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Swire Pacific Limited

PRINCIPAL ACCOUNTING POLICIES

(1)

Basis of consolidation

The consolidated accounts of the Group incorporate the accounts of Swire Pacific Limited and all its subsidiary companies made up to 31st December.

The results of subsidiary companies are included in the consolidated profit and loss account and minority interests therein are deducted from the consolidated profit after taxation. Results attributable to subsidiary company interests acquired or disposed of during the year are included from the date of acquisition or to the date of disposal as applicable.

Goodwill arising on consolidation, representing the excess of cost of acquisition of subsidiary and associated companies over the Group's share of the fair value ascribed to the separable net assets at the date of acquisition, is eliminated against revenue reserves in the year in which it arises. On disposal of a previously acquired business, subsidiary or associated company, goodwill previously eliminated against reserves is written back and the profit or loss is adjusted accordingly.

Minority interests in the balance sheet comprise the outside shareholders' proportion of the net assets of subsidiary companies.

(2)

Associated companies

Associated companies are those companies, not being subsidiary companies, in which the Group has a substantial long-term interest in the equity voting rights or is a partner in a joint venture or consortium and over which the Group is in a position to exercise significant influence.

The consolidated profit and loss account includes the Group's share of results of associated companies as reported in their audited accounts which are made up to dates between 30th September and 31st December. In the Company's balance sheet investments in associated companies are stated at cost less provisions for permanent diminution in value. In the consolidated balance sheet, the investment in associated companies represents the Group's share of net assets.

(3)

Foreign currencies

The rates of exchange at which foreign currencies are translated into Hong Kong dollars for accounting purposes are as follows:

	(i)	In respect of foreign currency denominated assets and liabilities with the exception of the Perpetual Capital Securities as set out in (iv) below, the balance sheets of subsidiary and associated companies and forward exchange contracts which do not match commitments, the rates ruling at the balance sheet date; and
	(ii)	In respect of foreign currency transactions entered into during the year, the market rates or forward exchange contract rates ruling at the relevant transaction dates.

Exchange differences arising on the translation of foreign currencies into Hong Kong dollars are reflected in the profit and loss account with the following exceptions:

	(iii)	Unrealised differences on net investments in foreign subsidiary and associated companies (including intra-Group balances of an equity nature) and related long-term liabilities are taken directly to reserves.
	(iv)	The Group's Perpetual Capital Securities, which were issued by a wholly-owned subsidiary (the 'Issuer'), are denominated in US dollars and have no scheduled maturity. They are, however, redeemable at the Company's or the Issuer's option either (i) on or after 30th October 2006 or (ii) at any time upon amendment or imposition of certain taxes and, in any case, become due in the event of the Company's or the Issuer's winding-up. Since it is not the present intention of the Group that the Perpetual Capital Securities will be redeemed, they are valued at the historical exchange rate.
	(v)	Borrowings and leasing obligations relating to aircraft and related equipment in Cathay Pacific are so arranged that repayments are covered by the anticipated future operating cash flows in the related currencies in order to reduce exposure to exchange rate fluctuations. Any unrealised exchange differences on such borrowings and obligations are deferred and carried forward in Cathay Pacific's balance sheet as deferred items. These differences are recognised in Cathay Pacific's profit and loss account when realised as repayments of the loan or leasing obligation fall due, and are effectively set off against the matching change in value of the future foreign currency earnings which are received and used to make those repayments. In the opinion of the directors, this policy fairly reflects the effects of long-term financing arrangements in foreign currencies concluded in reasonable anticipation of the availability when required of surplus operating cash flows in the appropriate foreign currencies. The matching of foreign exchange differences in this manner is a key foreign exchange risk management tool for Cathay Pacific's airline operations, which involve multi-currency cash inflows and outflows. The appropriateness of continuing to defer these exchange differences is assessed on an on-going basis, taking into consideration the latest operating cash flow projections of each currency in which the long-term liabilities are committed. Moreover, the directors consider that the immediate recognition of all such exchange differences in the Group profit and loss account could materially distort a particular year's results. The accounting policy does not comply with the requirements of HK SSAP11 which stipulates the immediate recognition of all such exchange differences in the profit and loss account. The effect on the Group accounts of this departure from HK SSAP11 is set out in notes 15 and 21 to the accounts.

