.
(ii) Sale of building materials
Sale of building materials is recognised when goods are delivered and title has passed to customers.
(iii) Rental of properties
Rental income is recognised when the rental becomes due and receivable.
(e) Fixed Assets, Depreciation and Hire Purchase Contracts
Fixed assets, other than investment properties, are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the fixed assets have been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the profit and loss account 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 benefits expected to be obtained from the use of the fixed asset, the expenditure is capitalised as an additional cost of the fixed asset.
Properties under construction are stated at cost. No depreciation is provided until the properties are completed and used.
Depreciation of fixed assets is provided using the straight-line method over their estimated useful lives. The principal annual rates used are as follows:
| Land and buildings in Hong Kong held under medium-term leases | 2% |
| Leasehold improvements | 25% |
| Plant and machinery | 10% |
| Furniture, fixtures and office equipment | 25% |
| Motor vehicles | 25% |
| Motor launch | 10% |
When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the profit and loss account.
Assets held under hire purchase contracts are capitalised at their fair values at the inception of the contracts, and depreciated over their expected useful lives on the same basis as owned assets.
The capital element of the obligations under hire purchase contracts is shown as a liability. The interest element of the obligations is charged against the profit and loss account so as to produce a constant periodic rate of charge.
(f) Investment Properties
Investment properties are interests in land and buildings in respect of which construction work and development have been completed and which are held for their investment potential and for the long term.
Investment properties are included in the balance sheet at their open market value, on the basis of an annual valuation performed by independent professional valuers. Changes in the value of investment properties are dealt with as movements in the property revaluation reserve. If the total of this reserve is insufficient to cover a reduction in the open market value on a portfolio basis, the excess is charged to the profit and loss account.
Upon the disposal of an investment property, the relevant portion of the revaluation reserve realised in respect of previous valuations is released from the property revaluation reserve to the profit and loss account as part of the profit or loss on disposal of the investment property.
No depreciation is provided on investment properties unless the unexpired lease term is 20 years or less, in which case depreciation is provided on their carrying value over the unexpired lease term.
(g) Subsidiaries
A company is a subsidiary of another company if the latter controls more than half of the voting power of the former. Investment in subsidiaries in the accounts of the Company is carried at cost less provision for permanent diminution in value where considered necessary by the directors. The results of the subsidiaries are included in the profit and loss account of the Company to the extent of dividends declared by the subsidiaries.
(h) Associated Companies
An associated company is a company in which the Group has a long-term interest and over which the Group is in a position to exercise significant influence. Associated companies are accounted for using the equity method of accounting in the consolidated financial statements and the cost method in the Company's balance sheet less any provision for permanent diminution in value where considered necessary by the directors.
(i) Investments
Listed and unlisted investments held for the long-term are stated at cost less provision for permanent diminution in value.
Income from investments is accounted for to the extent of dividends declared and interest received or receivable.
(j) Deferred expenditures
(i) Development costs
Development costs are stated at cost less accumulated amortisation. Amortisation is provided using the straight-line method over a period of four years, the average period of time over which benefits of the costs are expected to materialise.
(ii) Pre-operating expenditures
Pre-operating expenditures are stated at cost less accumulated amortisation. Amortisation is provided using the straight-line basis over a period of five years upon commencement of commercial operations.
(k) Inventories
Inventories are carried at the lower of cost and net realisable value.
Cost is based on the first-in, first-out cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.
(l) Construction Contracts
The accounting policy for contract revenue is set out in Note (1)(d)(i) above. When the outcome of a construction contract can be estimated reliably, contract costs are recognised as expenses by reference to the stage of completion of the contract at the balance sheet date. When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as an expense in the period in which they are incurred.
When it is probable that total contract costs will exceed total contract revenue, the expected total loss is recognised as an expense immediately.
Construction contracts in progress at the balance sheet date are recorded at the net amount of costs incurred plus recognised profits less recognised losses and progress billings, and are presented in the balance sheet as the "Gross amount due from customers for contract work" (as an asset) or the "Gross amount due to customers for contract work" (as a liability). Amounts billed, but not yet paid by customers, for work performed on a contract are included in the balance sheet under "Trade debtors".
(m) Operating Leases
Leases where substantially all the rewards and risks of ownership remain with the leasing company are accounted for as operating leases. Rental payments under operating leases are charged to the profit and loss account on a straight-line basis over the period of the relevant leases.
(n) Deferred Taxation
Deferred taxation is provided under the liability method, at the current tax rate, in respect of the timing differences between profit as computed for taxation purposes and profit as stated in the financial statements, except where it is considered that no liability will arise in the foreseeable future.
A deferred tax asset is not recognised unless the related benefits are expected to crystallise in the foreseeable future.
