Engineered for clean energy Annual Report 2015 ENGINEERED FOR CLEAN ENERGY We delivered the first batch of NATIONAL VI COMPLIANT ENGINES to the Beijing Public Transportation Group in 2015; We launched the second- generation HYBRID ENGINE COMPLIANT with National V emission standards which is the latest design incorporating a gas engine with an ISG generator in 2015 ; We launched various TIER 3 COMPLIANT DIESEL ENGINES for both construction and agriculture applications in China in 2015; We launched 4 NEW ENGINE MODELS meeting China’s latest emission standards for use in both on- and off-road applications in 2016; Our YC6MK engine was awarded the BEST ENVIRONMENTAL TECHNOLOGY AWARD IN 2014; We were awarded the CHINA QUALITY AWARD NOMINATION IN 2016 which is China’s Highest Product Quality Award. YC6MK engine won the “GOLDEN ENGINE AWARD” at the Fifth Reliable Commercial Vehicle Engine Competition in 2016. ENGINEERED FOR CLEAN ENERGY (cid:10687)(cid:7722)(cid:3379)(cid:19579)(cid:11450)(cid:7790)(cid:5625)(cid:10812)(cid:5675) (cid:6005)(cid:7333) (cid:6214)(cid:1136)(cid:2441)(cid:17344)(cid:10725)(cid:1555)(cid:2567)(cid:2270)(cid:7536)(cid:2754)(cid:8883)(cid:17820)(cid:13105)(cid:13589)(cid:2156)(cid:18006)(cid:2940) (cid:2754)(cid:6662)(cid:1489)(cid:1358)(cid:14501)(cid:1245)(cid:2807)(cid:2560)(cid:1078)(cid:9079)(cid:7491)(cid:2263)(cid:11450)(cid:1489)(cid:5322)(cid:2940) (cid:1461)(cid:2739) (cid:2143)(cid:11102)(cid:2441)(cid:17344)(cid:11450)(cid:1245)(cid:2807)(cid:2754)(cid:20156)(cid:4658)(cid:2257)(cid:9495)(cid:17385)(cid:4568)(cid:6253)(cid:3422)(cid:8883) (cid:17820)(cid:2754)(cid:14131)(cid:9414)(cid:20156)(cid:3605)(cid:11450)(cid:19766)(cid:8824) (cid:2129)(cid:5424)(cid:20750)(cid:13599)(cid:7038)(cid:11450)(cid:3379)(cid:19579)(cid:1335)(cid:1104) (cid:6214)(cid:1136)(cid:1965)(cid:7487)(cid:14501)(cid:4019)(cid:12148)(cid:1360)(cid:17241)(cid:1329)(cid:2560)(cid:6427)(cid:7487)(cid:1954)(cid:1357)(cid:16912)(cid:1559) (cid:5340)(cid:11450)(cid:1358)(cid:12278)(cid:1335)(cid:1104) (cid:14939)(cid:18006)(cid:14501)(cid:4019)(cid:11450)(cid:2702)(cid:5147)(cid:5147)(cid:1426)(cid:10725)(cid:3769) CHINA YUCHAI’S CORE IDEALS VISION To be the premier manufacturer of environmentally-friendly engines and automotive systems and a leading supplier of high value products and services MISSION Utilize our product excellence and leadership to meet customers’ automotive and power demands Establish China Yuchai as a high performance and highly respected global corporation Lead in the pursuit of business excellence, responsible corporate citizenship and trusted integrity Create an environment that is a great place to work for our employees CONTENTS China Yuchai’s Core Ideals Financial Highlights President’s Statement Corporate Background Our China-Wide Presence Yuchai Overseas Network Directors and Executive Officers of the Company Board of Directors Executive Officers of the Company Corporate Governance 13 14 15 16 01 02 04 10 11 12 1 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 FINANCIAL HIGHLIGHTS 2013 Rmb’000 2014 Rmb’000 2015 Rmb’000 Revenue 15,902,355 16,436,142 13,733,437 Profit attributable to equity holders of the parent* 700,423 730,280 341,108 Total assets 19,293,168 18,773,336 18,815,602 Equity attributable to equity holders of the parent 6,391,573 6,988,432 7,239,617 Earnings per share attributable to ordinary equity holders of the parent (Rmb per share) 2013 18.79 2014 19.36 2015 8.81 Weighted average number of shares 37,267,673 37,720,248 38,712,282 *the term “parent” as used here refers to China Yuchai. WE SOLD 364,567 ENGINES 2 FINANCIAL HIGHLIGHTS ENGINEERED FOR CLEAN ENERGY TOTAL ASSETS (in Rmb million) EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT (in Rmb million) REVENUE (in Rmb billion) 19,293.2 18,773.3 18,815.6 6,391.6 6,988.4 7,239.6 15.9 16.4 13.7 2013 2014 2015 2013 2014 2015 2013 2014 2015 PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT (in Rmb million) EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT (in Rmb) 700.4 730.3 341.1 18.79 19.36 8.81 2013 2014 2015 2013 2014 2015 3 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 PRESIDENT’S STATEMENT $ REVENUE RMB13.7bn OPERATING PROFIT RMB0.8bn ENGINES SOLD 364,567 Dear Shareholders, We are pleased to report that notwithstanding the challenging environment in 2015, we continued to remain cash flow positive, retained our pricing power and profitability and maintained our leading position as a developer and manufacturer of a diverse portfolio of advanced engines for on- and off-road applications. The year 2015 continued to be a transitional year for China’s economy as the government continued with reforms to restructure and rebalance its economy to one more focused on domestic consumption. The Chinese economy grew 6.9% in 2015 led by lower construction and manufacturing activities and is expected to continue to grow at a rate of between 6.5% to 7% over the next 5 years. Although China’s growth rate is substantially higher compared with many other countries, it is significantly lower than the growth registered in the years following the 2008 global financial crisis. As a result, we witnessed changes in various market segments in 2015. In addition to slower economic growth, our engine sales were also impacted by the implementation of stricter emission standards in both the on– and off- road markets. The new emission standards were introduced to reduce the increased effects of widespread air pollution experienced across China. As the world’s largest commercial vehicle market, growing exhaust emissions from both on- and off-road vehicles are a major contributor to the poor air quality in China. The government’s generous incentives for electric vehicles (“EV”) as part of its efforts to develop the new-energy vehicle industry have led to increased sales of EVs which has affected sales of our diesel and natural gas engines. In addition, the global glut of crude oil in 2015 saw large declines in oil prices which significantly reduced the demand for natural gas engines in China impacting on our sales in this segment. Based on a review of industry statistics for 2015, the overall sales of commercial vehicles (excluding gasoline powered and electric powered vehicles) declined 14.4%. Sales of heavy- and medium- duty trucks and buses recorded greater declines compared with the overall change in 2015. As one of the largest commercial vehicle engine manufacturer with the broadest product line in 4 PRESIDENT’S STATEMENT ENGINEERED FOR CLEAN ENERGY China, our unit sales decline of 24.6% was consistent with One of our growth strategies is to utilize joint ventures to sales decreases in the heavy- and medium-duty markets. develop technology and new engines, position the Company However, the smaller decline in our net revenue of 16.4% to penetrate new markets and enhance our engine offerings to RMB 13.7 billion (US$ 2.1 billion) was mainly attributable in the off-road markets. Our joint venture with Shentou to a higher average selling price as we sold more National Investments (Hong Kong) Limited, a company possessing IV-compliant engines. Due to changes in the operating distribution experience in Europe will exclusively sell our environment, we disposed our entire shareholding interest in off-road diesel and natural gas engines (excluding marine Xiamen Yuchai Diesel Engines Co., Ltd. (“Xiamen Yuchai”) to engines) and spare parts and provide engine-related services a third party and consolidated all our operations at our main throughout Europe. Our tie-up with MTU Friedrichshafen manufacturing plant in Yulin City. The Xiamen Yuchai assembly GmbH (“MTU”), a subsidiary of Rolls-Royce Power Systems, facility historically supplied engines and parts to several to produce the MTU S4000 series of diesel engines to large customers in the surrounding regions. We continue to augment our engine portfolio with state-of-the-art, Tier support these important customers from our main facility 3-compliant, high-speed large rating off-road engines will be in Yulin City. In addition, lean manufacturing techniques based at our Yulin manufacturing facility and initially focus are used throughout our manufacturing process to reduce on sales within China with export potential in the future. costs and continually improve efficiencies. Selling, general & We will continue to increase our investment in research and administrative expenses were reduced by 6.3% in 2015. We development (“R&D”) to offer a suite of advanced engines in also enjoyed the full benefits of our new foundries resulting China. We increased our R&D investment in 2015 by 2.5% to in lower rejection rates and costs. Overall cost controls and RMB 507.0 million (US$ 77.5 million) and anticipate further productivity enhancements are our main priorities. increases in the future due to the implementation of stricter emission standards. This is a key long-term growth strategy As demand in on-road markets remained sluggish, we placed as we develop diesel, natural gas, and hybrid engines to more emphasis on the off-road markets as a growth area. We provide a wide variety of engines to meet our customers’ continue to position ourselves to penetrate many of the off- diverse needs in the light-, medium-, and heavy-duty engine road market segments including agriculture, marine, power markets. Our R&D proficiency has resulted in an engine generation and others. Our engine sales to the off-road portfolio consisting of 30 engine series across 10 engine markets have increased from 27.6% of total sales in 2011 platforms representing one of the broadest product lines in to 33.1% in 2015. In order to increase food production, the the world’s largest automotive market. New high horsepower government has been encouraging farmers to use larger engines have been designed to leverage our brand name equipment which require more powerful engines. However, and reputation for quality, and increase our presence in the the upgrading of emission standards for off-road vehicles market for larger engines up to 80 liters for the marine and and engines from Tier 2 to Tier 3 had an adverse effect on power generation segments. both machinery OEMs and engine suppliers which resulted in slower sales. We remain optimistic for the marine market as On the product development front, we also collaborate with China has many vessels along its rivers and long coastline. renowned organizations such as AVL of Austria, FEV of We continue to focus on the growth opportunities in the off- Germany, SWRI of USA and Ricardo of UK to develop good road markets both domestically and increasingly abroad as quality engines. The resources of prestigious universities we continue to supply high quality engines to the on-road including Brunel University London, Tsinghua University, markets. Our new high horsepower engines and production Tianjin University and Shanghai Jiaotong University also capabilities will provide access to new market segments. played an important role in talent development for our 5 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 PRESIDENT’S STATEMENT research and development program. Due to our outstanding aim. The YC6K12 and YC6MK are heavy-duty diesel engines track record of achievement, we were put in charge of meeting global standards for fuel consumption and weight, 10 national research subjects as part of the Chinese and are compliant with National IV and V emission standards. government’s 863 program. These engines were developed and manufactured by Y&C Engine Co., Ltd. (“Y&C”), a joint venture between our main One of our key targets is to develop engines compliant operating subsidiary, Guangxi Yuchai Machinery Company with higher emission standards prior to their application Limited (“GYMCL”), and a company jointly established by nationwide. This approach ensures we have the engines China International Marine Containers Group Ltd. and Chery to take advantage of growth opportunities when certain Automobile Co., Ltd. customers, such as bus operators in the larger cities, require engines beyond the current national standards. We have We continue to gather accolades and awards from our OEM already sold engines compliant with National V and VI customers in 2015 including the Dongfeng Group which is emission standards and we continue to add new models to our largest customer. In particular, we won the “Excellent our engine portfolio. We were also one of the first producers Supplier” award from Dongfeng and Jianghuai Auto (JAC) and of natural gas and hybrid engines in China. the annual awards for “Excellent Supplier” and “Outstanding Ten new engines were launched in 2015. Three new engines meeting the requirements for the newly introduced Tier 3 emission standards for off-road diesel engines were Contribution Supplier in R&D” from Dongfeng Liuzhou Motor. In addition, we also won the following awards: “The China Patent Excellence Award” at The 17th SIPO Award for Outstanding Patented Invention from The State Intellectual launched. Two of these new models were designed for the Property Office (SIPO), our YC6K engine won the “Fuel loader, excavator and forklift markets. The YC6TD600L-C30 Saving Champion Engine” in the 6x4 Trailer class at The 8th marine engine was also launched and represented the first China International Truck Fuel Saving Competition, and “The Tier 3 compliant marine engine developed in China. Five more National Advance Enterprise on Quality Inspection Award” advanced National V-compliant engines were introduced for from the China Association for Quality Inspection. This is various truck and bus markets as we expand our portfolio a testimony of our R&D efforts and dedication to building compliant with this future standard. Light-duty vehicle sales advanced engines and providing superior services to all our have been more durable in the current environment and we continue to increase our product offerings to meet this customers. We take seriously our responsibility of being a good corporate citizen focused on ‘green technology’ to opportunity. Our advancing engine technology ensures that create a sustainable environment for future generations. we better serve current customers as well as creates future growth opportunities. We have further broadened our presence in the overseas market as our exports sales grew approximately 22% in The National V emission standard is expected to be 2015. In addition to nearby markets in Southeast Asia, we implemented nationwide in 2017 and we have increased continue to penetrate into other territories across the world our engine model offerings compliant with this standard. such as the Middle East, Central and South America, and In early 2016, we launched four new National V-compliant Europe. We believe there are good growth opportunities engines for the light-, medium- and heavy-duty markets overseas and we are working towards increasing our market and new energy segments. Improving and protecting the share in these regions. environment is a key goal of China’s 13th Five Year Plan and our new engines will help reduce the country achieve this After reviewing our profitable results in 2014, future 6 ENGINEERED FOR CLEAN ENERGY PRESIDENT’S STATEMENT capital and operational needs, and our outlook, we shared our success with our shareholders by paying an elective dividend of US$1.10 per share in July 2015 for financial year 2014. The cash dividend totaled US$23.4 million and an additional 1,102,634 new shares were issued to shareholders based on their elections. Through our operations and financial discipline, we created positive cash flow which increased cash and bank balances from RMB 2.5 billion at the end of 2014 to RMB 3.8 billion (US$587.0 million) at December 31, 2015. On May 12, 2016, we announced the declaration of a dividend of US$0.85 per share of common stock for financial year 2015. The dividend payment will be made either wholly in cash or in new shares at the option of the stockholder. The number of shares to be issued will be determined based on the volume weighted average trading prices of the Company’s common stock on the New York Stock Exchange during the period from June 20 to and including June 22, 2016. The dividend is payable on June 29, 2016 to shareholders of record at the close of business on May 26, 2016 with an ex- dividend date of May 24, 2016. Through our corporate culture focused on superior product quality and stringent financial discipline, we strive to maintain market leadership by building competitive advantages in technology, low-cost manufacturing, our large service network and broad product lines to capture opportunities across multiple segments. We remain optimistic about the long-term outlook for GYMCL in the commercial engine markets in China and abroad. The changes we have made in 2015 have positioned us for continued success. Weng Ming HOH President, July 8, 2016 7 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 (cid:5745)(cid:16119)(cid:14378)(cid:16899) (cid:4672)(cid:7074)(cid:11450)(cid:14039)(cid:1106)(cid:1314)(cid:952) (cid:6215)(cid:1314)(cid:5566)(cid:14745)(cid:5294)(cid:2631)(cid:5854)(cid:6363)(cid:2688)(cid:952)(cid:3422)(cid:21)(cid:19)(cid:20)(cid:24)(cid:5290)(cid:17935)(cid:1078)(cid:1120)(cid:1915)(cid:9495)(cid:6471)(cid:6222)(cid:11450)(cid:3933)(cid:10725)(cid:3769)(cid:7509) (cid:19498)(cid:952)(cid:6215)(cid:1314)(cid:13597)(cid:13603)(cid:1555)(cid:6455)(cid:11638)(cid:14501)(cid:4019)(cid:11450)(cid:10726)(cid:18439)(cid:9079)(cid:573)(cid:4560)(cid:1325)(cid:14131)(cid:2257)(cid:2560)(cid:11518)(cid:2143)(cid:14131)(cid:2257)(cid:952)(cid:5292) 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China Yuchai International Limited (“CYI”) is a Bermuda holding company established on April 29, 1993. CYI is a subsidiary of Singapore-based Hong Leong Asia Ltd (“Hong Leong Asia”) and it is listed on the New York Stock Exchange, with major operations in China. The Group’s principal operating subsidiary Guangxi Yuchai Machinery Company Limited (“GYMCL”) is one of the largest engine manufacturers in China. Located in Yulin City, Guangxi Zhuang Autonomous Region in southern China, GYMCL produces, assembles and sells a comprehensive range of products covering light-, medium- to heavy-duty engines for trucks, buses, passenger vehicles, construction equipment, marine and agriculture applications, engine parts and components and diesel-powered generators. The engines produced by GYMCL range from diesel to natural gas and hybrid engines. GYMCL’s products range from 1.2L to 80L over 10 engine platforms with a power range from 60PS to 2400PS. In its current portfolio, the number of engine series offerings is 30 and GYMCL is intending to further expand its reach in the natural gas engine market as well as in the off-road markets with improved product offerings such as the high horsepower marine diesel engine and power generator engine. GYMCL produces diesel engines compliant with National IV and V emission standards, and natural gas engines compliant with National V emission standards, and also has the ability to produce certain diesel and natural gas engines compliant with National VI emission standards and develop alternative fuels and environmentally friendly hybrid engines with improved fuel efficiency. GYMCL also has the ability to produce diesel engines compliant with Tier 3 emission standards for use in off-road machinery. GYMCL has built a strong reputation among vehicle manufacturers and customers for the performance and reliability of its products as well as its after-sales customer service. CYI currently owns 76.4% of GYMCL’s outstanding shares through six wholly-owned subsidiaries. CYI has also invested in HL Global Enterprises Limited (“HLGE”) which is listed on the main board of the Singapore Exchange. Currently, CYI holds a 48.9% shareholding interest in HLGE. The core businesses of HLGE are hospitality operations and property development. 