| 2.2 | Basis of Preparation |
The consolidated financial statements have been prepared under the historical cost convention, except that the following assets are stated at their fair value set out below:
| • | Financial assets at fair value through other comprehensive income |
| • | Financial assets at fair value through profit and loss |
| (a) | Going Concern Assumption |
As of December 31, 2017, current liabilities of the Group exceeded current assets by approximately RMB165.9 billion (2016: approximately RMB260.4 billion). Given the current global economic conditions and taking into account of the Group’s expected capital expenditure in the foreseeable future, management has comprehensively considered the Group’s available sources of funds as follows:
| • | The Group’s continuous net cash inflows from operating activities; |
| • | Approximately RMB307.4 billion of revolving banking facilities and registered quota of corporate bonds, of which approximately RMB271.5 billion was unutilized as of December 31, 2017; and |
| • | Other available sources of financing from domestic banks and other financial institutions in view of the Group’s good credit history. |
In addition, the Group believes it has the ability to raise funds from short, medium and long-term perspectives and maintain reasonable financing costs through appropriate financing portfolio.
Based on the above considerations, the Board of Directors is of the opinion that the Group has sufficient funds to meet its working capital requirements and debt obligations. As a result, the consolidated financial statements of the Group for the year ended December 31, 2017 have been prepared on a going concern basis.
| (b) | Critical Accounting Estimates and Judgements |
The preparation of the consolidated financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Judgements made by management in the application of IFRSs that have significant effect on the financial statements and major sources of estimation uncertainty are discussed in Note 4.
| (c) | New Accounting Standards and Amendments |
| (i) | The IASB has issued a number of amendments to IFRSs that are first effective for the current accounting period of the Group. None of these impact on the accounting policies of the Group. However, additional disclosure has been included in Note 27(b) to satisfy the new disclosure requirements introduced by the amendments to IAS 7, Statement of cash flows: “Disclosure initiative”, which require entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. |
| (ii) | Up to the date of issue of these financial statements, the IASB issued certain amendments, new standards and interpretations which are not yet effective for the year ended December 31, 2017 and which have not been adopted in these financial statements except for IFRS 9 (2010), “Financial instruments” was early adopted by the Group on January 1, 2011. These include the following which may be relevant to the Group. |
| Effective for accounting periods beginning on or after |
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IFRS 9 (2014), “Financial instruments” |
January 1, 2018 | |||
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IFRS 15, “Revenue from contracts with customers” |
January 1, 2018 | |||
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Amendments to IFRS 2, Share- based payment “Classification and measurement of share-based payment transactions” |
January 1, 2018 | |||
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Amendments to IFRS 40, Investment property “Transfer of investment property” |
January 1, 2018 | |||
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IFRIC 22, “Foreign currency transaction and advance consideration” |
January 1, 2018 | |||
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Annual Improvements to IFRSs 2014-2016 Cycle |
January 1, 2018 | |||
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IFRS 16, “Leases” |
January 1, 2019 | |||
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IFRIC 23, “Uncertainty over income tax treatments” |
January 1, 2019 | |||
The Group is required to adopt IFRS 9 (2014) and IFRS 15 from January 1, 2018 and the Group is currently finalizing its assessment of the impact of these new standards will have on its consolidated financial statements upon adoption. In addition, it is in the process of making an assessment of what the impact of other amendments, new standards and interpretations is expected to be in the period of initial application. So far the Group has identified the following aspects of the new standards which may have impact on the consolidated financial statements. The actual impacts upon the initial adoption of the standards may differ as the assessment to date is based on the information currently available to the Group, and further impacts may be identified before the Group publishes its interim financial report for the six months ending June 30, 2018. The Group may also change its accounting policy elections, including the transition options, until the standards are initially applied in that financial report.
IFRS 15, “Revenue from contracts with customers”
IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. It replaces existing revenue recognition guidance, including IAS 18, “Revenue”, IAS 11, “Construction contracts” and IFRIC 13, “Customer Loyalty Programs”.
Under IFRS 15, an entity is required to identify the performance obligations in the contract, determine the transaction price of the contract and then allocate the transaction price to the performance obligations in the contract based on each performance obligation’s standalone price, and recognize revenue when the performance obligations are satisfied.
The Group has been assessing whether and how the new requirements will impact its accounting in different areas, including identification of the number and the nature of performance obligations for bundled sales transactions and sales incentive offers, determination of standalone price, price allocation method, contract modifications and cost capitalization. Based on the assessment completed to date, with the exception of the accounting for contract costs which is further explained below, the Group expects that the new requirements will not result in material adjustments on the opening balances at January 1, 2018 as the Group’s current accounting policy is generally consistent with the new requirements in material respects
Sales commission
IFRS 15 requires an entity to capitalize incremental costs of obtaining a contract with a customer – e.g. sales commissions, and amortize the capitalized costs on a systematic basis that is consistent with the pattern of transfer of the good or service to which the capitalized costs related.