(o) Foreign Currency Translation
The Group maintains its books and records in Hong Kong dollars. Transactions in other currencies during the year are translated into Hong Kong dollars at the rates of exchange prevailing at the dates of the transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are translated into Hong Kong dollars at the rates of exchange prevailing at the balance sheet date. Exchange differences are dealt with in the profit and loss account.
(p) Borrowing Costs
Interest that is directly attributable to a construction contract is capitalised as part of the cost of that project. Interest is capitalised at the weighted average cost of the related borrowings up to the date of completion of the construction contract.
Other borrowing costs, including amortisation of discount or premium related to borrowings, ancillary costs incurred in connection with arranging financing and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs, are expensed in the profit and loss account.
(2) TURNOVER
Contribution to the Group's turnover by principal activities is as follows:
1999 1998
$'000 $'000
Contracting of building construction, maintenance
and decoration projects 1,849,377 1,513,685
Sale of building materials 14,162 20,995
Sale of properties - 81,199
Others 11,638 4,766
---------- ----------
Total 1,875,177 1,620,645
========== ==========
(3) OPERATING PROFIT
Operating profit is arrived at after charging (crediting) the following:
1999 1998
$'000 $'000
(Note 28)
Depreciation
- Owned assets 12,126 10,200
- Assets held under hire purchase contracts 4,486 3,058
---------- ----------
16,612 13,258
Less: Amount capitalised as construction costs (10,434) (7,879)
---------- ----------
6,178 5,379
---------- ----------
Amortisation of development costs 750 750
Amortisation of pre-operating expenditures 418 -
Cost of inventories 35,977 31,791
Loss on disposals of fixed assets 162 188
Auditors' remuneration 1,000 1,530
Operating leases on
- Land and buildings 1,815 882
- Other equipment 24,799 24,769
---------- ----------
26,614 25,651
Less: Amount capitalised as construction costs (24,489) (24,769)
---------- ----------
2,125 882
---------- ----------
Hire purchase charges 2,116 1,374
Less: Amount capitalised as construction costs (1,586) (1,235)
---------- ----------
530 139
---------- ----------
Interest expense on overdrafts and
bank loans repayable within five years 32,950 35,431
Less: Amount capitalised as construction costs (20,021) (28,915)
---------- ----------
12,929 6,516
---------- ----------
Exchange loss (gain), net 16 (186)
Interest income on bank deposits (11,566) (12,012)
Dividend income (48) -
Construction contract revenue (1,849,377) (1,513,685)
========== ==========
(4) DIRECTORS' REMUNERATION AND FIVE HIGHEST-PAID INDIVIDUALS
(a) Directors' remuneration
Details of Directors' remuneration are as follows:
1999 1998
$'000 $'000
Fees 750 750
Salaries 9,717 8,468
Performance-related bonus - 1,370
Contribution to defined contribution scheme 439 372
------ ------
10,906 10,960
====== ======
The Directors received remuneration in the following bands during the year:
1999 1998
Number Number
of Directors of Directors
Up to $1,000,000 4 4
$1,500,001 - $2,000,000 2 2
$5,000,001 - $5,500,000 - 1
$5,500,001 - $6,000,000 1 -
===== =====
(b) Five highest-paid individuals
The five highest-paid individuals included three (1998 - three) Executive Directors whose emoluments are disclosed in (a) above. The details of the emoluments of the other two (1998 - two) individuals are as follows:
1999 1998
$'000 $'000
Salaries 1,980 1,195
Performance-related bonuses - 1,550
Contribution to defined contribution scheme 89 50
------ ------
2,069 2,795
====== ======
The emoluments of the other two highest-paid individuals fell within the following bands:
1999 1998
Number Number
of Employees of Employees
Up to $1,000,000 1 -
$1,000,001 - $1,500,000 1 1
$1,500,001 - $2,000,000 - 1
===== =====
(5) EXCEPTIONAL ITEMS
Exceptional items of the Group comprise:
1999 1998
$'000 $'000
Provision for reduction in market value of investment
properties (see Note 10) 8,425 14,308
Loss on disposal of investment property
(see Note 10) 3,880 -
Provision for contract retention receivable (a) 6,844 -
Provision for foreseeable loss of
a construction contract (b) 50,062 -
------ ------
69,211 14,308
====== ======
(a) In the normal course of business, contract retentions are generally refundable when the maintenance certificate is issued upon completion of the contract. Due to unforeseen circumstances in the current year, the recoverability of a retention on a private sector contract became uncertain and a provision for the relevant amount was made in the financial statements.
(b) The amount represents a provision for the anticipated loss on a construction contract that incurred substantial cost overruns as a result of various unforeseen difficulties and disruptions.