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(cid:1126)(cid:19644)(cid:10725)(cid:10809)(cid:7487)(cid:19590)(cid:1954)(cid:2606)(cid:948)(cid:263)(cid:1126)(cid:19644)(cid:10725)(cid:10809)(cid:264)(cid:949)(cid:574)(cid:10687)(cid:7722)(cid:3379)(cid:19579)(cid:11556)(cid:2179)(cid:6455) (cid:7487)(cid:1126)(cid:19644)(cid:10725)(cid:10809)(cid:23)(cid:27)(cid:17)(cid:28)(cid:8)(cid:11450)(cid:14039)(cid:7545)(cid:574) (cid:1126)(cid:19644)(cid:10725)(cid:10809)(cid:11450)(cid:7790)(cid:5625)(cid:1104)(cid:2263)(cid:7269)(cid:18312)(cid:5325)(cid:13573)(cid:14939)(cid:1092)(cid:6261)(cid:3430)(cid:1245)(cid:5430)(cid:2567)(cid:574) 10 ENGINEERED FOR CLEAN ENERGY OUR CHINA-WIDE PRESENCE Guangxi Yuchai Machinery Company Limited (cid:1954)(cid:2606)(cid:5745)(cid:18206) 35 regional offices (cid:10687)(cid:7722)(cid:2260)(cid:1217)(cid:3898) 2,791 customer service stations (cid:10687)(cid:7722)(cid:6326)(cid:7525)(cid:7491)(cid:2263)(cid:12559) As of May 2016 11 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 YUCHAI OVERSEAS NETWORK 128 OVERSEAS SERVICE AGENTS APPOINTED AS OF MAY 2016 14 OVERSEAS OFFICES 12 12 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY ENGINEERED FOR CLEAN ENERGY Our Bye-Laws require that our Board of Directors shall consist of eleven members so long as the special share is outstanding. As of February 29, 2016, there were eight members elected to and serving on our Board of Directors. Pursuant to the rights afforded to the holder of the special share, Hong Leong Asia had designated Messrs. Gan Khai Choon, Kwek Leng Peck and Hoh Weng Ming as its nominees. Mr. Yan Ping and Mr. Han Yi Yong are nominees of Coomber Investments Limited. Our directors are appointed or elected, except in the case of casual vacancy, at the annual general meeting or at any special general meeting of shareholders and hold office until the next annual general meeting of shareholders or until their successors are appointed or their office is otherwise vacated. Our directors and executive officers are identified below. NAME HOH Weng Ming (1)(4) GAN Khai Choon (1)(4) KWEK Leng Peck (1)(2) YAN Ping(1) WU Qi Wei(1) NEO Poh Kiat (1)(2)(3) TAN Aik-Leang (1)(3) HAN Yi Yong (1) HO Chi-Keung Raymond(2)(3) POSITION President and Director Director Director Director Alternate Director to YAN Ping Director Director Director Director LEONG Kok Ho(1) Chief Financial Officer FOO Shing Mei Deborah General Counsel Codan Services Limited Secretary YEAR FIRST ELECTED OR APPOINTED DIRECTOR OR OFFICER 2011 1995 1994 2012 2012 2005 2005 2010 2013 2012 2007 2015 Mr. Meng Choong Wong was appointed a non- executive director of the Company on August 11, 2015 and resigned on January 5, 2016. (1) (2) (3) (4) Also a Director of Guangxi Yuchai Machinery Company Limited ( “Yuchai”). Member of the Compensation Committee. Member of the Audit Committee. Also a Director of HL Global Enterprises Limited (“HLGE”). 13 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 BOARD OF DIRECTORS MR. HOH WENG MING was appointed President and a Director of the Company on July 17, 2013 and November 11, 2011 respectively. He was the Chief Financial Officer of the Company from May 1, 2008 to November 10, 2011. He is also a Director of Yuchai and HLGE with effect from December 26, 2008 and February 16, 2011 respectively. Mr. Hoh has more than 25 years of working experience in accounting and financial management positions with extensive regional experience in Singapore, Malaysia, New Zealand, Hong Kong and China. He has worked in various finance roles with companies including Johnson Electric Industrial Manufactory Limited as well as Henan Xinfei Electric Co., Ltd., a subsidiary of Hong Leong Asia. Previously, he held the position of Financial Controller of the Company from 2002 to 2003. Mr. Hoh has a Bachelor of Commerce Degree majoring in Accountancy from the University of Canterbury, Christchurch, New Zealand and an M.B.A. degree from Massey University, New Zealand. He is a Chartered Accountant in New Zealand and Malaysia and a Fellow Member of the Hong Kong Institute of Certified Public Accountants. MR. GAN KHAI CHOON is a Director of the Company, Yuchai, Grace Star, Venture Lewis, Venture Delta and Safety Godown Company Limited. He is also the non-executive Chairman of HLGE, an Executive Director of City e-Solutions Limited and Managing Director of Hong Leong International (Hong Kong) Limited. He has extensive experience in the banking, real estate investment and development sectors and has been involved in a number of international projects for the Hong Leong group of companies, which include the management and development of the Grand Hyatt Taipei and the Beijing Riviera. He holds a Bachelor of Arts Degree (Honors) in Economics from the University of Malaya. Mr. Gan is related to Mr. Kwek Leng Peck. MR. KWEK LENG PECK is a Director of the Company. He is a member of the Kwek family which controls the Hong Leong Investment Holdings group of companies. He is an Executive Director of Hong Leong Asia and Hong Leong Investment Holdings Pte. Ltd. and the non-executive Chairman of Tasek Corporation Berhad. He also sits on the boards of HL Technology, Hong Leong China, Yuchai, City Developments Limited, Hong Leong Finance Limited and Millennium & Copthorne Hotels Plc, as well as other affiliated companies. He has extensive experience in trading, manufacturing, property investment and development, hotel operations, corporate finance and management. MR. YAN PING is a Director of the Company and the Chairman of the Board of Directors of Yuchai. He is also the Chairman of the State Holding Company. The State Holding Company which is owned by the City Government of Yulin in Guangxi Zhuang Autonomous Region, China, is a 22.1% shareholder in Yuchai. Prior to his above appointments, Mr. Yan held various China-government related positions, including as Deputy Secretary-General of the Yulin Municipal Government, as Director of the Yulin Municipal Development and Reform Commission and as Deputy General Manager of Guangzhou- Shenzhen Railway Company, Ltd. Mr. Yan holds a Bachelor of Engineering Degree from Dalian Railway College and a Master’s degree in Statistics from the Dongbei University of Finance and Economics. MR. WU QI WEI is an Alternate Director of the Company to Mr. Yan Ping and the President and a director of Yuchai. He previously served as one of the Deputy General Managers of Yuchai and was in charge of sales and marketing. He holds a Bachelor of Engineering Degree from Hunan University, an MBA degree from the Huazhong University of Science and Technology and a Doctorate in Marine Engineering from Wuhan University of Technology. MR. NEO POH KIAT is a Director of the Company and Yuchai. He is the Managing Director of Octagon Advisors (Shanghai) Co. Ltd and a managing director of Octagon Advisors Pte. Ltd., a financial advisory firm in Singapore. Between August 1976 and January 2005, he held various senior managerial positions with companies in the DBS Bank group and United Overseas Bank Ltd. Mr. Neo is currently a director of Asia Airfreight Terminal Co Ltd, Goldstate Capital Fund Management Co Ltd, Cambodia Post Bank Plc, Fullerton Credit (Sichuan) Ltd, Fullerton Credit (Chongqing) Ltd and Fullerton Credit (Yunnan) Ltd.. He holds a Bachelor of Commerce Degree (Honors) from Nanyang University, Singapore. Our Board of Directors has determined that Mr. Neo is independent within the meaning of the NYSE’s corporate governance standards, on the basis that the Company has no material relationship with him. MR. TAN AIK-LEANG is a Director of the Company and Yuchai. He had held various senior executive and managerial positions over an aggregate period of more than 25 years at the Dao Heng Bank Group in Hong Kong, the National Australia Bank Group in Australia and Asia, and The Bank of Nova Scotia in Canada. Mr. Tan was also a Director of the Risk Management Association, Hong Kong Chapter from May 2000 to January 2016. Mr. Tan graduated in Accounting from Western Australian Institute of Technology (now known as Curtin University). He is a Fellow member of each of the Hong Kong Institute of Certified Public Accountants, CPA Australia, 14 BOARD OF DIRECTORS ENGINEERED FOR CLEAN ENERGY the Financial Services Institute of Australasia (formerly known as Australasian Institute of Banking and Finance) and the Institute of Canadian Bankers. Our Board of Directors has determined that Mr. Tan is independent within the meaning of the NYSE’s corporate governance standards, on the basis that the Company has no material relationship with him. MR. HO CHI-KEUNG RAYMOND was previously a director of the Company from June 2004 to September 2006 and was re-appointed as an independent director on April 30, 2013. He was in private practice as a solicitor in Hong Kong, Mainland China and Canada between 1983 and 2006. He is now practicing independently as an arbitrator. Mr. Ho was the Secretary General of the Law Society of Hong Kong from 2008 to 2011 and prior to that between 1999 and 2006, he was a partner of Fred Kan & Co., a law firm based in Hong Kong with operations in Tokyo, Japan and China. He holds the degrees of Bachelor of Laws and Master of Social Sciences from the University of Hong Kong, as well as a Master of Laws degree from the University of London. He is a Fellow of the UK Chartered Institute of Arbitrators and is currently listed on the HKIAC’s panel of arbitrators. He is a non-practising member of the Law Society of Hong Kong, The Law Society of England & Wales, The Law Society of British Columbia and The Law Society of the Australian Capital Territory. Mr. Ho currently is a director of Cheer Moon Development Limited and Power Rich Investment Limited. Our Board of Directors has determined that Mr. Ho is independent within the meaning of the NYSE’s corporate governance standards, on the basis that the Company has no material relationship with him. MR. HAN YI YONG is a Director of the Company and Yuchai. He is also the Chairman and a director of Coomber as well as the Company Secretary to Yuchai’s Board of Directors. He holds a Bachelor’s Degree in Vehicle Engineering from the Shandong University of Technology and a Master’s Degree in Power Machinery and Engineering from Guangxi University. EXECUTIVE OFFICERS OF THE COMPANY DR. PHUNG KHONG FOCK THOMAS was appointed Chief Financial Officer of the Company on June 1, 2016. He has over 20 years’ experience in both the manufacturing and service sectors. Prior to this appointment, Dr. Phung was the East Asia Pacific Finance Director for Alstom Transport (Singapore) Pte Ltd (“Alstom”). Prior to Alstom, Dr. Phung was with Bombardier Transportation group as Director Controlling Asia Pacific for four years and Commercial Manager/Site Controller of joint venture operations in China for three years. Preceding this, he was Finance Director & Deputy General Manager at Shandong Asia Pacific SSYMB Pulp & Paper Co. Ltd. where he was based in Shandong, China for three years. Dr. Phung has also worked at Thales GeoSolutions (Asia Pacific), Glaxo SmithKline Singapore Pte Ltd and Baker Oil Tools, a Baker Hughes company. Dr. Phung started his career as a credit authorizer at Bank of America in Singapore. Dr. Phung received his PhD in Finance from Cass Business School, City University in London in 1998 and an MBA in Financial Management from Hull University Business School in Hull, UK in 1994. MS. FOO SHING MEI DEBORAH was appointed General Counsel of the Company with effect from December 10, 2007. Ms. Foo has more than 15 years’ of commercial and corporate experience gained from various in-house positions in Singapore and Hong Kong. Prior to joining the Company, she held the positions of Vice President of Group Legal and Company Secretary at NASDAQ-listed Pacific Internet Limited. She holds a BA (Hons) in Law and History from the University of Keele, UK and a Masters of Law Degree in Commercial and Corporate law from the University of London, UK. She is a Barrister-at-Law (Middle Temple) and is admitted as an Advocate and Solicitor in Singapore. MR. LAI TAK CHUEN KELVIN was appointed Vice President of Operations of the Company on June 7, 2010. He was appointed Chief Business Officer and a Director of Yuchai on March 11, 2011 and June 28, 2013 respectively. Mr. Lai holds a Bachelor of Business Administration in Management from the Open University of Hong Kong as well as a Postgraduate Certificate in Engineering Business Management from the University of Warwick, UK. He worked for 10 years as a marine engineer on ocean going vessels and later as a Port Engineer at the International Maritime Corporation. He has also worked for Rolls-Royce International Ltd in their power generation and industrial power business in China and Taiwan, and worked for Cummins Hong Kong Ltd as General Manager in their diesel engine distribution and aftermarket business. 15 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 CORPORATE GOVERNANCE We are an exempted company incorporated in Bermuda and are subject to the laws of that jurisdiction. The legal framework in Bermuda which applies to exempted companies is flexible and allows an exempted company to comply with the corporate governance regime of the relevant jurisdiction in which the company operates or applicable listing standards. Under Bermuda law, members of a board of directors owe a fiduciary duty to the company to act in good faith in their dealings with or on behalf of the company and to exercise their powers and fulfill the duties of their office honestly. In addition, the Bermuda company legislation imposes a duty on directors and officers of an exempted company to act honestly and in good faith with a view to the best interests of the company and requires them to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Bermuda legislation also imposes certain specific duties and obligations on companies and directors, both directly and indirectly, including duties and obligations with respect to matters such as (a) loans to directors and related persons; and (b) limits on indemnities for directors and officers. Bermuda law does not impose specific obligations in respect of corporate governance, such as those prescribed by NYSE listing standards, requiring a company to (i) appoint independent directors to their boards; (ii) hold regular meetings of non-management directors; (iii) establish audit, nominating and governance or compensation committees; (iv) have shareholders approve equity compensation plans; (v) adopt corporate governance guidelines; or (vi) adopt a code of business conduct and ethics. We are also subject to the NYSE listing standards, although, because we are a foreign private issuer, those standards are considerably different from those applied to US companies. Under the NYSE rules, we need only (i) establish an independent audit committee that has specified responsibilities as described in the following table; (ii) provide prompt certification by our chief executive officer of any material non-compliance with any corporate governance rules; (iii) provide periodic written affirmations to the NYSE with respect to our corporate governance practices; and (iv) provide a brief description of significant differences between our corporate governance practices and those followed by US companies. 16 CORPORATE GOVERNANCE ENGINEERED FOR CLEAN ENERGY The following table compares the Company’s principal corporate governance practices, which are in compliance with Bermuda law, to those required of US companies. STANDARD FOR US DOMESTIC LISTED COMPANIES CHINA YUCHAI INTERNATIONAL LIMITED’S PRACTICE Director Independence • A majority of the board must consist of independent directors. • Three of our eight directors, Messrs. Neo Poh Kiat, Tan Aik-Leang and Ho Chi-Keung Raymond are independent within the meaning of the NYSE standards. Independence is defined by various criteria including the absence of a material relationship between director and the listed company. Directors who are employees, are immediate family of the chief executive officer or receive over $120,000 per year in direct compensation from the listed company are not independent. Directors who are employees of or otherwise affiliated through immediate family with the listed company’s independent auditor are also not independent. • The non-management directors of each company must meet at regularly scheduled executive sessions without management. • As a foreign private issuer, our non-management directors are not required to meet periodically without management directors. • Our audit committee meets the requirements of Rule 10A-3 under the Exchange Act. AUDIT COMMITTEE • Listed companies must have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act. The rule requires that the audit committee (i) be comprised entirely of independent directors; (ii) be directly responsible for the appointment, compensation, retention and oversight of the independent auditor; (iii) adopt procedures for the receipt and treatment of complaints with respect to accounting, internal accounting controls or auditing matters; (iv) be authorized to engage independent counsel and other advisors it deems necessary in performing its duties; and (v) be given sufficient funding by the company to compensate the independent auditors and other advisors as well as for the payment of ordinary administrative expenses incurred by the committee. • The audit committee must consist of at least three members, and each member meets the independence requirements of both the NYSE rules and Rule 10A-3 under the Exchange Act. • Our audit committee currently consists of three members, all of whom meets the independence requirements of both the NYSE rules and Rule 10A-3 under the Exchange Act. • The audit committee must have a written charter that addresses the committee’s purpose and responsibilities. • Our audit committee has a charter outlining the committee’s purpose and responsibilities, which are similar in scope to those required of US companies. 