The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
Impairment of goodwill
Determining whether goodwill (note 17) is impaired requires an estimation of the value in use of the cash-
generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.
Fair value of financial instruments
As described in note 37 to the consolidated financial statements, the valuation techniques applied by the external valuers for financial instruments not quoted in an active market have been agreed with the directors. The directors use their judgement to determine whether valuation techniques applied are appropriate to the circumstances of the Group.
Allowance for bad and doubtful debts
The provisioning policy for bad and doubtful debts of the Group is based on the evaluation by management of the collectability of the trade and other receivables (note 20). A considerable amount of judgment is required in assessing the ultimate realisation of these receivables, including assessing the current creditworthiness and the past collection history of each customer. If the financial conditions of these customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional allowance will be required.
Allowance for inventories
The Company’s management reviews the condition of inventories, as stated in note 19 to the consolidated financial statements, at each balance sheet date, and makes allowance for inventories that are identified as obsolete, slow-moving or no longer recoverable or suitable for use in production. The Group carries out the inventory review on a product-by-product basis and makes allowances by reference to the latest market prices and current market conditions.
Impairment of long lived assets
If circumstances indicate that the net book value of a long lived asset may not be recoverable, the asset may be considered “impaired” and an impairment loss may be recognised in accordance with HKAS 36 “Impairment of Assets”. The carrying amounts of long lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling prices because quoted market prices for the Group’s assets are not readily available. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which requires significant estimation relating to the level of sales volume, selling prices and the amount of operating costs. The Group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sales volume, selling prices and the amount of operating costs.
for the year ended 31 December 2010
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
5.
CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION
UNCERTAINTY
(Continued)Key sources of estimation uncertainty
(Continued)Depreciation
Property, plant and equipment is depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. The Group reviews the estimated useful lives of the assets regularly in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group’s historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
Impairment of investments
The Company assesses annually and at each interim reporting date if an investment in an associate has suffered any impairment in accordance with HKAS 36. Details of the approach are stated in the respective accounting policies. The assessment requires an estimation of future cash flows, including expected dividends, from the assets and the selection of appropriate discount rates. Future changes in financial performance and position of these entities would affect the estimation of impairment loss and cause adjustments to their carrying amounts.
6. TURNOVER/REVENUE
Turnover/revenue represents the consideration received and receivable from sales, net of discounts, returns and related sales taxes, of automobiles and automobile parts and components.
The Group’s customer base is diversified and no customer with whom the transactions has exceeded 10% of the Group’s revenue.
7. SEGMENTS INFORMATION
The Group is principally engaged in manufacturing and trading of automobiles and automobile parts and related automobile components which account for the total turnover and trading profits of the Group for the current and prior years and no segment information has been presented in previous financial statements. After the acquisition of the automatic transmissions business (note 38) during the year ended 31 December 2009, the Group re- organised its management structure and business lines. As a result, the Group manages its businesses by business lines and starts to report segment information from the current year. In a manner consistent with the way in which information is reported internally to the Group’s most senior executive management for the purposes of resource allocation and performance assessment, the Group has presented the following two reportable segments.
for the year ended 31 December 2010
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENTS INFORMATION
(Continued)Information regarding the Group’s reportable segments is set out below. Comparative segment information has been restated to reflect the change in the Group’s management structure and business lines.