(6) TAXATION
(a) Taxation in the consolidated profit and loss account represents:
1999 1998
$'000 $'000
Company and subsidiaries
Provision for Hong Kong profits tax in respect of the
estimated assessable profit for the year at 16%
(1998 - 16.5%) 525 8,823
Special rebate by the Government of Hong Kong Special
Administrative Region ("HKSAR") (747) -
Under-provision of prior year profits tax 1,039 -
Reversal of deferred taxation (6,823) (2,504)
------- -------
(6,006) 6,319
Associated companies 1,122 91
------- -------
(4,884) 6,410
======= =======
On 3rd March, 1999, the Government of HKSAR announced that there would be a special profits tax rebate of 10 per cent on the profits tax charged and paid for the year of assessment 1997/1998. In this connection, the amount of tax rebate received from the Government of HKSAR, which amounted to $746,609, has been recognized in the profit and loss account of the current year.
(b) Movement in deferred taxation comprises:
1999 1998
$'000 $'000
Balance, beginning of year 15,382 17,886
Change of tax rate - (190)
Reversal of net timing differences (6,823) (2,314)
------- -------
Balance, end of year (Note 17) 8,559 15,382
======= =======
The change of Hong Kong profits tax rate from 16.5% to 16% became effective starting from the year of assessment 1998/1999.
(c) Deferred taxation as at year end arose from:
1999 1998
$'000 $'000
Accelerated depreciation allowances 8,625 6,655
Timing differences on profit recognition in respect of
construction contracts not yet completed - 7,887
Tax losses (658) -
Others 592 840
------- -------
8,559 15,382
======= =======
Starting from the year of assessment 1997/1998, the Inland Revenue Department adopted the percentage of completion basis in assessing the tax liability on construction contracts of the Group which commenced in that year. The effect of this change in taxation basis has been reflected in the current year results as some contracts, which commenced in the prior year, started to recognise profit in the current year.
There was no other material unprovided deferred taxation as at 31st March, 1999.
(7) (LOSS) PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The consolidated loss attributable to shareholders includes a profit of approximately $85,272,000 (1998 - $6,959,000) dealt with in the financial statements of the Company.
(8) (LOSS) EARNINGS PER SHARE AND DILUTED (LOSS) EARNINGS PER SHARE
(Loss) Earnings per share and diluted (loss) earnings per share have been calculated based on the audited consolidated loss attributable to shareholders for the year of $44,083,000 (1998 - profit of $15,229,000) and the weighted average number of 936,977,440 shares (1998 - 787,104,179 shares) in issue during the year.
(9) FIXED ASSETS
(a) Movements in fixed assets of the Group during the year were as follows:
1999 1998
--------------------------------------------------------------------------------- -------
Furniture,
Leasehold Properties fixtures and
Land and improve- under Plant and office Motor Motor
buildings ments construction machinery equipment vehicles launch Total Total
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Cost
Balance, beginning
of year 65,256 4,722 5,320 90,657 21,934 17,433 1,685 207,007 152,286
Additions 2,353 - 10,190 31,791 4,605 7,603 - 56,542 58,448
Disposals - - - (3,983) (795) (3,587) - (8,365) (3,727)
------ ----- ------ ------- ------ ------ ----- ------- -------
Balance, end of year 67,609 4,722 15,510 118,465 25,744 21,449 1,685 255,184 207,007
------ ----- ------ ------- ------ ------ ----- ------- -------
Accumulated
depreciation
Balance, beginning
of year 4,970 4,722 - 23,506 15,040 13,566 998 62,802 52,651
Charge for the year 1,332 - - 8,976 3,325 2,811 168 16,612 13,258
Disposals - - - (1,445) (494) (3,379) - (5,318) (3,107)
------ ----- ------ ------- ------ ------ ----- ------- -------
Balance, end of year 6,302 4,722 - 31,037 17,871 12,998 1,166 74,096 62,802
------ ----- ------ ------- ------ ------ ----- ------- -------
Net book value
Balance, end of year 61,307 - 15,510 87,428 7,873 8,451 519 181,088 144,205
====== ===== ====== ======= ====== ====== ===== ======= =======
Balance, beginning
of year 60,286 - 5,320 67,151 6,894 3,867 687 144,205 99,635
====== ===== ====== ======= ====== ====== ===== ======= =======
(b) The Group's land and buildings are held in Hong Kong under medium-term leases. As at 31st March, 1999, the land, with a net book value of approximately $34,152,000 (1998 - $34,878,000) included in the above analysis, is held under a crown lease in Hong Kong which extends to the year 2047.
(c) The properties under construction mainly represent the costs incurred for constructing the office building and staff quarters near the semi-precast plant in Shenzhen, mainland China.
(d) Fixed assets under hire purchase contracts of the Group comprise:
1999 1998
$'000 $'000
Plant and machinery 35,690 32,034
Furniture, fixtures and office equipment 93 242
Motor vehicles 6,336 3,720
------- -------
Total 42,119 35,996
======= =======
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