17 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 CORPORATE GOVERNANCE At a minimum, the committee’s purpose must be to assist the board in the oversight of the integrity of the company’s financial statements, the company’s compliance with legal and regulatory requirements, the independent auditor’s qualifications and independence and the performance of the company’s internal audit function and independent auditors. The audit committee is also required to review the independent auditing firm’s annual report describing the firm’s internal quality control procedures, any material issues raised by the most recent internal quality control review or peer review of the firm, or by any recent governmental inquiry or investigation, and any steps taken to address such issues. The audit committee is also required to assess the auditor’s independence by reviewing all relationships between the company and its auditor. It must establish the company’s hiring guidelines for employees and former employees of the independent auditor. The committee must also discuss the company’s annual audited financial statements and quarterly financial statements with management and the independent auditors, the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies, and policies with respect to risk assessment and risk management. It must also meet separately, periodically, with management, the internal auditors and the independent auditors. • Each listed company must disclose whether its board of directors has identified an Audit Committee Financial Expert, and if not the reasons why the board has not done so. • Our audit committee’s charter outlines the committee’s purpose and responsibilities which are similar in scope to those required of US companies. • Our audit committee assesses the auditor’s independence on an ongoing basis by reviewing all relationships between the company and its auditor. It has established the company’s hiring guidelines for employees and former employees of the independent auditor. The committee also discusses with management and the independent auditors the Company’s annual audited financial statements and quarterly financial statements, the Company’s earnings press releases, as well as financial information and earning guidance provided to analysts and rating agencies, and policies with respect to risk assessment and risk management. It also meets separately, periodically, with management, the internal auditors and the independent auditors. • The Board of Directors has identified Mr. Tan Aik-Leang as our Audit Committee Financial Expert. • Each listed company must have an internal audit function. • We are a holding company and the majority of business is done at our main subsidiary, Yuchai. Yuchai maintains an independent internal audit function headed by a secondee appointed by the Company. The Head of Internal Audit reports to the Chairman of the Audit Committees of the Company and Yuchai who reports to the Boards. The Board of Yuchai approves the audit plan, review significant audit issues and monitors corrective actions taken by management. COMPENSATION COMMITTEE • Listed companies must have a compensation committee composed entirely of independent board members as defined by the NYSE listing standards. • Our compensation committee currently has three members, two of whom are independent within the meaning of the NYSE standards. • The committee must have a written charter that addresses its purpose and responsibilities. 18 CORPORATE GOVERNANCE • These (i) include responsibilities reviewing and approving corporate goals and objectives relevant to CEO compensation; (ii) evaluating CEO performance and compensation in light of such goals and objectives for the CEO; (iii) based on such evaluation, reviewing and approving CEO compensation levels; (iv) recommending to the board non-CEO compensation, incentive compensation plans and equity-based plans; and (v) producing a report on executive compensation as required by the SEC to be included in the company’s annual proxy statement or annual report. The committee must also conduct an annual performance self-evaluation. NOMINATING/CORPORATE GOVERNANCE COMMITTEE • Listed companies must have a nominating/corporate governance committee composed entirely of independent board members. • The committee must have a written charter that addresses its purpose and responsibilities, which include (i) identifying qualified individuals to become board members; (ii) selecting, or recommending that the board select, the director nominees for the next annual meeting of shareholders; (iii) developing and recommending to the board a set of corporate governance principles applicable to the company; (iv) overseeing the evaluation of the board and management; and (v) conducting an annual performance evaluation of the committee. EQUITY-COMPENSATION PLANS • Shareholders must be given the opportunity to vote on all equity—compensation plans and material revisions thereto, with limited exceptions. CORPORATE GOVERNANCE GUIDELINES • Listed companies must adopt and disclose corporate governance guidelines. CODE OF BUSINESS CONDUCT AND ETHICS • All listed companies, US and foreign, must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any amendment to or waivers of the code for directors or executive officers. ENGINEERED FOR CLEAN ENERGY reviews, • Our compensation committee reviews among other things the Company’s general compensation structure, and recommends or approves executive appointments, compensation and benefits of directors and executive officers, subject to ratification by the Board of Directors, and supervises the administration of our employee benefit plans, if any. • We do not have a nominating/corporate governance committee. However, certain responsibilities of this committee are undertaken by our Compensation Committee, such as the review and approval of executive appointments and all other functions are performed by the Board of Directors. • We intend to have our shareholders approve equity- compensation plans. • We have formally adopted various corporate governance guidelines, including Code of Business Conduct and Ethics (described below); Audit Committee Charter; Whistle- blowing Policy; Insider Trading Policy; and Disclosure Controls and Procedures. • We adopted a Code of Business Conduct and Ethics Policy in May 2004, which was revised on December 9, 2008. A copy of the Code is posted on our internet website at http://www.cyilimited.com. We intend to promptly disclose any amendment to or waivers of the Code for directors or executive officers. 19 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 FINANCIAL REPORT Report of Independent Registered Public Accounting Firm Consolidated Statement of Profit or Loss Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 21 23 24 25 27 30 33 ENGINEERED FOR CLEAN ENERGY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FINANCIAL YEAR ENDED DECEMBER 31, 2015 The Board of Directors and Shareholders of China Yuchai International Limited We have audited China Yuchai International Limited’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). China Yuchai International Limited’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, China Yuchai International Limited maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position as of December 31, 2015 and 2014, and the related consolidated statements of profit or loss, consolidated statements of comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2015 of China Yuchai International Limited and our report dated April 15, 2016 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Singapore April 15, 2016 21 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FINANCIAL YEAR ENDED DECEMBER 31, 2015 The Board of Directors and Shareholders of China Yuchai International Limited We have audited the accompanying consolidated statements of financial position of China Yuchai International Limited as of December 31, 2015 and 2014, and the related consolidated statements of profit or loss, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Yuchai International Limited at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), China Yuchai International Limited’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 15, 2016 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Singapore April 15, 2016 22 CONSOLIDATED STATEMENT OF PROFIT OR LOSS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) ENGINEERED FOR CLEAN ENERGY Sales of goods Rendering of services Revenue Cost of sales (goods) Cost of sales (services) Gross profit Other operating income Other operating expenses Note 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 7 7 7 8.1 8.1 15,809,894 16,355,854 13,639,013 2,083,819 92,461 80,288 94,424 14,427 15,902,355 16,436,142 13,733,437 2,098,246 (12,577,458) (13,104,609) (10,893,562) (1,664,359) (59,993) (40,543) (49,303) (7,533) 3,264,904 3,290,990 2,790,572 8.2(a) 8.2(b) 179,887 (23,535) 121,901 (27,009) 106,931 (87,594) 426,354 16,337 (13,383) (77,454) Research and development costs 8.1, 8.3 (468,612) (494,594) (506,955) Selling, distribution and administrative costs 8.1 (1,550,228) (1,598,670) (1,497,774) (228,836) Operating profit Finance costs Share of profit of associates Share of losses of joint ventures Gains arising from acquisitions Profit before tax Income tax expense Profit for the year Attributable to: Equity holders of the parent Non-controlling interests 1,402,416 1,292,618 805,180 8.4 (161,211) (156,670) (116,351) 5 6 4 9 159 (79,245) — 956 (30,711) 95,192 245 (2,936) — 1,162,119 1,201,385 686,138 (222,147) (179,639) (176,818) 123,018 (17,776) 37 (448) — 104,831 (27,015) 939,972 1,021,746 509,320 77,816 700,423 239,549 939,972 730,280 291,466 1,021,746 341,108 168,212 509,320 52,116 25,700 77,816 Earnings per share 10 Basic and diluted, profit for the year attributable to ordinary equity holders of the parent 18.79 19.36 8.81 1.35 Weighted average number of shares: - Basic and diluted 37,267,673 37,720,248 38,712,282 38,712,282 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 23 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Profit for the year 939,972 1,021,746 509,320 77,816 Other comprehensive income Other comprehensive income to be reclassified to profit or loss in subsequent periods: Foreign currency translation (3,728) 11,937 31,533 4,818 Transfer of reserve on initial equity interest in a joint venture on acquisition — (469) Realization of foreign currency translation reserves upon disposal of assets classified as held for sale 10,770 Realization of foreign currency translation reserves upon liquidation of foreign operation — — — Net other comprehensive income to be reclassified to profit or loss in subsequent periods, representing other comprehensive income for the year, net of tax 7,042 11,468 Total comprehensive income for the year, net of tax 947,014 1,033,214 — — — — 144 22 31,677 540,997 4,840 82,656 Attributable to: Equity holders of the parent Non-controlling interests 697,466 249,548 741,244 291,970 947,014 1,033,214 375,646 165,351 540,997 57,393 25,263 82,656 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 24 CONSOLIDATED STATEMENT OF FINANCIAL POSITION (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) ENGINEERED FOR CLEAN ENERGY ASSETS Non-current assets Property, plant and equipment Investment property Prepaid operating leases Goodwill Intangible assets Investment in associates Investment in joint ventures Deferred tax assets Long-term bank deposits Other receivables Current assets Inventories Trade and bills receivables Prepayments Other receivables Prepaid operating leases Other current assets Cash and cash equivalents Short-term bank deposits Restricted cash Note 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 11 12 13 14 15 5 6 9 22 21 18 20 21 13 19 22 22 22 4,460,842 4,329,544 661,484 — 424,591 212,636 108,526 3,175 272,216 388,282 — 1,261 7,437 392,455 212,636 81,826 3,379 266,784 341,728 60,000 1,519 1,136 59,961 32,487 12,502 516 40,760 52,211 9,167 232 5,871,529 5,697,308 870,456 1,921,180 8,113,094 1,711,330 7,178,513 261,463 1,096,760 43,971 244,740 13,498 56,290 35,532 348,151 12,546 50,099 5,429 53,192 1,917 7,654 2,291,345 3,474,364 530,827 193,440 24,249 7,195 300,564 1,099 45,921 12,901,807 13,118,294 2,004,262 Total assets 18,773,336 18,815,602 2,874,718 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 25 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 CONSOLIDATED STATEMENT OF FINANCIAL POSITION (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) EQUITY AND LIABILITIES Equity Issued capital Preference shares Statutory reserves Capital reserves Retained earnings Other components of equity Equity attributable to equity holders of the parent Non-controlling interests Total equity Non-current liabilities Interest-bearing loans and borrowings Other liabilities Deferred tax liabilities Deferred grants Other payables Current liabilities Trade and other payables Interest-bearing loans and borrowings Other liabilities Provision for taxation Provision for product warranty Note 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 23 23 25 16(b) 16(a) 9 17 27 27 16(b) 16(a) 28 1,840,227 1,955,720 298,802 21 302,780 2,932 21 298,221 30,954 4,924,767 5,012,934 (82,295) (58,233) 6,988,432 2,163,382 9,151,814 7,239,617 2,190,452 9,430,069 3 45,564 4,729 765,895 (8,897) 1,106,096 334,665 1,440,761 1,077,716 128 134,224 313,004 120,588 1,645,660 6,426,708 1,209,001 92 41,509 298,552 56,509 55 127,419 334,328 115,341 633,652 6,076,849 2,399,195 59 42,201 233,577 8,634 8 19,468 51,080 17,622 96,812 928,443 366,558 9 6,448 35,687 7,975,862 8,751,881 1,337,145 Total liabilities 9,621,522 9,385,533 1,433,957 Total equity and liabilities 18,773,336 18,815,602 2,874,718 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 26 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) ENGINEERED FOR CLEAN ENERGY l a t o T y t i u q e - n o N s t s e r e t n i g n i l l o r t n o c l a t o T r o f d i a p i m u m e r P r e h t O n o e v r e s e r n o i t i s i u q c a n o i t c a s n a r t i n g e r o F - n o n f o - n o n h t i w e c n a m r o f r e P y c n e r r u c s e v r e s e R s t e s s a f o d e i f i s s a l c g n i l l o r t n o c g n i l l o r t n o c s e r a h s s t s e r e t n i s t s e r e t n i e v r e s e r e v r e s e r n o i t a l s n a r t l d e h s a e l a s r o f d e n i a t e R i s g n n r a e l a t i p a C s e v r e s e r s e v r e s e r y r o t u t a t S s e r a h s e c n e r e f e r P d e u s s I l a t i p a c ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R t n e r a p e h t l f o s r e d o h y t i u q e e h t o t e b a t u b i r t t A l , 7 6 8 1 7 7 7 , , 4 5 9 9 6 8 1 , , 3 1 9 1 0 9 5 , ) 5 2 9 ( ) 6 6 1 ( ) 5 8 ( ) 8 1 6 9 8 ( , ) 4 8 7 3 1 ( , , 2 3 6 0 8 9 3 , , 2 7 9 9 3 9 9 4 5 9 3 2 , 3 2 4 0 0 7 , 2 4 0 7 , 9 9 9 9 , ) 7 5 9 2 ( , — — ) 4 4 7 2 7 ( , ) 4 4 7 2 7 ( , — — 4 1 0 7 4 9 , 8 4 5 9 4 2 , 6 6 4 7 9 6 , ) 0 0 0 4 ( , ) 6 6 1 4 ( , 6 6 1 ) 4 6 2 ( ) 8 0 7 7 0 2 ( , — — ) 4 6 2 ( ) 8 0 7 7 0 2 ( , , 5 6 1 4 3 4 8 , , 2 9 5 2 4 0 2 , , 3 7 5 1 9 3 6 , — — — — — — — — ) 5 2 9 ( — — — — — — — — 6 6 1 — — — — — — — — ) 5 8 ( , ) 9 5 3 6 0 1 ( ) 1 4 7 6 1 ( , 4 8 7 3 1 , — — — 3 2 4 0 0 7 , ) 1 4 7 6 1 ( , 4 8 7 3 1 , , 3 2 4 0 0 7 — — — — — — — — — — — — ) 2 7 2 2 ( , , ) 8 0 7 7 0 2 ( — — , 5 7 0 1 7 4 4 , 2 3 9 2 , 0 1 7 8 9 2 , 1 2 — — — — — — — — — — — 2 7 2 2 , — — — ) 4 6 2 ( — — — — — — — — 2 3 9 2 , 8 1 7 0 0 3 , 1 2 — — — — — — — — , 6 9 1 4 2 7 1 , , 6 9 1 4 2 7 1 , 3 1 0 2 , 1 y r a u n a J t A e v i s n e h e r p m o c r e h t O ) s s o l ( / e m o c n i r a e y e h t r o f t i f o r P r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T y r o t u t a t s o t r e f s n a r T s e v r e s e r - n o n o t i d a p s d n e d v D i i s t s e r e t n i g n i l l o r t n o c r e p 0 9 0 $ S U . ( i d a p ) e r a h s d n a d e r a l c e d s d n e d v D i i a f o n o i t a d u q L i i s t s e r e t n i g n i l l o r t n o c - n o n f o n o i t i s i u q c A 3 1 0 2 , 1 3 r e b m e c e D t A i y r a d i s b u s 27 . s t n e m e t a t s l a i c n a n i f e h t f o t r a p l a r g e t n i n a m r o f s e t o n y r o t a n a p x e l d n a s e i c i l o p g n i t n u o c c a i g n y n a p m o c c a e h T CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) r o f d i a p i m u m e r P r e h t O n o e v r e s e r i n g e r o F n o i t i s i u q c a n o i t c a s n a r t e c n a m r o f r e P y c n e r r u c l a t o T y t i u q e - n o N s t s e r e t n i g n i l l o r t n o c l a t o T s t s e r e t n i s t s e r e t n i ) 3 2 e t o N ( - n o n f o - n o n h t i w s e r a h s g n i l l o r t n o c g n i l l o r t n o c e v r e s e r e v r e s e r ) 3 2 e t o N ( n o i t a l s n a r t d e n i a t e R i s g n n r a e l a t i p a C s e v r e s e r s e v r e s e r y r o t u t a t S ) 5 2 e t o N ( s e r a h s e c n e r e f e r P d e u s s I l a t i p a c ) 3 2 e t o N ( ) 3 2 e t o N ( ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R t n e r a p e h t l f o s r e d o h y t i u q e e h t o t e b a t u b i r t t A l ) 5 8 ( ) 9 5 3 6 0 1 ( , , 5 7 0 1 7 4 4 , 2 3 9 2 , 8 1 7 0 0 3 , 1 2 , 6 9 1 4 2 7 1 , , 5 6 1 4 3 4 8 , , 2 9 5 2 4 0 2 , , 3 7 5 1 9 3 6 , , 6 4 7 1 2 0 1 , , 6 6 4 1 9 2 0 8 2 0 3 7 , 8 6 4 1 1 , 4 0 5 4 6 9 0 1 , , 4 1 2 3 3 0 1 , 0 7 9 1 9 2 , 4 4 2 1 4 7 , ) 2 ( 8 4 3 5 , , ) 4 2 5 4 7 2 ( — — — — , 1 3 0 6 1 1 — — , ) 1 3 3 2 6 1 ( ) 1 3 3 2 6 1 ( , — — , 1 3 0 6 1 1 ) 2 ( 8 4 3 5 , ) 4 2 5 4 7 2 ( , ) 7 8 ( ) 9 4 8 8 ( , 2 6 7 8 , , 4 1 8 1 5 1 9 , , 2 8 3 3 6 1 2 , , 2 3 4 8 8 9 6 , ) 5 2 9 ( — — — — — — — — — — ) 5 2 9 ( — — — — — — — — — — 2 6 7 8 , 2 6 7 8 , — — — — — — — — — 8 4 3 5 , 4 6 9 0 1 , — — 0 8 2 0 3 7 , 4 6 9 0 1 , 0 8 2 0 3 7 , — — — — — — — — — ) 4 6 0 2 ( , , ) 4 2 5 4 7 2 ( — — — — — — — — — — — — — — — — — 4 6 0 2 , — — — ) 2 ( — — — — — — — — — — — 3 6 2 5 , ) 5 9 3 5 9 ( , , 7 6 7 4 2 9 4 , 2 3 9 2 , 0 8 7 2 0 3 , 1 2 — — — e m o c n i e v i s n e h e r p m o c r e h t O r a e y e h t r o f t i f o r P 4 1 0 2 , 1 y r a u n a J t A r o f e m o c n i e v i s n e h e r p m o c l a t o T r a e y e h t 1 3 0 6 1 1 , ) 3 2 e t o N ( r a e y e h t g n i r u d d e u s s i s e r a h S — — — — — — , 7 2 2 0 4 8 1 , g n i l l o r t n o c - n o n o t i d a p s d n e d v D i i s t s e r e t n i s e v r e s e r y r o t u t a t s o t r e f s n a r T ) 4 2 e t o N ( ) e r a h s r e p 0 2 1 $ S U . ( n o i t a s n e p m o c d e s a b - e r a h s f o t s o C i d a p d n a d e r a l c e d s d n e d v D i i g n i l l o r t n o c - n o n f o n o i t i s i u q c A s t s e r e t n i 4 1 0 2 , 1 3 r e b m e c e D t A i y r a d i s b u s a f o n o i t a d u q L i i 28 . s t n e m e t a t s l a i c n a n i f e h t f o t r a p l a r g e t n i n a m r o f s e t o n y r o t a n a p x e l d n a s e i c i l o p g n i t n u o c c a i g n y n a p m o c c a e h T CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) ENGINEERED FOR CLEAN ENERGY r o f d i a p i m u m e r P r e h t O n o e v r e s e r i n g e r o F n o i t i s i u q c a n o i t c a s n a r t e c n a m r o f r e P y c n e r r u c l a t o T y t i u q e - n o N s t s e r e t n i g n i l l o r t n o c l a t o T s t s e r e t n i s t s e r e t n i ) 3 2 e t o N ( - n o n f o - n o n h t i w s e r a h s g n i l l o r t n o c g n i l l o r t n o c e v r e s e r e v r e s e r ) 3 2 e t o N ( n o i t a l s n a r t d e n i a t e R i s g n n r a e l a t i p a C s e v r e s e r s e v r e s e r y r o t u t a t S ) 5 2 e t o N ( s e r a h s e c n e r e f e r P d e u s s I l a t i p a c ) 3 2 e t o N ( ) 3 2 e t o N ( ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R ’ 0 0 0 b m R t n e r a p e h t l f o s r e d o h y t i u q e e h t o t e b a t u b i r t t A l , 4 1 8 1 5 1 9 , , 2 8 3 3 6 1 2 , , 2 3 4 8 8 9 6 , ) 5 2 9 ( 2 6 7 8 , 3 6 2 5 , ) 5 9 3 5 9 ( , , 7 6 7 4 2 9 4 , 2 3 9 2 , 0 8 7 2 0 3 , 1 2 , 7 2 2 0 4 8 1 , 0 2 3 9 0 5 , , 2 1 2 8 6 1 8 0 1 1 4 3 , 7 7 6 1 3 , ) 1 6 8 2 ( , 8 3 5 4 3 , , 7 9 9 0 4 5 1 5 3 5 6 1 , 6 4 6 5 7 3 , — , ) 0 0 5 7 5 2 ( 5 7 2 0 1 , — — — — , 3 9 4 5 1 1 — — , ) 1 1 5 8 0 1 ( ) 1 1 5 8 0 1 ( , — — , 3 9 4 5 1 1 — ) 0 0 5 7 5 2 ( , 5 7 2 0 1 , — — — — — — — — — — — — — — — — — — ) 9 9 4 2 2 ( , ) 0 7 7 9 2 ( , 1 7 2 7 , ) 9 8 9 1 1 ( , ) 2 6 7 8 ( , , 9 6 0 0 3 4 9 , , 2 5 4 0 9 1 2 , , 7 1 6 9 3 2 7 , , 1 6 7 0 4 4 1 , 5 6 6 4 3 3 , , 6 9 0 6 0 1 1 , ) 4 1 9 2 1 ( , ) 3 7 9 1 ( , — — — — — — — — — 5 7 2 0 1 , — — 8 3 5 5 1 , 4 7 3 2 , 8 3 5 4 3 , — — 8 0 1 1 4 3 , 8 3 5 4 3 , 8 0 1 1 4 3 , — — — — — — — ) 7 5 8 0 6 ( , — — ) 2 3 3 1 ( , — 1 9 8 5 , ) 0 0 5 7 5 2 ( , — — — — — — — — — — — — — — — — 2 3 3 1 , ) 1 9 8 5 ( , ) 8 9 2 9 ( , 5 9 8 5 6 7 , 9 2 7 4 , 4 6 5 5 4 , — 2 2 0 8 2 , — , 4 3 9 2 1 0 5 , 4 5 9 0 3 , 1 2 2 8 9 2 , — — — — — — — — — — 1 2 3 — — — e m o c n i e v i s n e h e r p m o c r e h t O r a e y e h t r o f t i f o r P 5 1 0 2 , 1 y r a u n a J t A r o f e m o c n i e v i s n e h e r p m o c l a t o T r a e y e h t 3 9 4 5 1 1 , ) 3 2 e t o N ( r a e y e h t g n i r u d d e u s s i s e r a h S — — — — — — , 0 2 7 5 5 9 1 , s e v r e s e r y r o t u t a t s o t r e f s n a r T g n i l l o r t n o c - n o n o t i d a p s d n e d v D i i i d a p d n a d e r a l c e d s d n e d v D i i ) 4 2 e t o N ( ) e