This requirement will result in a change in the timing of expensing sales commission and similar costs incurred in obtaining contracts as under the Group’s current policy sales commissions are expensed when incurred. However, as allowed by IFRS 15, the Group will continue to expense the costs of obtaining contracts when incurred if the amortization period of those costs would be one year or less.
IFRS 15 allows for two transition methods, namely the full retrospective method and the cumulative effect transition method with the cumulative effect from initial application recognized as an adjustment to the opening balance of retained earnings at the date of initial application. The Group plans to elect to use the cumulative effect transition method for the adoption of IFRS 15 and will recognize the cumulative effect of initial application as an adjustment to the opening balance of equity at January 1, 2018. As allowed by IFRS 15, the Group plans to apply the new requirements only to contracts that are not completed before January 1, 2018.
Based on a preliminary assessment, upon the initial adoption of IFRS 15, this change in accounting policy will result in a recognition of contract asset of approximately RMB2 billion to RMB2.5 billion, with a corresponding after-tax increase to the opening balance of retained profits at January 1, 2018. The adoption will also result in additional disclosures around the nature and timing of the Group’s performance obligations, deferred revenue contract liabilities, deferred contract cost assets, as well as significant judgments and practical expedients used by the Group in applying the new revenue recognition model.
The Group has identified and is in the process of implementing changes to its systems and processes and internal control to meet the standard’s reporting and disclosure requirements.
IFRS 9 (2014), “Financial Instruments”
The Group has early adopted IFRS 9 (2010) in 2011 and will apply IFRS 9 (2014) on January 1, 2018. Compared with IFRS 9 (2010), IFRS 9 (2014) includes the new expected credit losses model for impairment of financial assets, the new general hedge accounting requirements and limited amendments to the classification and measurement of financial assets.
The new impairment model in IFRS 9 (2014) replaces the “incurred loss” model in IAS 39 with an “expected credit loss” model. Under the expected credit loss model, it will no longer be necessary for a loss event to occur before an impairment loss is recognized. Instead, an entity is required to recognize and measure either a 12-month expected credit loss or a lifetime expected credit loss, depending on the asset and the facts and circumstances. However, lifetime expected credit loss measurement always applies for trade receivables and contract assets without a significant financing component. The Group expects that the application of the expected credit loss model will result in earlier recognition of credit losses.
IFRS 9 (2014) is effective for annual periods beginning on or after January 1, 2018 on a retrospective basis. The Group plans to use the exemption from restating comparative information and will recognize any transition adjustments against the opening balance of equity at January 1, 2018. Based on a preliminary assessment, if the Group were to adopt the new impairment requirements at December 31, 2017, credit loss allowance at that date would increase by approximately RMB1 billion, compared with that recognized under IAS 39, with a corresponding after-tax decrease to the opening balance of retained profits at January 1, 2018.
The Group has identified and is in the process of implementing changes to its systems and processes and internal control to meet the standard’s reporting and disclosure requirements.
IFRS 16, “Leases”
As disclosed in Note 2.27, currently the Group classifies leases into finance leases and operating leases and accounts for the lease arrangements differently, depending on the classification of the lease. The Group enters into some leases as the lessor and others as the lessee.
IFRS 16 is not expected to impact significantly on the way that lessors account for their rights and obligations under a lease. However, once IFRS 16 is adopted, lessees will no longer distinguish between finance leases and operating leases. Instead, subject to practical expedients, lessees will account for all leases in a similar way to current finance lease accounting, i.e. at the commencement date of the lease the lessee will recognize and measure a lease liability at the present value of the minimum future lease payments and will recognize a corresponding “right-of-use” asset. After initial recognition of this asset and liability, the lessee will recognize interest expense accrued on the outstanding balance of the lease liability, and the depreciation of the right-of-use asset, instead of the current policy of recognizing rental expenses incurred under operating leases on a systematic basis over the lease term. As a practical expedient, the lessee can elect not to apply this accounting model to short-term leases (i.e. where the lease term is 12 months or less) and to leases of low-value assets, in which case the rental expenses would continue to be recognized on a systematic basis over the lease term.
IFRS 16 will primarily affect the Group’s accounting as a lessee of leases for properties, plant and equipment which are currently classified as operating leases. The application of the new accounting model is expected to lead to an increase in both assets and liabilities and to impact on the timing of the expense recognition in the statement of profit or loss over the period of the lease. The Group will need to perform a more detailed analysis to determine the amounts of new assets and liabilities arising from operating lease commitments on adoption of IFRS 16, after taking into account the applicability of the practical expedient and adjusting for any leases entered into or terminated between now and the adoption of IFRS 16 and the effects of discounting.