Principal Accounting Policies

Basis of preparation

The Financial Statements have been prepared under the historical cost convention, as modified by the revaluation of certain non-current assets, and in conformity with International Accounting Standards.

Basis of consolidation

(a) The consolidated profit and loss account and balance sheet include the financial statements of the Company, its subsidiary undertakings and, on the basis set out in (b) below, its associates. Subsidiary undertakings are companies over which the Company exercises dominant influence and in which it has an attributable interest of 20% or more of the ordinary share capital held for the long term. The results of subsidiary undertakings and associates are included or excluded from their effective dates of acquisition or disposal respectively.

The cost of and related income arising from shares held in the Company by a wholly-owned subsidiary undertaking and an associate is eliminated from Shareholders' funds and profit respectively.

(b) Associates are companies, not being subsidiary undertakings, over which the Group exercises significant influence and in which it has an attributable interest of 20% or more of the ordinary share capital held for the long term. Associates are included on the equity basis of accounting. The principal associates are Hongkong Land, which revalues its property portfolio annually, Jardine Matheson and Cycle & Carriage.

The profit or loss on disposal of investment properties held by associates is recognised by reference to their carrying value.

(c) Outside interests represent the proportion of the results and net assets of subsidiary undertakings and their associates not attributable to the Group.

(d) The results of companies other than subsidiary undertakings and associates are included only to the extent of dividends received.

Foreign currencies

Assets and liabilities of subsidiary undertakings and associates, together with all other monetary assets and liabilities expressed in foreign currencies are translated into United States Dollars at the rates of exchange ruling at the year end. Results expressed in foreign currencies are translated into United States dollars at the average rates of exchange ruling during the year.

Net exchange differences arising from the translation of the financial statements of subsidiary undertakings and associates expressed in foreign currencies, and exchange differences on transactions which hedge these investments are taken directly to exchange reserves. On the disposal of these investments, such exchange differences are recognised in the consolidated profit and loss account as part of the profit or loss on disposal. All other exchange differences are dealt with in the consolidated profit and loss account.

Goodwill

Goodwill represents the difference between the cost of an acquisition and the fair value of the Group's share of the net assets of the acquired subsidiary undertaking or associate at the date of acquisition. Goodwill on acquisitions occurring on or after 1st January 1995 is reported in the balance sheet as an intangible asset or included within associates or, if negative goodwill within non-current liabilities, and is amortised using the straight line method over its estimated useful life which is generally between 5 and 20 years. Goodwill on acquisitions which occurred prior to 1st January 1995 was taken directly to reserves.

The profit or loss on disposal of subsidiary undertakings and associates is calculated by reference to the net assets at the date of disposal including the attributable amount of goodwill which remains unamortised but does not include any attributable goodwill previously eliminated against reserves.

Investments

(a) Other fixed asset investments are shown at cost less amounts provided. As the investments are held for the long term, provision is only made where, in the opinion of the Directors, there is a permanent diminution in value.

(b) Liquid investments which are readily convertible to known amounts of cash are included in bank balances and other liquid funds and are stated at market value. Increases or decreases in market value are dealt with in the consolidated profit and loss account.

Tangible fixed assets and depreciation

Land and buildings are stated at valuation. Independent valuations are performed every three years on an open market for existing use basis. In the intervening years the Directors review the carrying value of land and buildings and adjustment is made where there has been a material change. Revaluation surpluses and deficits are dealt with in capital reserves except for movements on individual properties below depreciated cost which are dealt with in the profit and loss account. Other tangible fixed assets are stated at cost less amounts provided for depreciation.

Depreciation is calculated on the straight line basis at annual rates estimated to write off the cost or valuation of each asset over its estimated life.

The principal rates generally in use are as follows:

No depreciation is provided on freehold land. In respect of hotel properties held on leases with more than 20 years to run, it is the Group's practice to maintain the properties in a continual state of sound repair, such that their value is not diminished by the passage of time. Accordingly, the Directors consider that the lives of these properties are so long and their residual values, based on prices prevailing at the time of valuation, are so high that their depreciation is insignificant. The cost of maintenance and repairs of the hotel properties is charged to the profit and loss account as incurred and the cost of significant improvements is capitalised

The profit or loss on disposal of tangible fixed assets is recognised by reference to their carrying value.

Stocks

Stocks which principally comprise goods held for resale are stated at the lower of cost and net realisable value.

Deferred taxation

Deferred taxation is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values.

Provision for deferred taxation is made on the revaluation of certain non-current assets and, in relation to an acquisition, on the difference between the fair values of the net assets acquired and their tax base. Provision for withholding tax which could arise on the remittance of retained earnings relating to subsidiary undertakings is only made where there is a current intention to remit such earnings. Deferred tax assets relating to carry forward of unused tax losses are recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised.

This is a change in accounting policy as a result of the implementation of the revised International Accounting Standard 12 - Income Taxes. In previous years deferred taxation was provided in respect of timing differences between profit as computed for taxation purposes and profit as stated in the financial statements to the extent that a liability or asset is expected to be payable or receivable in the foreseeable future. The comparative figures for 1997 have been restated to reflect the change in policy. The effect of this change has been to decrease the profit after taxation and outside interests for the year ended 31st December 1997 by US$4.5 million and the Shareholders' funds as at that date by US$29.4 million.

Turnover

Turnover consists of the gross value of goods sold and services rendered.

Operating leases

Operating lease rentals are charged to the consolidated profit and loss account as incurred.

Pension costs

The Group operates a number of defined benefit and defined contribution plans, the assets of which are held in trustee administered funds.

The pension costs relating to the defined benefit plans are assessed in accordance with the advice of independent qualified actuaries using the attained age normal method. Surpluses or deficits arising from past service costs, experience adjustments and the effects of changes in actuarial assumptions are amortised as an even percentage of pensionable payroll over the expected remaining working lives of the participating employees.

The Group's total contributions relating to the defined contribution plans are charged to the consolidated profit and loss account in the year to which they relate.

Derivative financial instruments

The Group only enters into derivative financial instruments in order to hedge underlying exposures. Where these relate to interest rate movements, interest payable and receivable under such instruments is accrued and recorded as an adjustment to the interest income or expense related to the underlying exposure. Premiums paid or received on options are included in debtors or creditors and amortised to the profit and loss account over the life of the agreements. Where derivative financial instruments are used to hedge future commitments or transactions in foreign currencies, the unrealised exchange differences are deferred against the matching losses and gains on the specific transactions.

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