r a h s r e p 0 1 1 $ S U . ( n o i t a s n e p m o c d e s a b - e r a h s f o t s o C g n i l l o r t n o c - n o n f o n o i t i s i u q c A s t s e r e t n i i y r a d i s b u s a f o l a s o p s i D 5 1 0 2 , 1 3 r e b m e c e D t A 29 s t s e r e t n i 2 0 8 8 9 2 , ’ 0 0 0 $ S U . s t n e m e t a t s l a i c n a n i f e h t f o t r a p l a r g e t n i n a m r o f s e t o n y r o t a n a p x e l d n a s e i c i l o p g n i t n u o c c a i g n y n a p m o c c a e h T CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 CONSOLIDATED STATEMENT OF CASH FLOWS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Operating activities Profit before tax 1,162,119 1,201,385 686,138 104,831 Adjustments to reconcile profit before tax to net cash flows: (Written back)/Impairment of doubtful debts (net) Inventories written down Reversal of write-down of inventories Depreciation of property, plant and equipment Amortization of prepaid operating leases Dividend income from held for trading investment Impairment of property, plant and equipment Write-off of property, plant and equipment Impairment of intangible asset Share of net loss of associates and joint ventures Exchange loss Fair value (gain)/loss on foreign exchange forward contract Loss on disposal of property, plant and equipment Gain on disposal of prepaid operating leases Loss on disposal of subsidiary Gain on liquidation of joint venture Gain on disposal of held for trading investment Gain on disposal of assets classified as held for sale Finance costs Interest income Fair value loss on held for trading investment Cost of share-based payments Gains arising from acquisitions Write off of trade and other payables Loss on dilution of equity interest in joint venture Written back of impairment loss on development properties Total adjustments (11,775) 7,061 (27,665) 377,110 11,829 (1,009) 9,163 — — 79,086 16,736 (12,198) 3,427 (11,437) 363 — (3,484) (7,292) 161,211 (78,939) 2,866 — — — — — (1,595) 21,297 (24,694) 418,675 12,581 (989) 10,433 15 60,000 29,755 13,044 2,731 5,984 (194) — — — — 156,670 (45,824) 5,250 5,360 (95,192) (42,437) — — 32,938 59,339 (24,079) 456,002 13,433 — 2,873 4,931 26,700 2,691 45,354 (15,506) 14,874 (2,511) 13,647 (348) — — 116,351 (41,314) 10,871 10,275 — (9) 2,848 5,032 9,066 (3,679) 69,670 2,052 — 439 753 4,079 411 6,929 (2,369) 2,273 (384) 2,085 (53) — — 17,776 (6,312) 1,661 1,570 — (1) 435 (2,976) (455) 1,677,172 1,732,255 1,412,522 215,809 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 30 ENGINEERED FOR CLEAN ENERGY CONSOLIDATED STATEMENT OF CASH FLOWS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Changes in working capital (Increase)/decrease in inventories (Increase)/decrease in trade and other receivables (302,693) (1,322,998) 433,630 (85,712) 168,176 732,413 Increase/(decrease) in trade and other payables 790,171 (1,140,069) (495,825) (Increase)/decrease in balances with related parties (90,891) (137,956) Decrease/(Increase) in development properties 8,923 828 5,206 — Cash flows from operating activities Income taxes paid 759,684 802,976 1,822,492 (170,042) (267,290) (135,774) 25,695 111,901 (75,753) 795 — 278,447 (20,744) Net cash flows from operating activities 589,642 535,686 1,686,718 257,703 Investing activities Acquisition of subsidiaries Additional investment in subsidiaries Acquisition/additional investment in associates and joint ventures Dividend received from held for trading investment Dividends received from joint ventures Interest received Net cash inflow on liquidation of a joint venture Proceeds from disposal of held for trading investment Payment for prepaid operating leases Proceeds from disposal of prepaid operating leases Additions of intangible asset Proceeds from disposal of property, plant and equipment — — (16,690) — — (87) (22,499) (3,437) (19,720) 1,009 1,054 70,608 — 21,341 (58,941) 19,792 (4,640) 15,169 (462) 989 258 50,081 — — (8,300) 2,518 (21,515) 16,113 (2,591) — 1,190 46,402 1,763 — — 4,505 — 6,602 Purchase of property, plant and equipment (441,434) (660,930) (397,817) Proceeds from disposal of subsidiary, net of cash disposed Proceeds from disposal of assets classified as held for sale Proceeds from government grants Placement of fixed deposits with banks Withdrawal of fixed deposits from banks 9,504 84,497 43,694 (319,619) 24,095 — — 14,562 (97,069) 197,513 170,703 — 39,558 (66,901) 193,589 (396) — 182 7,090 269 — — 688 — 1,009 (60,781) 26,081 — 6,044 (10,221) 29,577 Net cash flows used in investing activities (553,591) (523,019) (25,496) (3,895) The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 31 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 CONSOLIDATED STATEMENT OF CASH FLOWS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Financing activities Dividends paid to non-controlling interests Dividends paid to equity holders of the parent Interest paid and discounting on bills receivable Payment of finance lease liabilities Proceeds from borrowings Repayment of borrowings Proceeds from issue of bonds Placement of fixed deposits pledged with banks for banking facilities Withdrawal of fixed deposits pledged with banks for banking facilities Acquisition of non-controlling interests (72,744) (207,708) (159,497) (25) (156,908) (158,493) (153,617) (71) (94,899) (142,007) (108,279) (85) (14,499) (21,697) (16,543) (13) 2,895,844 1,924,613 2,534,384 387,212 (3,078,286) (1,939,054) (2,772,862) (423,648) — (167,329) — — 398,777 60,927 (300,564) (45,921) 240,566 (4,000) 168,781 — — — — — Net cash flows used in financing activities (553,179) (314,749) (485,535) (74,182) Net (decrease)/increase in cash and cash equivalents (517,128) (302,082) 1,175,687 Cash and cash equivalents at January 1 3,127,602 2,596,536 2,291,345 Effect of exchange rate changes on balances in foreign currencies (13,938) (3,109) 7,332 Cash and cash equivalents at December 31 2,596,536 2,291,345 3,474,364 179,626 350,080 1,121 530,827 Significant non-cash investing and financing transactions For the years ended December 31, 2013, 2014 and 2015, certain customers settled their debts with trade bills amounting to Rmb 14,012 million, Rmb 14,117 million and Rmb 12,032 million (US$ 1,838 million) respectively. These outstanding trade bills were classified as bills receivables in the financial statements. The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 32 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 1. Corporate information 1.1 Incorporation The consolidated financial statements of China Yuchai International Limited (the “Company”) and its subsidiaries (collectively, the “Group”) for the year ended December 31, 2015 were authorized for issue in accordance with a resolution of the directors on April 15, 2016. China Yuchai International Limited is a limited company incorporated under the laws of Bermuda whose shares are publicly traded. The registered office of the Company is at 2 Clarendon House, Church Street, Hamilton HM11, Bermuda. On March 7, 2008, the Company registered a branch office in Singapore, located at 16 Raffles Quay #26-00, Hong Leong Building, Singapore 048581. The principal operating office is located at 16 Raffles Quay #39-01A, Hong Leong Building, Singapore 048581. 1.2 Investment in Guangxi Yuchai Machinery Company Limited The Company was incorporated under the laws of Bermuda on April 29, 1993. The Company was established to acquire a controlling financial interest in Guangxi Yuchai Machinery Company Limited (“Yuchai”), a Sino-foreign joint stock company which manufactures, assembles and sells diesel engines in the People’s Republic of China (the “PRC”). The principal markets for Yuchai’s diesel engines are truck manufacturers in the PRC. The Company owns, through six wholly-owned subsidiaries, 361,420,150 shares or 76.41% of the issued share capital of Yuchai (“Foreign Shares of Yuchai”). Guangxi Yuchai Machinery Group Company Limited (“State Holding Company”), a state-owned enterprise, owns 22.09% of the issued share capital of Yuchai (“State Shares of Yuchai”). In December 1994, the Company issued a special share (the “Special Share”) at par value of US$0.10 to Diesel Machinery (BVI) Limited (“DML”), a company controlled by Hong Leong Corporation Limited, now known as Hong Leong (China) Limited (“HLC”). The Special Share entitles its holder to designate the majority of the Company’s Board of Directors (six of eleven). The Special Share is not transferable except to Hong Leong Asia Ltd. (“HLA”), the holding company of HLC, or any of its affiliates. During 2002, DML transferred the Special Share to HL Technology Systems Pte. Ltd. (“HLT”), a wholly-owned subsidiary of HLC. Yuchai established three direct subsidiaries, Guangxi Yuchai Machinery Monopoly Development Co., Ltd. (“YMMC”), Guangxi Yulin Yuchai Accessories Manufacturing Company Limited (“YAMC”) and Yuchai Express Guarantee Co. Ltd (“YEGCL”). YMMC and YAMC were established in 2000, and are involved in the manufacture and sale of spare parts and components for diesel engines in the PRC. YEGCL was established in 2004, and is involved in the provision of financial guarantees to mortgage loan applicants in favor of banks in connection with the applicants’ purchase of automobiles equipped with diesel engines produced by Yuchai. In 2006, YEGCL ceased granting new guarantees with the aim of servicing the remaining outstanding guarantee commitments to completion. YEGCL has no more guarantee commitments remaining at the end of 2011. As YEGCL is a non-core business of the Group, on December 27, 2012, Yuchai disposed of its entire shareholdings in YEGCL to one of the subsidiaries of State Holding Company for a consideration of Rmb 85.8 million, and resulted in a loss of Rmb 10.9 million. In October 2015, Yuchai acquired 2.86% of equity interest in YAMC from State Holding Company with a purchase consideration of Rmb 4.2 million. As at December 31, 2015, Yuchai held an equity interest of 71.83% and 100% respectively in YMMC and YAMC. In July 2015, YMMC acquired 40% of equity interest in Yunnan Yuchai Machinery Industry Company Limited (“YMMC Yunnan”) by way of offsetting trade receivables from the third party of Rmb18.3 million. As a result, YMMC Yunnan became a wholly owned subsidiary of YMMC. As at December 31, 2015, YMMC had direct controlling interests in 30 subsidiaries (2014: 30 subsidiaries) which are involved in the trading and distribution of spare parts of diesel engines and automobiles, all of which are established in the PRC. 33 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 1. Corporate information (cont’d) 1.2 Investment in Guangxi Yuchai Machinery Company Limited (cont’d) In December 2006, Yuchai established a wholly-owned subsidiary called Xiamen Yuchai Diesel Engines Co., Ltd (“Xiamen Yuchai”). This new subsidiary was established to facilitate the construction of a new diesel engine assembly factory in Xiamen, Fujian province in the PRC. In September 2015, Yuchai disposed Xiamen Yuchai to consolidate operations back to Yulin City. See Note 4 for transaction details. In December 2007, Yuchai purchased a subsidiary, Guangxi Yulin Hotel Company Limited (“Yulin Hotel”). In August 2012, Yuchai established a wholly-owned subsidiary, Guangxi Yuchai Accessories Manufacturing Company Limited (“GYAMC”). YAMC has gradually shifted the business operations to GYAMC since November 2015. (a) Cooperation with Zhejiang Geely Holding Group Co. Ltd. On April 10, 2007, Yuchai signed a Cooperation Framework Agreement with Zhejiang Geely Holding Group Co., Ltd. (“Geely”) and Zhejiang Yinlun Machinery Company Limited (“Yinlun”) to consider establishing a proposed company to develop diesel engines for passenger cars in the PRC. Yuchai was the largest shareholder followed by Geely as the second largest shareholder. In December 2007, further to the Cooperation Framework Agreement, Yuchai entered into an Equity Joint Venture Agreement with Geely and Yinlun, to form two joint entities, namely Zhejiang Yuchai Sanli Engine Company Limited (“Zhejiang Yuchai”) in Tiantai, Zhejiang province, and Jining Yuchai Engine Company Limited (“Jining Yuchai”) in Jining, Shandong province. The entities are primarily engaged in the development, production and sales of a proprietary diesel engine including the engines of 4D20 series and its parts for passenger vehicles. Yuchai was the controlling shareholder with 52% with Geely and Yinlun held 30% and 18% shareholding respectively in both entities. These two entities have been duly incorporated. On May 22, 2012, further to discussion between Yuchai, Geely and Yinlun, in order to streamline the operations of both joint venture companies and to ensure that Yuchai’s resources and costs are prudently allocated, a share swap agreement had been entered into between Yuchai, Geely and Yinlun such that Yuchai exits from Zhejiang Yuchai and focuses only on Jining Yuchai. The share swap involved Yuchai transferring its 52% shareholding in Zhejiang Yuchai to Yinlun, and Yinlun transferring its 18% shareholding in Jining Yuchai to Yuchai. Jining Yuchai has paid Zhejiang Yuchai a total consideration of Rmb 24.8 million which Zhejiang Yuchai had previously paid to Zhejiang Haoqing Manufacturing Co., Ltd. in respect of development of technology for 4D20 diesel engines. Upon the completion of the share swap on June 7, 2012, Yuchai holds a 70% shareholding in Jining Yuchai with Geely maintaining its 30% shareholding in Jining Yuchai. The technology for the 4D20 diesel engines purchased from Geely is entirely owned by Jining Yuchai. The share swap between Yuchai and Yinlun resulted in a cash payment of Rmb 25 million from Yinlun to Yuchai. Management considered that terms and conditions of these two arrangements and their economic effects and accounted for these transactions as a single transaction. 34 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 1. Corporate information (cont’d) 1.2 Investment in Guangxi Yuchai Machinery Company Limited (cont’d) (a) Cooperation with Zhejiang Geely Holding Group Co. Ltd. (cont’d) On September 28, 2014, Yuchai transferred its entire 70% shareholding interest in Jining Yuchai to an independent third party (the “Purchaser”) for a consideration of Rmb 1.00 dollar. Geely also transferred its entire 30% shareholding interest in Jining Yuchai. Pursuant to the transfer, Yuchai entered into the following agreements with the Purchaser and Jining Yuchai: (i) Loan Agreement Under the terms of the loan agreement entered into between the Purchaser and Jining Yuchai with Yuchai and its wholly-owned subsidiary, Guangxi Yulin Hotel Company Limited (“Lenders”), the Lenders agreed to extend loans with tenure of two years, of amounts not exceeding Rmb 70 million, to Jining Yuchai, by way of entrusted loans, and such loans are solely to be utilised for Jining Yuchai’s working capital purpose. As collateral for the loans, the Purchaser has agreed to pledge its entire shareholding interest in Jining Yuchai to the Lenders and Jining Yuchai has agreed to pledge all of its legal properties (including but not limited to buildings, land and machineries. etc.) to the Lenders. In the event of a breach of the Loan Agreement by Jining Yuchai, the Lenders are accorded the right to sell the pledged property and shareholding interest of the Purchaser in Jining Yuchai to ensure repayment of the loans granted by the Lenders. In addition, in consideration of the Lenders’ financial support to Jining Yuchai, as long as the Purchaser remains a shareholder in Jining Yuchai, irrespective of whether the loans remain outstanding or not, the Purchaser is prohibited from transferring all or part of its shareholding interest in Jining Yuchai to any third party without the prior written consent of the Lenders. The Purchaser has also granted the Lenders an irrevocable option to acquire all of its shareholding in Jining Yuchai at any time at a consideration not exceeding Rmb 250. These two provisions are also contained in a separate undertaking letter issued and signed by the purchaser to the Lenders. The Purchaser, as long as it remains a shareholder in Jining Yuchai, will consult with the Lenders prior to the exercise of any of its powers in relation to Jining Yuchai. The Lenders have the right to recommend for appointment of Jining Yuchai’s legal representative and executive director. (ii) Management Agreement In 2014, under the management agreement entered into between Yuchai and the purchaser, Yuchai has been appointed by the Purchaser to manage Jining Yuchai in all matters relating to the running of its operations and management of its assets. The term of the agreement is for one year which may be extended upon mutual agreement and the management fee is Rmb 240 per annum. In October 2015 the management agreement has renewed and extended for one more year. 35 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 1. Corporate information (cont’d) 1.2 Investment in Guangxi Yuchai Machinery Company Limited (cont’d) (a) Cooperation with Zhejiang Geely Holding Group Co. Ltd. (cont’d) According to the terms of the agreements, Yuchai has an existing arrangement to acquire the 100% shareholding interest in Jining Yuchai. In the event Yuchai exercises this irrevocable option to acquire all shareholding in Jining Yuchai and other rights that currently give the entity access to the returns, Yuchai will potentially obtain 100% shareholding interest of Jining Yuchai. Accordingly, the Group recorded a transaction with non-controlling interest for the deemed acquisition of 30% shareholding interest in Jining Yuchai. The difference of Rmb 36,673 (US$5,603) between the consideration and the carrying value of the additional interest acquired has been recognised as discount on acquisition of non-controlling interests within equity. Yuchai through the above-mentioned contractual arrangements has the power to exercise effective control and is able to direct the activities of Jining Yuchai that most significantly affect its economic performance, and has the exposure or rights to receive benefits from Jining Yuchai from its involvement. Accordingly, Yuchai continues to consolidate the financial results of Jining Yuchai. (b) Cooperation with Caterpillar (China) Investment Co., Ltd. On December 11, 2009, Yuchai, pursuant to a Joint Venture Agreement entered into with Caterpillar (China) Investment Co., Ltd. (“Caterpillar”), incorporated Yuchai Remanufacturing Services (Suzhou) Co., Ltd. (“Yuchai Remanufacturing”) in Suzhou, Jiangsu province to provide remanufacturing services for and relating to Yuchai’s diesel engines and components and certain Caterpillar’s diesel engines and components. The registered capital of Yuchai Remanufacturing is US$200 million. Yuchai holds 51% and Caterpillar holds the remaining 49% in the joint venture. Yuchai and Caterpillar hold joint control in governing the financial and operating policies of the joint venture and Caterpillar has veto rights in relation to certain key decisions despite having only 49% voting rights. As such, Yuchai accounted for Yuchai Remanufacturing as a joint venture. On September 4, 2014, Yuchai, pursuant to an Equity Transfer Agreement entered into with Caterpillar, obtained 49% of equity interest in Yuchai Remanufacturing from Caterpillar. Upon the completion of the equity transfer transaction, Yuchai became legal and beneficial owner of 100% of the equity interest in Yuchai Remanufacturing. From the date of acquisition, Yuchai began to consolidate the financial results of Yuchai Remanufacturing. For details, please refer to Note 4. (c) Cooperation with Chery Automobile Co., Ltd. On August 11, 2009, Yuchai, pursuant to a Framework Agreement entered into with Jirui United Heavy Industry Co., Ltd. (“Jirui United”), a company jointly established by China International Marine Containers Group Ltd. and Chery Automobile Co., Ltd., and Shenzhen City Jiusi Investment Management Co., Ltd. (“Jiusi”), incorporated Y & C Engine Co., Ltd. (“Y & C”) in Wuhu, Anhui province to produce heavy duty vehicle engines with the displacement range from 10.5L to 14L including the engines of YC6K series. The registered capital of the Y & C is Rmb 500 million. Yuchai and Jirui United each hold 45% in the joint venture with Jiusi holding the remaining 10%. 