(4)

Valuation of investment properties

Investment properties, whether complete or in the course of development, are valued at intervals of not more than three years by independent valuers; in each of the intervening years valuations are undertaken by professionally qualified executives of the Group. The valuations are on an open market basis, related to individual properties, and separate values are not attributed to land and buildings. The valuations are incorporated in the annual accounts. Increases in valuations are credited to the property valuation reserve; decreases are first set off against increases on earlier valuations on a portfolio basis and thereafter are debited to operating profit. Upon sale of a revalued investment property the revaluation surplus is transferred to operating profit. Investment properties held on leases with unexpired periods of 20 years or less are depreciated over the remaining portion of the leases.

(5)

Leased assets

Fixed assets held by Cathay Pacific under lease agreements that give rights equivalent to ownership are treated as if they had been purchased outright at fair market value, and the corresponding liability to the lessor, net of interest charges, is included in Cathay Pacific's balance sheet. Such leased assets are depreciated on the same basis as owned assets as set out in principal accounting policy no. 6.

Amounts payable in respect of finance leases are apportioned between interest charges and reductions of lease obligations in Cathay Pacific's accounts based upon the interest rates implicit in the relevant leases.

Payments made and due under operating lease agreements are aggregated and charged to operating profit on a straight line basis over the periods of the respective leases.

(6)

Fixed assets and depreciation

Fixed assets, other than leased assets as set out in principal accounting policy no. 5 and investment properties, are carried at cost less depreciation. Changes in the value of investment properties reflecting market conditions, depreciation and other factors are incorporated in the annual accounts on the basis set out in principal accounting policy no. 4. With the exception of land included in investment properties and freehold land, all other leasehold land is depreciated over the remaining period of the relevant lease. Other fixed assets are depreciated at rates sufficient to write off their original cost to estimated or guaranteed residual values over their anticipated useful lives in the following manner:

	Other properties	2% to 5% per annum
	Plant and machinery	8% to 50% per annum
	Vessels	5% to 7 1/2% per annum
	Aircraft and related equipment	5% per annum

The expected useful lives and residual values of all fixed assets are regularly reviewed to take into account operational experience and changing circumstances.

(7)

Long-term investments

Long-term investments are stated at cost less provision where there has been a permanent diminution in the underlying value of the investment.

(8)

Deferred expenditure

Deferred expenditure is amortised over periods of up to ten years.

(9)

Stocks and work in progress

Stocks are stated at the lower of cost and net realisable value. Cost represents average unit cost and net realisable value is determined on the basis of anticipated sales proceeds less estimated selling expenses. Work in progress comprises direct material and labour costs and an appropriate proportion of overhead expenses less provisions for foreseeable losses.

(10)

Property under development for sale

Property under development for sale is included under current assets and comprises land at cost, construction costs, interest charges and profit taken to date, less sales installments received and receivable and provisions for possible losses.

When a development property in Hong Kong is sold in advance of completion, profit is recognised over the course of the development and is computed each year as a proportion of the total estimated profit to completion; the proportion used being the lower of the proportion of construction costs incurred at the balance sheet date to estimated total construction costs and the proportion of sales proceeds received and receivable at the balance sheet date to total sales proceeds. Sales proceeds due on completion are accounted for as receivables if the occupation permit has been issued and the development is substantially completed.

Where purchasers fail to pay the balance of the purchase price on completion and the company exercises its entitlement to resell the property, sales deposits received in advance of completion which are forfeited are credited to operating profit; any profits recognised up to the date of completion are written back.

(11)

Net liquid funds and cash and cash equivalents

Net liquid funds comprise cash at bank and in hand less bank and other short-term borrowings.

For the purposes of the cash flow statement, cash and cash equivalents comprise cash in hand, amounts repayable on demand from banks and financial institutions and short-term liquid investments which were within three months of maturity when acquired, less advances from banks and financial institutions repayable within three months from the date of the advance.

(12)

Borrowing costs

Interest charges incurred in financing property developments up to the dates of completion are included in the cost of those assets.

(13)

Deferred taxation

Provision is made for deferred taxation at current rates of taxation in respect of material timing differences except where it is considered that no liability will arise in the foreseeable future.

(14)

Revenue recognition

Sales are recognised as revenue upon delivery of goods and provision of services. Revenue for property under development for sale is recognised as set out in principal accounting policy no. 10.

(15)

Retirement benefits

Swire Pacific Limited and its subsidiary and associated companies provide retirement benefit schemes for their employees, the majority of which are of a defined benefit nature and are all held in separate trustee administered funds. With only a few minor exceptions, employees are not required to contribute to the cost of these Schemes.

All Schemes are actuarially valued as required on a regular basis using a prospective actuarial valuation method. The Group profit and loss account is charged each year with actuarially determined contributions based on such valuations.

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