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Hopson Development Holdings Limited

Notes to the Financial Statement
31st December, 1998
(Amounts expressed in Hong Kong dollars unless otherwise stated)

Note: [1] [2] [3] [4] [5] [6] [7] [8] [9]

1. GROUP REORGANISATION

The Company was incorporated in Bermuda on 24th July, 1997 as an exempted company under the Companies Act 1981 of Bermuda. Pursuant to a group reorganisation scheme in connection with the listing of the Company's shares on The Stock Exchange of Hong Kong Limited (the "Stock Exchange"), the Company became the ultimate holding company of the other companies comprising the Group on 27th May, 1998.

The comparative figures in the consolidated balance sheet, profit and loss account and cash flow statement are presented as proforma figures of the Group which have been prepared on a combined basis as if the current group structure had been in existence throughout the year ended 31st December, 1997.


2. PRINCIPAL ACCOUNTING POLICIES

The financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong, the disclosure requirements of the Companies Ordinance and The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. Principal accounting policies are summarised below:

a. Basis of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. The consolidated profit and loss account only includes results of the subsidiaries acquired or disposed of during the year from or to their effective dates of acquisition or since their respective dates of incorporation or disposal, whichever is applicable. All significant intra-group transactions and balances have been eliminated on consolidation.

Goodwill arising on consolidation represents the excess of cost of investment over the fair value of the net assets of subsidiaries at the dates of acquisition. Goodwill is eliminated against reserves in the year of acquisition. Upon disposal of interests in subsidiaries, the underlying goodwill previously eliminated is reversed as investment cost in determining the gain or loss on disposals.

The reserve on acquisition represents the excess of the fair value of the net assets of subsidiaries at the dates of acquisition over the consideration paid and is included in capital reserve.

b. Co-operative joint ventures in the PRC

Co-operative joint ventures are Sino-foreign joint ventures in respect of which the partners' profit sharing ratios and share of net assets upon the expiration of the joint venture periods may not be in proportion to their equity ratios but are as defined in the respective joint venture contracts.

Interest in co-operative joint ventures in the People's Republic of China (the "PRC") are accounted for as if they are subsidiaries of the Company by virtue of the fact that the Group has control over the boards of directors of the joint ventures and/or undertakes the rights and obligations in terms of the business operations.

c. Subsidiaries

A company is a subsidiary company if the Company holds, directly or indirectly, more than 50% of the issued voting capital as a long-term investment.

In the Company's financial statements, investments in subsidiaries are 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 to the extent of dividends received and receivable.

d. Associated companies

A company is an associated company if not less than 20% nor more than 50% of the issued voting capital is held directly or indirectly as a long-term investment and significant influence is exercised over its management.

In the consolidated financial statements, investment in associated company is stated at the Group's share of net assets of the associated company at the time of acquisition, plus the Group's share of post acquisition profit/loss and reserves of the associated company. In the Company'sfinancial statements, investment in associated company is stated at cost less provision for permanent diminution in value where considered necessary by the directors, while income from associated company is recorded to the extent of dividends received and receivable.

e. Fixed assets and depreciation

Fixed assets 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. Expenditures incurred after the fixed assets have been put into operation, such as repairs and maintenance and overhaul costs, are normally charged to the profit and loss account in the period in which they are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of the fixed asset, the expenditures are capitalised as additional costs of the fixed asset.

Depreciation is calculated on the straight-line basis at annual rates estimated to write off the cost of each asset over its expected useful life. The annual rates are as follows:

                                                    Over the remaining
Leasehold land                                     period of the lease
Buildings                                                         2.5%
Leasehold improvement                                              20%
Furniture, fixtures and office equipment                           20%
Motor vehicles                                                     30%

Gain or loss on disposal of fixed assets is recognised in the profit and loss account based on the net disposal proceeds less the then carrying amount of the assets, with previously recognised revaluation surplus transferred from fixed assets revaluation reserve to retained profit.

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 by qualified independent 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 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 and 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. Properties under development

Properties under development for sale, the pre-sale of which has not commenced, are included in current assets at the lower of cost and net realisable value. Properties under development for sale, the pre-sale of which has commenced, are included in current assets at cost plus attributable profits less sale instalments received and receivable and any foreseeable losses.

Properties under development for long-term investment are stated at the lower of cost less provision for any permanent diminution in value.

Cost of properties under development comprises land cost, fees for land use rights and development costs including interest charges and other direct costs attributable to such properties. Net realisable value is based on estimated selling prices in the ordinary course of business as determined by management with reference to the prevailing market conditions, less further costs expected to be incurred to completion and selling expenses.