36 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 1. Corporate information (cont’d) 1.2 Investment in Guangxi Yuchai Machinery Company Limited (cont’d) (c) Cooperation with Chery Automobile Co., Ltd. (cont’d) In October 2014, Jiusi, Jirui United and Yuchai agreed to Jiusi transferring 5% of its shareholding interest in Y & C to Jirui United. As a result, Jirui United’s shareholding interest in Y & C increased to 50%. Yuchai and Jirui United hold joint control in governing the financial and operating policies of the joint venture, and share the financial results of Y & C based on respective shareholding percentage accordingly. (d) Cooperation with Guangxi Skylink Software Technology Co., Ltd. On February 8, 2013, Yuchai, pursuant to a joint venture agreement entered into with Guangxi Skylink Software Technology Co., Ltd. (“Guangxi Skylink”), incorporated Guangxi Yineng IOT Science & Technology Co., Ltd. (“Guangxi Yineng”) in Nanning, Guangxi province, to design, develop, manage and market an Electronic Operations Management Platform. The registered share capital of Guangxi Yineng is Rmb 36 million. Yuchai holds 40% and Guangxi Skylink holds the remaining 60% in the joint venture. Yuchai and Guangxi Skylink hold joint control in governing the financial and operating policies of the joint venture, and share the financial results of Guangxi Yineng based on respective shareholding percentage accordingly. In July 2015, the Shareholders’ Resolution of Guangxi Yineng approved the further capital injection from Guangxi Skylink. As a result, Yuchai’s equity interest in Guangxi Yineng was diluted from 40% to 20%. Yuchai retains joint control of Guangxi Yineng. 1.3 Investment in Thakral Corporation Ltd. In March 2005, the Company through Venture Delta Limited (“Venture Delta”) and Grace Star Services Ltd. (“Grace Star”) held 14.99% of the ordinary shares of Thakral Corporation Ltd. (“TCL”). TCL is a company listed on the main board of the Singapore Exchange Securities Trading Limited (the “Singapore Exchange”) and is involved in the manufacture, assembly and distribution of high-end consumer electronic products and home entertainment products in the PRC. Three directors out of eleven directors on the board of TCL were appointed by the Group. Based on the Group’s shareholdings and representation in the board of directors of TCL, management concluded that the Group had the ability to exercise significant influence over the operating and financial policies of TCL. Consequently, the Company’s consolidated financial statements include the Group’s share of the results of TCL, accounted for under the equity method. The Group acquired an additional 1% of the ordinary shares of TCL in September 2005. As a result of the rights issue of 87,260,288 rights shares on February 16, 2006, the Group’s equity interest in TCL increased to 19.4%. On August 15, 2006, the Group exercised its right to convert all of its 52,933,440 convertible bonds into 529,334,400 new ordinary shares in the capital of TCL. Upon the issue of the new shares, the Group’s interest in TCL has increased to 36.6% of the total issued and outstanding ordinary shares. During the year ended December 31, 2007, the Group did not acquire new shares in TCL. However, as a result of conversion of convertible bonds into new ordinary shares by TCL’s third party bondholders, the Group’s interest in TCL was diluted to 34.4%. On September 2, 2008, Venture Delta transferred 1,000,000 ordinary shares, representing 0.04% interest in TCL to Grace Star. 37 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 1. Corporate information (cont’d) 1.3 Investment in Thakral Corporation Ltd. (cont’d) On December 1, 2009, TCL announced its plan to return surplus capital of approximately S$130.6 million to shareholders by way of the Capital Reduction Exercise. Concurrently with the Capital Reduction Exercise, Venture Delta and Grace Star intend to appoint a broker to sell 550,000,000 shares out of their 898,990,352 shares in TCL at a price of S$0.03 per share on an ex-distribution basis (“Placement”). As of December 1, 2009, from the date that an associate is classified as disposal group held for sale, the Group ceased to apply the equity method and the investment in TCL was measured at the lower of the carrying amount and fair value less cost to sell and classified as held for sale. On July 7, 2010, TCL made payment of cash distribution to shareholders pursuant to the Capital Reduction Exercise. Subsequent to the cash distribution, the Group began to sell its shares in TCL in the market. As of December 31, 2010, 580,253,000 shares in TCL had been disposed of and the Group’s shareholding interest in TCL had reduced from 34.4% to 12.2%. In line with the decrease of the Group’s shareholding interest in TCL, the Group’s representation in the board of directors of TCL also reduced to one out of eight directors on the board of TCL. As of December 31, 2010, the Group did not exercise significant influence over the operating and financial policies of TCL. The Group’s investment in TCL was classified as held for trading investment as they were held for the purpose of selling in the near term. The Group’s investment in TCL was measured at fair value with changes in fair value recognized in other operating income/expenses in the statement of profit or loss. In 2013, the Group further disposed of 116,284,000 shares in TCL in the open market at a total consideration of S$4.3 million, its shareholding interests in TCL decreased from 12.2% to 7.7% as of December 31, 2013. On April 1, 2015, TCL proposed to undertake a share consolidation exercise to consolidate every 20 ordinary shares in the capital of TCL into 1 ordinary share. The share consolidation exercise was completed on May 11, 2015. Upon completion of the share consolidation exercise, the Company held 10,122,667 ordinary shares of TCL. As of December 31, 2015, the Company’s shareholding interests in TCL remained at 7.7% (2014: 7.7%). 1.4 Investment in HL Global Enterprises Limited On February 7, 2006, the Group acquired 29.1% of the ordinary shares of HL Global Enterprises Limited (“HLGE”). HLGE is a public company listed on the main board of the Singapore Exchange. HLGE is primarily engaged in investment holding, and through its group companies, invests in rental property, hospitality and property developments in Asia. On November 15, 2006, the Group exercised its right to convert all of its 196,201,374 non-redeemable convertible cumulative preference shares (“NCCPS”) into 196,201,374 new ordinary shares in the capital of HLGE. Upon the issue of the new shares, the Group’s equity interest in HLGE had increased to 45.4% of the enlarged total number of ordinary shares in issue. During the year ended December 31, 2007, the Group did not acquire new shares in HLGE. However, new ordinary shares were issued by HLGE arising from the third party’s conversion of NCCPS, and the Group’s interest in HLGE was diluted to 45.4%. On March 26, 2010, the Group converted 17,300,000 of Series B redeemable convertible preference shares (“Series B RCPS”) into ordinary shares in the capital of HLGE. On September 24, 2010, the Group further converted 16,591,000 of Series B RCPS into ordinary shares in the capital of HLGE. Meanwhile, 154,758 of new ordinary shares were issued by HLGE arising from third parties’ conversion of NCCPS. As of December 31, 2010, the Group’s interest in HLGE increased from 45.4% to 47.4%. 38 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 1. Corporate information (cont’d) 1.4 Investment in HL Global Enterprises Limited (cont’d) On March 24, 2011, the Group converted 17,234,000 of Series B RCPS into ordinary shares in the capital of HLGE. On September 23, 2011, the Group further converted 17,915,000 of Series B RCPS into ordinary shares in the capital of HLGE. As of December 31, 2011, the Group’s interest in HLGE increased from 47.4% to 49.4%. On January 13, 2012, HLGE established a trust known as the HL Global Enterprises Share Option Scheme 2006 Trust (the “Trust”) with Amicorp Trustees (Singapore) Limited as the trustee of the Trust (the “Trustee”) pursuant to a trust deed dated January 13, 2012 entered into between HLGE and the Trustee (the “Trust Deed”) to facilitate the implementation of the HL Global Enterprises Share Option Scheme 2006 (the “HLGE 2006 Scheme”). On the same date, the Group transferred 24,189,170 of Series B RCPS in the capital of HLGE, representing 100% of the remaining unconverted Series B RCPS, to the Trustee for a nominal consideration of S$1.00 for the purpose of the Trust. Pursuant to the Articles of Association of HLGE, the 24,189,170 of Series B RCPS held by the Trustee were converted into 24,189,170 new ordinary shares in the capital of HLGE on January 16, 2012, and the new ordinary shares which rank pari passu in all respects with the existing issued ordinary shares, were held by the Trustee under the Trust. As disclosed in Note 3.1, the Trust, being a special purpose entity, has been consolidated. On April 4, 2012, the Group converted 13,957,233 of Series A redeemable convertible preference shares (“Series A RCPS”) into ordinary shares in the capital of HLGE. As of December 31, 2012, the Group’s interest in HLGE increased from 49.4% to 50.1%, based on the total outstanding ordinary shares of HLGE, net of the ordinary shares held by the Trustee under the Trust. As of December 31, 2013, the Group’s interest in HLGE remained at 50.1%, based on the total outstanding ordinary shares of HLGE, net of the ordinary shares held by the Trustee under the Trust. In 2014, the Group purchased in the open market an aggregate of 465,000 ordinary shares in the capital of HLGE. As of December 31, 2014, the Group’s interest in HLGE increased from 50.1% to 50.2%, net of the ordinary shares held by the Trustee under the Trust. On March 2, 2015, HLGE proposed to undertake a share consolidation exercise to consolidate every 10 ordinary shares in the capital of HLGE into 1 ordinary share. The share consolidation exercise was completed on May 14, 2015. Upon completion of the share consolidation exercise, the Company held 47,107,707 ordinary shares of HLGE. As of December 31, 2015, the Group’s shareholding interest in HLGE remains at 50.2%. The Group considers HLGE as a subsidiary as it has power to exercise effective control and direct the activities of HLGE that most significantly affect its economic performance and has the exposure or rights to receive benefits from HLGE from its involvement. 39 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies 2.1 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments and held for trading investment that have been measured at fair value. The consolidated financial statements are presented in Renminbi (“Rmb”) and all values are rounded to the nearest thousand (“Rmb’000”) except when otherwise indicated. 2.2 Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries (“the Group”) as at December 31, 2015. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: • • • Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee The ability to use its power over the investee to affect its returns Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • • • The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Group’s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. 40 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.2 Basis of consolidation (cont’d) Profit or loss and each component of other comprehensive income (“OCI”) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non- controlling interest and other components of equity while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value. 2.3 Summary of significant accounting policies (a) Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, any previously held equity interest is re-measured at its acquisition date fair value and any resulting gain or loss is recognized in profit or loss. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 Financial Instruments: Recognition and Measurement, is measured at fair value with changes in fair value recognized either in either profit or loss. 41 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (a) Business combinations and goodwill (cont’d) Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests, and any previous interest held over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in this circumstance is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained. (b) Investments in associates and joint ventures An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. The Group’s investments in its associates and joint ventures are accounted for using the equity method. Under the equity method, the investment in an associate or a joint venture is initially recognized at cost. The carrying amount of the investment is adjusted to recognize changes in the Group’s share of net assets of the associate or joint venture since the acquisition date. Goodwill relating to the associate or joint venture is included in the carrying amount of the investment and is not tested for impairment separately. 42 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (b) Investments in associates and joint ventures (cont’d) The statement of profit or loss reflects the Group’s share of the results of operations of the associate or joint venture. Any change in OCI of those investees is presented as part of the Group’s OCI. In addition, when there has been a change recognized directly in the equity of the associate or joint venture, the Group recognizes its share of any changes, when applicable, in the statement of changes in equity. Unrealized gains and losses resulting from transactions between the Group and the associate or joint venture are eliminated to the extent of the interest in the associate or joint venture. The aggregate of the Group’s share of profit or loss of an associate and a joint venture is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and non- controlling interests in the subsidiaries of the associate or joint venture. The financial statements of the associate or joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognize an impairment loss on its investment in its associate or joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, then recognizes the loss as “Share of profit of associates” and “Share of losses of joint ventures” in the statement of profit or loss. Upon loss of significant influence over the associate or joint control over the joint venture, the Group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the associate or joint venture upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognized in profit or loss. (c) Current versus non-current classification The Group presents assets and liabilities in statement of financial position based on current/non-current classification. An asset as current when it is: • • • • Expected to be realized or intended to sold or consumed in normal operating cycle Held primarily for the purpose of trading Expected to be realized within twelve months after the reporting period, or Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period 43 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (c) Current versus non-current classification (cont’d) All other assets are classified as non-current. A liability is current when: • • • • It is expected to be settled in normal operating cycle It is held primarily for the purpose of trading It is due to be settled within twelve months after the reporting period, or There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period The Group classifies all other liabilities as non-current. Deferred tax assets and liabilities are classified as non-current assets and liabilities. (d) Fair value measurement The Group measures financial instruments, such as held for trading investments and derivatives, at fair value at each balance sheet date. Fair value related disclosures for financial instruments that are measured at fair value are summarized in the following notes: • • Quoted equity shares Note 34 Foreign exchange forward contract Note 34 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • • In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. 44 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (d) Fair value measurement (cont’d) A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • • • Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 34. (e) Foreign currency translation The Company’s functional currency is US Dollar. The Group’s consolidated financial statements are presented in Renminbi, which is also the functional currency of Yuchai, the largest operating segment of the Group. Each entity in the Group determines its own functional currency, and items included in the financial statements of each entity are measured using that functional currency. 45 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (e) Foreign currency translation (cont’d) Transactions and balances Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognized in profit or loss with the exception of monetary items that are designated as part of the hedge of the Group’s net investment of a foreign operation. These are recognized in OCI until the net investment is disposed of, at which time, the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in OCI. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of gain or loss on change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognized in OCI or profit or loss are also recognized in OCI or profit or loss, respectively). Group companies On consolidation, the assets and liabilities of foreign operations are translated into Rmb at the rate of exchange prevailing at the reporting date and their statements of profit or loss are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation for consolidation are recognized in OCI. On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is recognized in profit or loss. For the US Dollar convenience translation amounts included in the accompanying consolidated financial statements, the Rmb equivalent amounts have been translated into US Dollar at the rate of Rmb 6.5452 = US$1.00, the rate quoted by the People’s Bank of China (“PBOC”) at the close of business on 29 February 2016. No representation is made that the Rmb amounts could have been, or could be, converted into US Dollar at that rate or at any other rate prevailing on February 29, 2016 or any other date. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spot rate of exchange at the reporting date. 46 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (f) Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured, regardless of when the payment is received. