For the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations, eligible employees (including directors, supervisors, senior management and other key personnel of the Group) would be granted share appreciation rights, which can only be settled in cash (“cash-settled transactions”).
The cost of cash-settled transactions is measured initially at fair value at the grant date. The fair value is expensed over the period until vesting with recognition of a corresponding liability. The liability is measured at each balance sheet date up to and including the settlement date with changes in fair value recognised in the income statement.
(23) Fiduciary activities
Where the Group acts in a fi duciary capacity such as custodian or agent, assets arising thereon together with related undertakings to return such assets to customers are excluded from the balance sheet.
Notes to Financial Statements
31 December 2007 (In RMB millions, unless otherwise stated)
The Group grants entrusted loans on behalf of third-party lenders, which are recorded off-balance sheet. The Group, as an agent, grants such entrusted loans to borrowers under the direction of those third-party lenders who fund these loans. The Group has been contracted by those third-party lenders to manage the administration and collection of these loans on their behalf. Those third-party lenders determine both the underwriting criteria for and the terms of all entrusted loans including their purposes, amounts, interest rates, and repayment schedules. The Group charges a commission related to its activities in connection with entrusted loans which are recognised ratably over the period in which the service is provided. The risk of loss is borne by those third-party lenders.
(24) Financial guarantee contracts
The Group issues fi nancial guarantee contracts, including letters of credit, letters of guarantee and acceptance. These fi nancial guarantee contracts provide for specifi ed payments to be made to reimburse the holders for the losses they incur when a guaranteed party defaults under the original or modifi ed terms of a debt instrument, loan or other obligation.
The Group initially measures all fi nancial contracts at fair value, in other liabilities, being the premium received. This amount is recognised ratably over the period of the contract to fee and commission income. Subsequently, the liabilities are measured as the higher of the initial fair value less cumulative amortisation and the best estimate of expenditure required to settle any fi nancial obligation arising as a result of the guarantee.
Any increase in the liability relating to a fi nancial guarantee is taken to the income statement. The premium received is recognised in the income statement as fee and commission income and on a straight-line basis over the life of the guarantee.
(25) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outfl ow of resources embodying economic benefi ts will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
Where the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expenses relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash fl ows at a pre-tax rate that refl ects, where appropriate, the risks specifi c to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as an interest expense.
(26) Contingent liabilities
A contingent liability is a possible obligation that arises from past events and whose existence will only be confi rmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that an outfl ow of economic resources will be required or the amount of obligation cannot be measured reliably. Contingent liabilities are not recognised but are disclosed in the notes to the fi nancial statements. When a change in the probability of an outfl ow occurs so that outfl ow is probable, it will then be recognised as a provision.
Notes to Financial Statements
31 December 2007
(In RMB millions, unless otherwise stated)
(27) Dividends
Dividends are recognised as a liability and deducted from equity when they are approved by the Bank’s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Bank. Dividend for the year that is approved after the balance sheet date are disclosed as an event after the balance sheet date.
4. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES
In the process of applying the Group’s accounting policies, management has used its judgements and made assumptions of the effects of uncertain future events on the fi nancial statements. The most signifi cant use of judgements and key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a signifi cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fi nancial period, are described below.