No depreciation is provided on properties under development.

h. Completed properties for sale

Completed properties for sale are stated at the lower of cost and net realisable value. Net realisable value is based on estimated selling prices in the ordinary course of business as determined by management with reference to the prevailing market conditions.

i. Land premium payable

Land premium payable is accrued based on land costs for properties under development in accordance with signed land grant contracts.

j. Foreign currency

Foreign currency transactions are translated into Hong Kong dollars at exchange rates in effect at the time of the transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet dates are translated into Hong Kong dollars at rates of exchange in effect at the balance sheet dates. Exchange differences are dealt with in the result of operations.

The financial statements of overseas subsidiaries are translated into Hong Kong dollars at the rates of exchange ruling at the balance sheet dates. Exchange differences arising on consolidation are taken directly to the exchange translation reserve.

k. Turnover and revenue recognition

Turnover comprised (1) pre-sale of properties under development for sale, which is recognised over the entire period of construction in respect of properties under development for sale, the pre-sale activities and construction work of which has progressed to a stage when the ultimate realisation of profit can be reasonably determined. Business taxes are levied at 5% of gross turnover and the turnover figure shown on the consolidated profit and loss account is presented net of business taxes. The total estimated profit is apportioned over the entire period of construction to reflect the progress of the development. On this basis, profit recognised on the pre-sold portion of the properties is calculated by reference to the proportion of construction costs incurred at the end of the period to the estimated total construction costs on completion with due allowance for contingencies. The profit so recognised is restricted to the amount of instalments received; (2) sale of completed properties held for sale which is recognised upon completion of sale and purchase agreement. The profit recognised is restricted to the amount of instalments received; and (3) rental income which is recognised when rental is received or receivable.

Revenue is recognised when the outcome of a transaction can be measured reliably and when it is probable that the economic benefits associated with the transaction will flow to the Group. Revenue comprises the aforementioned items classified as turnover; together with property design fee income which is recognised when services are provided and interest income which is recognised on a time proportion basis on the principal outstanding and at the rate applicable.

When purchasers fail to pay the balance of the purchase price on completion and the Group exercises its right to resell the property, sales deposits received in advance of completion are forfeited and credited to operating profits or withheld until re-sale of the property; and profits recognised up to the time of forfeiture are reversed.

l. 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.

m. Borrowing costs

Borrowing costs attributable to finance the development of properties under development is capitalised until the development of the relevant properties is completed and is included in the carrying value of these assets.

n. 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.

o. Related parties

Related parties are those parties which have the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.


3. RELATED PARTY TRANSACTIONS

a. The Group had the following material transactions with related parties during the year. The directors considered that these transactions were conducted in the normal course of business and under normal commercial terms:

Nature of transactions               Name of parties     Consolidated

                                                           1998  1997
                                                          $'000 $'000

Reimbursement of staff costs, rent   Guandong Zhujiang        -   583
  and other administrative expenses    Investment Company

Agency expenses                      Guandong Zhujiang        - 5,089
                                       Properties Company
 
Reimbursement of interest expense    Guandong Zhujiang    2,057 1,297
  on bank loans                        Investment Company

Property design expenses             Guandong Zhujiang    4,616     -
                                       Property Design
                                       Company

Office rental expenses               Tonking International  788   660
                                       Limited

                                     Guandong Zhujiang      517     -
                                       Investment Company
  
Property design fee income           Guandong Zhujiang    2,261     -
                                       Investment Company

b. Approximately $168,000,000 (1997 - $39,709,000) of the investment properties and properties under development for long-term investment were pledged as securities for bank loans granted to two related companies, Guangdong Zhujiang Investment Company and Guangzhou Tianhe Science and Technology Enterprises Development Company Limited (Note 13 and 14). The pledges were released subsequent to 31st December, 1998.

c. The balances with related parties are unsecured, non-interest bearing and without pre-determined repayment terms.


4. TURNOVER AND REVENUE

	
                                                 1998           1997
                                                $'000          $'000

Turnover                                    1,303,332        482,465

Property design fee income                      2,261              -

Interest income                                19,183          1,987
____________________________________________________________________
Total revenue                               1,324,776        484,452
                                            =========        =======

Approximately 30% (1997 - less than 30%) of the turnover for the year was made to the Group's five largest customers. Sales to the largest customer amounted to 14% of the Group's turnover for the year.