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding discounts, rebates, taxes or duty. The Group has concluded that it is the principal in all of its revenue arrangements since it is the primary obligor in all the revenue arrangements has pricing latitude and is also exposed to inventory and credit risks. The specific recognition criteria described below must also be met before revenue is recognized. Sale of goods Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates. Revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. Rendering of services Revenue from rendering of services relates to project management contracts and hotel room and restaurant operations. Revenue is recognized over the period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be performed. Interest income For all financial instruments measured at amortized cost and interest-bearing financial assets classified as available-for-sale, interest income is recorded using the effective interest rate (“EIR”). EIR is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in “Other operating income” in the statement of profit or loss. Rental income Rental income arising from operating leases is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature. Dividends Dividend income is recognized when the Group’s right to receive the payment is established, which is generally when shareholders approve the dividend. 47 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (g) Government grants Government grants are recognized where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognized as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the grant relates to an asset, it is recognized as income in equal amounts over the expected useful life of the related asset. (h) Taxes Current income tax Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where the Group operates and generates taxable income. Current income tax relating to items recognized directly in equity is recognized in equity and not in the statement of profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred tax Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax liabilities are recognized for all taxable temporary differences, except: • • When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future 48 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (h) Taxes (cont’d) Deferred tax (cont’d) Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilized, except: • • When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in OCI or directly in equity. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, are recognized subsequently if new information about facts and circumstances change. The adjustment is either treated as a reduction to goodwill (as long as it does not exceed goodwill) if it was incurred during the measurement period or recognized in profit or loss. 49 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (h) Taxes (cont’d) Sales tax Revenues, expenses and assets are recognized net of the amount of sales tax, except: • When the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case, the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item, as applicable • When receivables and payables are stated with the amount of sales tax included The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. (i) Non-current assets held for sale or for distribution to equity holders of the parent and discontinued operations The Group classifies non-current assets and disposal groups as held for sale or for distribution to equity holders of the parent if their carrying amounts will be recovered principally through a sale or distribution rather than through continuing use. Such non-current assets and disposal groups classified as held for sale or as held for distribution are measured at the lower of their carrying amount and fair value less costs to sell or to distribute. Costs to distribute are the incremental costs directly attributable to the distribution, excluding the finance costs and income tax expense. The criteria for held for distribution classification is regarded as met only when the distribution is highly probable and the asset or disposal group is available for immediate distribution in its present condition. Actions required to complete the distribution should indicate that it is unlikely that significant changes to the distribution will be made or that the distribution with be withdrawn. Management must be committed to the distribution expected within one year from the date of the classification. Similar considerations apply to assets or a disposal group held for sale. Property, plant and equipment and intangible assets are not depreciated or amortized once classified as held for sale or for distribution. Assets and liabilities classified as held for sale or for distribution are presented separately as current items in the statement of financial position. 50 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (i) Non-current assets held for sale or for distribution to equity holders of the parent and discontinued operations (cont’d) A disposal group qualifies as discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and: • • • Represents a separate major line of business or geographical area of operations Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or Is a subsidiary acquired exclusively with a view to resale Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the statement of profit or loss. (j) Cash dividend and non-cash distribution to equity holders of the parent The Company recognises a liability to make cash or non-cash distributions to equity holders of the parent when the distribution is authorized and the distribution is no longer at the discretion of the Company. A distribution is authorized when it is approved by the shareholders. A corresponding amount is recognized directly in equity. Non-cash distributions are measured at the fair value of the assets to be distributed with fair value measurement recognized directly in equity Upon distribution of non-cash asset, any difference between the carrying amount of the liabilities and the carrying amount of the assets distributed is recognized in the statement of profit or loss. (k) Property, plant and equipment Property, plant and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of the property, plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property, plant and equipment are required to be replaced at intervals, the Group recognizes depreciates them separately based on their specific useful lives. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in profit or loss as incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. 51 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (k) Property, plant and equipment (cont’d) Freehold land has an unlimited useful life and therefore is not depreciated. Asset under construction included in plant and equipment are not depreciated as these assets are not yet ready for intended use. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets as follows: Freehold buildings Leasehold land, buildings and improvements Plant and machinery Office furniture, fittings and equipment Motor and transport vehicles : : : : : 50 years Shorter of 15 to 50 years or lease term 3 to 20 years (Note 3.2) 3 to 20 years 3.5 to 15 years The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of profit or loss when the asset is derecognized. The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate. The Group capitalizes interest with respect to major assets under installation or construction based on the weighted average cost of the Group’s general borrowings and actual interest incurred for specific borrowings. Repairs and maintenance of a routine nature are expensed while those that extend the life of assets are capitalized. Construction in progress represents factories under construction and machinery and equipment pending installation. All direct costs relating to the acquisition or construction of buildings and machinery and equipment, including interest charges on borrowings, are capitalized as construction in progress. (l) Investment properties Investment properties are properties owned by the Group that are held to lease to third parties and earn rentals rather than for use in the production or supply of goods or services, or for administrative purposes, or in the ordinary course of business. Investment properties comprise completed investment properties and properties that are being constructed or developed for future use as investment properties. 52 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (l) Investment properties (cont’d) Investment properties are initially recognised at cost and subsequently carried at cost less accumulated depreciation and impairment losses. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of the investment properties. The estimated useful life is 30 years. Depreciation methods, useful lives and residual values of investment properties are reassessed at each reporting date. Investment properties are derecognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gain or loss on the retirement or disposal of an investment property is recognised in profit or loss in the year of retirement or disposal. Transfers are made to or from investment property only when there is a change in use. (m) Research and development costs Research costs are expensed as incurred. The Group received research and development subsidies of Rmb 15,798 and Rmb 37,301 (US$5,698) for the years ended December 31, 2014 and 2015 respectively. The subsidies received are recognized as deferred grants and net off against research and development expenses when earned. Development expenditures on an individual project are recognized as an intangible asset when the Group can demonstrate: • • • • • The technical feasibility of completing the intangible asset so that the asset will be available for use or sale Its intention to complete and its ability to use or sell the asset How the asset will generate future economic benefits The availability of resources to complete the asset The ability to measure reliably the expenditure during development Following initial recognition of the development expenditure as an asset, the asset is carried at cost less any accumulated amortization and accumulated impairment losses. Amortization of the asset begins when development is complete and the asset is available for use. Development costs are amortized over the period of expected future benefit, and are recorded in cost of sales. During the period of development, the asset is tested for impairment annually. As of December 31, 2013, 2014 and 2015, capitalized development expenditures are not amortized because the intangible asset has not been completed and is not available for use or sale. 53 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (n) Financial instruments – initial recognition and subsequent measurement A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets Initial recognition and measurement Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial assets are recognized initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognized on the trade date, i.e., the date that the Group commits to purchase or sell the asset. The Group’s financial assets include cash and bank balances, bank deposits, trade and other receivables, loans and other receivables, quoted financial instruments and derivative financial instruments. Subsequent measurement For purposes of subsequent measurement, financial assets are classified in four categories: • • • • Financial assets at fair value through profit or loss Loans and receivables Held-to-maturity investments Available-for-sale financial investments 54 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (n) Financial instruments – initial recognition and subsequent measurement (cont’d) Financial assets (cont’d) Subsequent measurement (cont’d) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments as defined by IAS 39. Financial assets at fair value through profit and loss are carried in the statement of financial position at fair value with net changes in fair value presented as other operating expenses (negative net changes in fair value) or other operating income (positive net changes in fair value) in the statement of profit or loss. Financial assets designated upon initial recognition at fair value through profit or loss are designated at their initial recognition date and only if the criteria under IAS 39 are satisfied. The Group has designated its remaining 7.7% shareholding interest in TCL as financial assets at fair value through profit or loss. The Group evaluates its financial assets held for trading, other than derivatives, to determine whether the intention to sell them in the near term is still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets and management’s intention to sell them in the foreseeable future significantly changes, the Group may elect to reclassify them. The reclassification to loans and receivables and available-for-sale depends on the nature of the asset. This evaluation does not affect any financial assets designated at fair value through profit or loss using the fair value option at designation, as these instruments cannot be reclassified after initial recognition. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortized cost using the EIR method, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in “Other operating income” in the statement of profit or loss. The losses arising from impairment are recognized in the statement of profit or loss in finance costs for loans and in cost of sales or other operating expenses for receivables. 55 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (n) Financial instruments – initial recognition and subsequent measurement (cont’d) Financial assets (cont’d) Subsequent measurement (cont’d) Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when the Group has the positive intention and ability to hold them to maturity. After initial measurement, held-to-maturity investments are measured at amortized cost using the EIR, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance income in the statement of profit or loss. The losses arising from impairment are recognized in the statement of profit or loss as finance costs. The Group did not have any held-to-maturity investments during the years ended December 31, 2014 and 2015. Available-for-sale (“AFS”) financial assets AFS financial assets include equity investments and debt securities. Equity investments classified as AFS are those that are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in the market conditions. After initial measurement, AFS financial assets are subsequently measured at fair value with unrealized gains or losses recognized in OCI and credited in the AFS reserve until the investment is derecognized, at which time the cumulative gain or loss is recognized in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the AFS reserve to the statement of profit or loss in finance costs. Interest earned whilst holding AFS financial assets reported as interest income using the EIR method. The Group evaluates whether the ability and intention to sell its AFS financial assets in the near term is still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets, the Group may elect to reclassify these financial assets if the management has the ability and intention to hold the assets for foreseeable future or until maturity. For a financial asset reclassified from the AFS category, the fair value carrying amount at the date of reclassification becomes its new amortized cost and any previous gain or loss on the asset that has been recognized in equity is amortized to profit or loss over the remaining life of the investment using the EIR. Any difference between the new amortized cost and the maturity amount is also amortized over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the statement of profit or loss. The Group does not have AFS financial assets in 2014 and 2015. 56 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (n) Financial instruments – initial recognition and subsequent measurement (cont’d) Financial assets (cont’d) De-recognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Group’s consolidated statement of financial position) when: • • The rights to receive cash flows from the asset have expired, or The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass- through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass- through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognize the transferred asset to the extent of the Group’s continuing involvement. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Impairment of financial assets The Group assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. An impairment exists if one or more events that has occurred since the initial recognition of the asset (an incurred “loss event”), has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. 57 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (n) Financial instruments – initial recognition and subsequent measurement (cont’d) Impairment of financial assets (cont’d) Financial assets carried at amortized cost For financial assets carried at amortized cost, the Group first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment. The amount of any impairment loss identified is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognized in statement of profit or loss. Interest income (recorded as “Other operating income” in the statement of profit or loss) continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to finance costs in the statement of profit or loss. AFS financial assets For AFS financial assets, the Group assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classified as AFS, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. “Significant” is evaluated against the original cost of the investment and “prolonged” against the period in which the fair value has been below its original cost. When there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized in the statement of profit or loss – is removed from OCI and recognized in the statement of profit or loss. Impairment losses on equity investments are not reversed through profit or loss; increases in their fair value after impairment are recognized in OCI. 58 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (n) Financial instruments – initial recognition and subsequent measurement (cont’d) Impairment of financial assets (cont’d) AFS financial assets (cont’d) The determination of what is ‘significant’ or ‘prolonged’ requires judgement. In making this judgment, the Group evaluates, among other factors, the duration or extent to which the fair value of an investment is less than its cost. In the case of debt instruments classified as AFS, the impairment is assessed based on the same criteria as financial assets carried at amortized cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortized cost and the current fair value, less any impairment loss on that investment previously recognized in the statement of profit or loss. Future interest income continues to be accrued based on the reduced carrying amount of the asset, using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the statement of profit or loss, the impairment loss is reversed through the statement of profit or loss. Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Group’s financial liabilities include trade and other payables, loans and borrowings, and derivative financial instruments. 59 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (n) Financial instruments – initial recognition and subsequent measurement (cont’d) Financial liabilities (cont’d) Subsequent measurement The measurement of financial liabilities depends on their classification, as described below: Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in the statement of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit and loss are designated at the initial date of recognition, and only if the criteria in IAS 39 are satisfied. The Group has not designated any financial liability as at fair value through profit or loss. Loans and borrowings After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance costs in the statement of profit or loss. This category generally applies to interest-bearing loans and borrowings. For more information, please refer to Note 16(b). 60 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (n) Financial instruments – initial recognition and subsequent measurement (cont’d) Financial liabilities (cont’d) De-recognition A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the de-recognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the statement of profit or loss. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously. Derivative financial instruments Initial recognition and subsequent measurement The Group uses derivative financial instruments, such as forward currency contracts, to hedge its foreign currency risks. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss. The Group does not apply hedge accounting. 61 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (o) Inventories Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: • • Raw materials: purchase cost on a weighted average basis Finished goods and work in progress: cost of direct materials and labor and a proportion of manufacturing overheads based on the normal operating capacity, but excluding borrowing costs Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. (p) Impairment of non-financial assets The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (“CGU”) fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre- tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. Impairment losses, including impairment on inventories, are recognized in the statement of profit or loss in expense categories consistent with the function of the impaired asset. For assets excluding goodwill and intangible assets with indefinite useful lives, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of profit or loss. 62 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (p) Impairment of non-financial assets (cont’d) Goodwill Goodwill and intangible assets with indefinite useful lives are tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods. Intangible assets Intangible assets with definite useful lives are tested for impairment annually as at December 31 either individually or at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired. (q) Cash and cash equivalents Cash and bank balances comprise cash at banks and on hand and short-term deposits with insignificant risk of changes in value. For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposits, as defined above, net of outstanding bank overdrafts and restricted cash. (r) Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement. Prepaid operating lease Prepaid operating lease represents payments made to the PRC land bureau for land use rights, which are charged to expense on a straight-line basis over the respective periods of the rights which are in the range of 15 to 50 years. 63 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (r) Leases (cont’d) Group as a lessee A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Group is classified as a finance lease. Finance leases are capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance costs in the statement of profit or loss. A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Operating lease payments are recognized as an operating expense in the statement of profit or loss on a straight-line basis over the lease term. Group as a lessor Leases in which the Group does not transfer substantially all the risks and rewards of ownership of an asset are classified as operating leases. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned. (s) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. To the extent that funds are borrowed specifically for the purpose of obtaining the asset, the amount of borrowing costs eligible for capitalization should be determined as the actual borrowing costs incurred less any investment income on the temporary investment of those borrowings. To the extent that funds are borrowed generally and used for the purpose of obtaining the asset, the amount of borrowing costs eligible for capitalization is by applying a capitalization rate to the expenditures on that asset. The capitalization rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized during a period should not exceed the amount of borrowing costs incurred during that period. 64 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (t) Provisions General Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the statement of profit or loss net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Product warranty The Group recognizes a liability at the time the product is sold, for the estimated future costs to be incurred under the lower of a warranty period or warranty mileage on various engine models, on which the Group provides free repair and replacement. For on-road applications engines, warranties extend for a duration (generally 12 months to 36 months) or mileage (generally 50,000 kilometers to 300,000 kilometers), whichever is the lower. For other applications engines, warranties extend for a duration of generally 3 to 24 months. Provisions for warranty are primarily determined based on historical warranty cost per unit of engines sold adjusted for specific conditions that may arise and the number of engines under warranty at each financial year. In previous years, warranty claims have typically not been higher than the relevant provisions made in our consolidated statement of financial position. If the nature, frequency and average cost of warranty claims change, the accrued liability for product warranty will be adjusted accordingly. (u) Pensions and other post-employment benefits The Group participates in and makes contributions to the national pension schemes as defined by the laws of the countries in which it has operations. The contributions are at a fixed proportion of the basic salary of the staff. Contributions are recognized as compensation expense in the period in which the related services are performed. (v) Share-based payments Employees (including senior executives) of the Group receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments (“equity-settled transactions”). 65 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (v) Share-based payments (cont’d) Equity-settled transactions The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model. That cost is recognized, together with a corresponding increase in other capital reserves in equity, over the period in which the performance and/or service conditions are fulfilled in employee benefits expense (Note 26). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The statement of profit or loss expense or credit for a period represents the movement in cumulative expense recognized as at the beginning and end of that period and is recognized in employee benefits expense (Note 26). No expense is recognized for awards that do not ultimately vest, except for equity-settled transactions for which vesting is conditional upon a market or non-vesting condition. These are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. When the terms of an equity-settled award are modified, the minimum expense recognized is the expense had the terms had not been modified, if the original terms of the award are met. An additional expense is recognized for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share (further details are given in Note 10). (w) Development properties Development properties are those properties which are held with the intention of development and sale in the ordinary course of business. They are stated at the lower of cost plus, where appropriate, apportion of attributable profit, and estimated net realizable value, net of progress billings. Net realizable value represents the estimated selling price less costs to be incurred in the selling of the properties. The cost of properties under development comprises specifically identified costs, including acquisition costs, development expenditure, borrowing costs and other related expenditure. Borrowing costs payable on loans funding a development property are also capitalized, on a specific identification basis, as part of the costs of the development property until the completion of development. 66 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.3 Summary of significant accounting policies (cont’d) (x) Related parties A related party is defined as follows: (a) A person or a close member of that person’s family is related to the Group and Company if that person: (i) has control or joint control over the Company; (ii) has significant influence over the Company; or (iii) is a member of the key management personnel of the Group or Company or of a parent of the Company. (b) An entity is related to the Group and the Company if any of the following conditions applies: (i) (ii) the entity and the Company are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others). one entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member). (iii) both entities are joint ventures of the same third party. (iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity. (v) the entity is controlled or jointly controlled by a person identified in (a). (vi) a person identified in (a) (i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity). (y) Segment reporting For management purposes, the Group is organized into operating segments based on their products and services which are independently managed by the respective segment managers responsible for the performance of the respective segments under their charge. The segment managers report directly to the management of the Company who regularly review the segment results in order to allocate resources to the segments and to assess the segment performance. Additional disclosures on each of these segments are shown in Note 31, including the factors used to identify the reportable segments and the measurement basis of segment information. 67 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.4 Changes in accounting policy and disclosures New and amended standards and interpretations The accounting policies adopted are consistent with those of the previous financial year, except for the following new and revised standards and amendments to IFRS effective as of January 1, 2015: Amendments to IAS 19 Defined Benefit Plans: Employee Contributions IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service. This amendment is effective for annual periods beginning on or after July 1, 2014. This amendment is not relevant to the Group, since none of the entities within the Group has defined benefit plans with contributions from employees or third parties. Annual Improvements 2010-2012 Cycle With the exception of the improvement relating to IFRS 2 Share-based Payment applied to share-based payment transactions with a grant date on or after July 1, 2014, all other improvements are effective for accounting periods beginning on or after July 1, 2014. The Group has applied these improvements for the first time in these consolidated financial statements. They include: IFRS 2 Share-based Payment This improvement is applied prospectively and clarifies various issues relating to the definitions of performance and service conditions which are vesting conditions, including: • • • • • A performance condition must contain a service condition A performance target must be met while the counterparty is rendering service A performance target may relate to the operations or activities of an entity, or to those of another entity in the same group A performance condition may be a market or non-market condition If the counterparty, regardless of the reason, ceases to provide service during the vesting period, the service condition is not satisfied The clarifications are consistent with how the Group has identified any performance and service conditions which are vesting conditions for the options granted under its Equity Incentive Plan. 68 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.4 Changes in accounting policy and disclosures (cont’d) New and amended standards and interpretations (cont’d) Annual Improvements 2010-2012 Cycle (cont’d) IFRS 3 Business Combinations The amendment is applied prospectively and clarifies that all contingent consideration arrangements classified as liabilities (or assets) arising from a business combination should be subsequently measured at fair value through profit or loss whether or not they fall within the scope of IFRS 9 (or IAS 39, as applicable). There is no contingent consideration arising from Group’s business combination activities, thus, this amendment did not impact with the Group’s accounting policy. IFRS 8 Operating Segments The amendments are applied retrospectively and clarify that: • • An entity must disclose the judgements made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are ‘similar’ The reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities The Group has not applied the aggregation criteria in IFRS 8.12. The Group has presented the reconciliation of segment assets to total assets in previous periods and continues to disclose the same in Note 31 in this year’s financial statements as the reconciliation is reported to the chief operating decision maker for the purpose of decision making. IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets The amendment is applied retrospectively and clarifies in IAS 16 and IAS 38 that the asset may be revalued by reference to observable data by either adjusting the gross carrying amount of the asset to market value or by determining the market value of the carrying value and adjusting the gross carrying amount proportionately so that the resulting carrying amount equals the market value. In addition, the accumulated depreciation or amortisation is the difference between the gross and carrying amounts of the asset. This amendment did not have any impact to the Group as the Group did not perform any revaluation. IAS 24 Related Party Disclosures The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. This amendment is not relevant for the Group as it does not receive any management services from other entities. 69 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.4 Changes in accounting policy and disclosures (cont’d) New and amended standards and interpretations (cont’d) Annual Improvements 2011-2013 Cycle These improvements are effective from July 1, 2014 and the Group has applied these amendments for the first time in these consolidated financial statements. They include: IFRS 3 Business Combinations The amendment is applied prospectively and clarifies for the scope exceptions within IFRS 3 that: • • Joint arrangements, not just joint ventures, are outside the scope of IFRS 3 This scope exception applies only to the accounting in the financial statements of the joint arrangement itself. The Company is not a joint arrangement, and thus this amendment is not relevant for the Group and its subsidiaries. IFRS 13 Fair Value Measurement The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IFRS9 (or IAS 39, as applicable). The Group does not apply the portfolio exception in IFRS 13. IAS 40 Investment Property The description of ancillary services in IAS 40 differentiates between investment property and owner-occupied property (i.e., property, plant and equipment). The amendment is applied prospectively and clarifies that IFRS 3, and not the description of ancillary services in IAS 40, is used to determine if the transaction is the purchase of an asset or a business combination. This amendment did not impact the accounting policy of the Group. 2.5 Standards issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective. 70 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.5 Standards issued but not yet effective (cont’d) IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 9. IFRS 14 Regulatory Deferral Accounts IFRS 14 is an optional standard that allows an entity, whose activities are subject to rate-regulation, to continue applying most of its existing accounting policies for regulatory deferral account balances upon its first-time adoption of IFRS. Entities that adopt IFRS 14 must present the regulatory deferral accounts as separate line items on the statement of financial position and present movements in these account balances as separate line items in the statement of profit or loss and other comprehensive income. The standard requires disclosures on the nature of, and risks associated with, the entity’s rate-regulation and the effects of that rate-regulation on its financial statements. IFRS 14 is effective for annual periods beginning on or after January 1, 2016. Since the Group is an existing IFRS preparer, this standard would not apply. IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after January 1, 2018 with early adoption permitted. During 2015, the Group performed preliminary assessment of IFRS 15. This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses or additional reasonable and supportable information being made available to the Group in the future. The assessment activities involved reviewing key contractual terms with Group’s customers. The assessment is currently ongoing. 71 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.5 Standards issued but not yet effective (cont’d) Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognized in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognized only to the extent of unrelated investors’ interests in the associate or joint venture. These amendments must be applied prospectively and are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group. Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception The amendments address issues that have arisen in applying the investment entities exception under IFRS 10. The amendments to IFRS 10 clarify that the exemption from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an investment entity, when the investment entity measures all of its subsidiaries at fair value. Furthermore, the amendments to IFRS 10 clarify that only a subsidiary of an investment entity that is not an investment entity itself and that provides support services to the investment entity is consolidated. All other subsidiaries of an investment entity are measured at fair value. The amendments to IAS 28 allow the investor, when applying the equity method, to retain the fair value measurement applied by the investment entity associate or joint venture to its interests in subsidiaries. These amendments must be applied retrospectively and are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group. Amendments to IAS 1 Disclosure Initiative The amendments to IAS 1 Presentation of Financial Statements clarify, rather than significantly change, existing IAS 1 requirements. The amendments clarify: • • The materiality requirements in IAS 1 That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be disaggregated 72 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.5 Standards issued but not yet effective (cont’d) Amendments to IAS 1 Disclosure Initiative (cont’d) • • That entities have flexibility as to the order in which they present the notes to financial statements That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement(s) of profit or loss and OCI. These amendments are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group. Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not re-measured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party. The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact to the Group. Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortise intangible assets. The amendments are effective prospectively for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact to the Group given that the Group has not used a revenue-based method to depreciate its non-current assets. 