5. PROFIT BEFORE TAXATION

The consolidated profit before taxation was determined after charging or crediting the following items:

                                                       1998     1997
                                                      $'000    $'000

After charging:

Depreciation                                          1,688      890

Directors' emoluments
  -fees                                                  90        -
  -other emoluments                                   7,768    3,900

Exchange loss, net                                    1,341      167

Interest expense

  -bank overdrafts and loans wholly
     repayable within five years                      4,922    2,929

  -other loans wholly repayable within five years         -      131

Less: Amount capitalised in properties
   under development                                      -   (1,297)

                                                      4,922    1,763

Auditors' remuneration                                  878      350

Operating lease rentals in respect
   of land and buildings                              1,037    1,432
                                                     ======    =====
After crediting:

Interest income
  -bank deposits                                     19,183      652
  -other loans                                            -    1,335
                                                     ======    =====


6. DIRECTORS' EMOLUMENTS

Details of directors' emoluments were:

                                                    1998       1997
                                                   $'000      $'000
 

Fees for executive directors                           -          -
Fees for non-executive directors                      90          -
Other emoluments for executive directors
  -Basic salaries and allowances                   5,732      3,900
  -Discretionary bonus                             2,036          -
Other emoluments for non-executive directors           -          -
___________________________________________________________________ 

                                                   7,858      3,900
                                                   =====      =====

No directors waived any emoluments during the year.

Analysis of directors' emoluments by number of directors and emoluments ranges was as follows:

                                               Number of directors
                                                 1998       1997

Executive directors
  Nil to $1,000,000                                 4          4
  $1,000,001 to $2,000,000                          -          2
  $3,000,001 to $4,000,000                          2          -

Non-executive directors
  Nil to $1,000,000                                 3          -
________________________________________________________________  
                                                    9          6
                                                  ===        ===


7. SENIOR EXECUTIVES' EMOLUMENTS

Details of remuneration of the five highest-paid individuals (including executive directors and employees) were as follows:

                                                    1998       1997
                                                   $'000      $'000

Basic salaries and allowances                      5,881      4,384
Discretionary bonus                                1,988          -
___________________________________________________________________
                                                   7,869      4,384
                                                   =====      =====

Number of directors included                           4          3
Number of employees included                           1          2
___________________________________________________________________
                                                       5          5
                                                   =====      =====

During the year, no emoluments were paid to the five highest-paid individuals (including directors and other employees) as inducement to join or upon joining the Group or as compensation for loss of office.

Analysis of emoluments paid to the five highest-paid individuals (including executive directors and employees) by number of individuals and emolument ranges was as follows:

                                               Number of executives
                                               1998            1997
  
Nil to $1,000,000                                 3               3
$1,000,001 to $2,000,000                          -               2
$3,000,001 to $4,000,000                          2               -
___________________________________________________________________   
                                                  5               5
                                                ===             ===


8. TAXATION

Taxation in the consolidated profit and loss account comprised:

                                                   1998           1997
                                                  $'000          $'000

Current taxation
  -Hong Kong profits tax                          6,400            365
  -PRC enterprise income tax                     11,537          1,548

Write-back of overprovision of
  -Current PRC enterprise income tax             (1,177)             -

Deferred taxation
  -PRC enterprise income tax                    124,826         63,378
  -Land appreciation tax                         16,552              -
______________________________________________________________________
                                                158,138         65,291
                                                =======         ======

a. Enterprise income tax

The Company is exempted from taxation in Bermuda until 28th March, 2016. Hong Kong profits tax was provided at 16% (1997 - 16.5%) on the assessable profits arising in or derived from Hong Kong. PRC enterprise income tax represents tax charges on the assessable profits of subsidiaries operating in the PRC at 33% (1997 - 33%).

Deferred taxation represents the tax effect of timing differences arising from the use of different bases of recognition of revenues and expenses for financial reporting and tax purposes. There was no material unprovided deferred taxation during the year.

b. Land appreciation tax

Land appreciation tax is levied at progressive rates ranging from 30% to 60% on the balance of the proceeds received on transfer of real properties after deducting certain deductible items including consideration paid for acquisition of land use rights, land development costs incurred, construction costs spent for new buildings and facilities on the land or the assessed value of old buildings and facilities on the land and taxes paid in relation to the transfer of real properties.


9. PROFIT ATTRIBUTABLE TO SHAREHOLDERS

The consolidated profit attributable to shareholders included a profit of $15,074,000 (1997 - Loss $44,000) dealt with in the financial statements of the Company.


Source: Hopson Development Holdings Limited
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