73 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.5 Standards issued but not yet effective (cont’d) Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants The amendments change the accounting requirements for biological assets that meet the definition of bearer plants. Under the amendments, biological assets that meet the definition of bearer plants will no longer be within the scope of IAS 41. Instead, IAS 16 will apply. After initial recognition, bearer plants will be measured under IAS 16 at accumulated cost (before maturity) and using either the cost model or revaluation model (after maturity). The amendments also require that produce that grows on bearer plants will remain in the scope of IAS 41 measured at fair value less costs to sell. For government grants related to bearer plants, IAS 20 Accounting for Government Grants and Disclosure of Government Assistance will apply. The amendments are retrospectively effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact to the Group as the Group does not have any bearer plants. Amendments to IAS 27: Equity Method in Separate Financial Statements The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Entities already applying IFRS and electing to change to the equity method in its separate financial statements will have to apply that change retrospectively. For first-time adopters of IFRS electing to use the equity method in its separate financial statements, they will be required to apply this method from the date of transition to IFRS. The amendments are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments will not have any impact on the Group’s consolidated financial statements. IFRS 16 Leases IFRS 16 requires lessees to recognize for most leases, a liability to pay rentals with a corresponding asset, and recognize interest expense and depreciation separately. The new standard is effective for annual periods beginning on or after January 1, 2019. The Group is currently assessing the impact of the new standard and plans to adopt the new standard on the required effective date. The Group expects the adoption of the new standard will result in increase in total assets and total liabilities. Annual Improvements 2012-2014 Cycle These improvements are effective for annual periods beginning on or after January 1, 2016. They include: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Assets (or disposal groups) are generally disposed of either through sale or distribution to owners. The amendment clarifies that changing from one of these disposal methods to the other would not be considered a new plan of disposal, rather it is a continuation of the original plan. There is, therefore, no interruption of the application of the requirements in IFRS 5. This amendment must be applied prospectively. 74 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 2. Basis of preparation and accounting policies (cont’d) 2.5 Standards issued but not yet effective (cont’d) IFRS 7 Financial Instruments: Disclosures (i) Servicing contracts The amendment clarifies that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. An entity must assess the nature of the fee and the arrangement against the guidance for continuing involvement in IFRS 7 in order to assess whether the disclosures are required. The assessment of which servicing contracts constitute continuing involvement must be done retrospectively. However, the required disclosures would not need to be provided for any period beginning before the annual period in which the entity first applies the amendments. (ii) Applicability of the amendments to IFRS 7 to condensed interim financial statements The amendment clarifies that the offsetting disclosure requirements do not apply to condensed interim financial statements, unless such disclosures provide a significant update to the information reported in the most recent annual report. This amendment must be applied retrospectively. IAS 19 Employee Benefits The amendment clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in that currency, government bond rates must be used. This amendment must be applied prospectively. IAS 34 Interim Financial Reporting The amendment clarifies that the required interim disclosures must either be in the interim financial statements or incorporated by cross-reference between the interim financial statements and wherever they are included within the interim financial report (e.g., in the management commentary or risk report). The other information within the interim financial report must be available to users on the same terms as the interim financial statements and at the same time. This amendment must be applied retrospectively. These amendments are not expected to have any impact on the Group. 3. Significant accounting judgments, estimates and assumptions The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. 75 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 3. Significant accounting judgments, estimates and assumptions (cont’d) 3.1 Judgments In the process of applying the Group’s accounting policies, management has made the following judgments, which have the most significant effect on the amounts recognized in the consolidated financial statements: Operating lease commitments – Group as lessor The Group has leased out some of its assets, including surplus office and manufacturing buildings. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, such as the lease term not constituting a major part of the economic life of the commercial property and the fair value of the asset, that it retains all the significant risks and rewards of ownership of these properties and accounts for the contracts as operating leases. Cash and cash equivalents The Group’s cash and cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. To determine whether a fixed deposit meets the definition of cash and cash equivalents, the Group considers factors such as its intention to hold the fixed deposit to meet short-term cash requirements and maturity and terms of such deposit. The carrying amount of cash and cash equivalents as at December 31, 2014 and 2015 are disclosed in Note 22. Consolidation of a special purpose entity As disclosed in Note 1.4, HLGE established the Trust with the Trustee pursuant to the Trust Deed to facilitate the implementation of the HLGE 2006 Scheme. Pursuant to the terms of the Trust Deed, the Trustee will, inter alia, acquire and hold existing shares in the capital of HLGE (collectively, the “Trust Shares”) for the benefit of participants who are employees of HLGE and/or its subsidiaries and who have been granted share options under the HLGE 2006 Scheme (excluding directors of HLGE and directors and employees of the HLGE’s parent company and its subsidiaries) (the “Beneficiaries”) and transfer such Trust Shares to the Beneficiaries upon the exercise of their share options under the HLGE 2006 Scheme. HLGE will be entitled, from time to time, during the period commencing from the date of the Trust Deed and ending upon the termination of the Trust, to appoint a new trustee in substitution of the existing Trustee. HLGE is entitled to the benefit of any remaining funds, investments or assets which are placed under the control of the Trustee upon termination of the Trust. Based on the foregoing provisions, HLGE therefore consolidates the Trust as part of HLGE in its separate and consolidated financial statements. The Trust Shares are not regarded as treasury shares pursuant to the Singapore Companies Act, Chapter 50 and the Trustee has the power, inter alia, to vote or abstain from voting in respect of the Trust Shares at any general meeting of HLGE in its absolute discretion and to waive its right to receive dividends in respect of the Trust Shares as it deems fit. However, the Trust Shares are accounted for as treasury shares by HLGE as they are issued by HLGE and held by the Trust, which is considered as part of HLGE in accordance with the relevant IFRS. 76 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 3. Significant accounting judgments, estimates and assumptions (cont’d) 3.1 Judgments (cont’d) Consolidation of a special purpose entity (cont’d) The Group considers HLGE as a subsidiary as it has power to exercise effective control and direct the activities of HLGE that most significantly affect its economic performance and has the exposure or rights to receive benefits from HLGE from its involvement. Therefore, HLGE is consolidated in the Group’s consolidated financial statements. Consolidation of a structured entity As discussed in Note 1.2(a) above, on July 1, 2014, pursuant to the Equity Transfer Agreement entered into between Yuchai and an independent third party (the “Purchaser”), Yuchai disposed its equity interest in Jining Yuchai amounting to Rmb 105 million (representing 70% of Jining Yuchai’s total share capital), for a consideration of Rmb 1.00 dollar. Geely also entered into an agreement to dispose their entire stake in Jining Yuchai to the Purchaser on June 18, 2014. In connection with the equity transfer transaction, Yuchai and the Purchaser entered into a Service Management Agreement on October 13, 2014. In accordance with the terms of the Service Management Agreement, the Purchaser appoints Yuchai to direct Jining Yuchai’s operating activities, manage Jining Yuchai’s assets and employees, and the Purchaser, in return, will pay Yuchai Rmb 240 per annum for the management services rendered. On the same day, Yuchai, Yulin Hotel, the Purchaser and Jining Yuchai also entered into a Loan Agreement. In this Loan Agreement, Yuchai and Yulin Hotel agreed to extend a loan facility of Rmb 70 million to Jining for tenure of two years from the date of the agreement, solely for Jining’s daily operation purpose. In addition, Yuchai has the right to appoint the sole director and legal representative of Jining Yuchai. Based on the contractual terms, the Group assessed that the voting rights in Jining Yuchai are not the dominant factor in deciding who controls the entity. Also, it is assessed that there is insufficient equity financing to allow Jining Yuchai to finance its activities without the non-equity financial support from Yuchai. Therefore, the Group concluded that Jining Yuchai is a structured entity under IFRS 10 and, through the contractual arrangements, has the power to exercise effective control and is able to direct the activities of Jining Yuchai that most significantly affect its economic performance, and has the exposure or rights to receive benefits from Jining Yuchai from its involvement. Therefore, Jining Yuchai continues to be consolidated in the Group’s consolidated financial statements. De-recognition of bills receivable The Group sell bills receivable to banks on an ongoing basis depending on funding needs and money market conditions. While the buyer is responsible for servicing the receivables upon maturity of the bills receivable, Chinese law governing bills allows recourse to be traced to all the parties in the discounting process. In relation to the transfer of risks and rewards of the bills receivable when discounted, the management believes that the risks and rewards relating to the bills receivable are substantially transferred to the banks. Accordingly, bills receivable are de-recognized, and a discount equal to the difference between the carrying value of the bills receivable and cash received is recorded in the statement of profit or loss. Please refer to Note 20. 77 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 3. Significant accounting judgments, estimates and assumptions (cont’d) 3.1 Judgments (cont’d) Deferred tax assets Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. The carrying amounts of deferred tax assets as of December 31, 2014 and 2015 are Rmb 388,282 and Rmb 341,728 (US$52,211) respectively. The Group has unrecognized tax loss carried forward amounting to Rmb 674,810 and Rmb 664,393 (US$101,508) as of December 31, 2014 and 2015 respectively. These losses relate to subsidiaries that have a history of losses, do not expire and may not be used to offset taxable income elsewhere in the Group. The subsidiary has no temporary taxable differences or any tax planning opportunities available that could partly support the recognition of these losses as deferred tax assets. If the Group was able to recognize all unrecognized deferred tax assets, profit would increase by Rmb 141,639 (US$21,640) for year ended December 31, 2015 (2014: Rmb 143,746). 3.2 Estimates and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the Group. Such changes are reflected in the assumptions when they occur. Impairment of non-financial assets Impairment exists when the carrying value of an asset or cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow (“DCF”) model. The cash flows are derived from the forecasts for the next eight to fifteen years and do not include restructuring activities that the Group is not yet committed to or significant future investments that will enhance the asset’s performance of the CGU being tested. The Group, based on its history of operations, believes that the adoption of forecast for more than five years is reasonable. The recoverable amount is sensitive to the discount rate used for the DCF model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. These estimates are most relevant to goodwill recognised by the Group. The key assumptions used to determine the recoverable amount for the different CGUs and assets, including a sensitivity analysis, are disclosed and further explained in Note 6, Note 14 and Note 15. 78 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 3. Significant accounting judgments, estimates and assumptions (cont’d) 3.2 Estimates and assumptions (cont’d) Share-based payments The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 26 to the financial statements. Useful lives of plant and machinery The costs of plant and machinery of the Group are depreciated on a straight-line basis over the useful lives of the plant and machinery. Management estimates the useful lives of the plant and machinery to be within 3 to 20 years (Note 2.3(k)). These are common life expectancies applied in the industry. Changes in the expected level of usage and technological developments could impact the economic useful lives and the residual values of the plant and machinery, therefore future depreciation charges could be revised. The carrying amount of the Group’s plant and machinery as of December 31, 2015 is disclosed in Note 11. A decrease of 5% in the expected useful life of the plant and machinery from management’s estimate would decrease the Group’s profit before tax by approximately Rmb 18,209 (US$2,782) (2014: Rmb 17,040). Impairment of property, plant and equipment Long-lived assets to be held and used, such as property, plant and equipment and construction-in-progress are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of carrying amount of an asset to the sum of the undiscounted cash flows expected to result from its use and eventual disposition. An impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset, if the carrying value is not recoverable from the expected future cash flows or fair value less cost of disposal. Assets to be disposed of would be separately presented in the consolidated statement of financial position and reported at the lower of the carrying amount or fair value less cost of disposal, and are no longer depreciated. Further details of the key assumptions applied in the impairment assessment of property, plant and equipment are disclosed in Note 11 to the financial statements. 79 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 3. Significant accounting judgments, estimates and assumptions (cont’d) 3.2 Estimates and assumptions (cont’d) Allowance for doubtful accounts The Group makes allowances for doubtful debts based on an assessment of the recoverability of trade and other receivables. Allowances are applied to trade and other receivables where events or changes in circumstances indicate that the balances may not be collectible. The identification of doubtful debts requires the use of judgment and estimates. Judgment is required in assessing the ultimate realization of these receivables, including the current creditworthiness, past collection history of each customer and on-going dealings with them. Where the expectation is different from the original estimate, such difference will impact the carrying value of trade and other receivables and doubtful debts expenses in the period in which such estimate has been changed. The carrying amounts of allowance for doubtful accounts as of December 31, 2014 and 2015 were Rmb 23,968 and Rmb 55,950 (US$8,548) respectively. Inventory provision Management reviews the inventory listing on a periodic basis. This review involves comparison of the carrying value of the inventory items with the respective net realizable value. The purpose is to ascertain whether an allowance is required to be made in the financial statements for any obsolete and slow-moving items. The carrying amounts of inventory provision as at December 31, 2014 and 2015 were Rmb 108,353 and Rmb 132,306 (US$20,214) respectively. Provision for product warranty The Group recognizes a provision for product warranty in accordance with the accounting policy stated on Note 2.3(t). The Group has made assumptions in relation to historical warranty cost per unit of engines sold. The carrying amounts of the provision of product warranty as at December 31, 2014 and 2015 were Rmb 298,552 and Rmb 233,577 (US$35,687) respectively. Fair value measurement of financial instruments When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the DCF model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. Judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. Please refer to Note 34 for details of fair value measurements. 80 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 3. Significant accounting judgments, estimates and assumptions (cont’d) 3.2 Estimates and assumptions (cont’d) Estimation of fair value in business acquisitions The fair value of assets and liabilities identified during acquisition is based on management’s assessment of fair values. No contingent liability or material intangible assets were identified and recognized. Fair value is the estimated amount for which these assets and liabilities could be exchanged on the date of valuation between a willing buyer and willing seller in an arm’s length transaction. The process of estimating fair value involves significant judgment and estimation. The fair values of the acquired assets are disclosed in Note 4 to the financial statements. Development costs The Group capitalizes development costs in accordance with the accounting policy. Initial capitalization of costs is based on management’s judgement that technological and economic feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. At December 31, 2015, the carrying amount of capitalized development costs was Rmb 81,826 (US$12,502) (2014: Rmb 108,526). Withholding tax The China’s Unified Enterprise Income Tax Law (“CIT law”) also provides for a tax of 10% to be withheld from dividends paid to foreign investors of PRC enterprises. This withholding tax provision does not apply to dividends paid out of profits earned prior to January 1, 2008. Beginning on January 1, 2008, a 10% withholding tax is imposed on dividends paid to the Company, as a non-resident enterprise, unless an applicable tax treaty provides for a lower tax rate and the Company will recognize a provision for withholding tax payable for profits accumulated after December 31, 2007 for the earnings that the Company does not plan to indefinitely reinvest in the PRC enterprises. The carrying amounts of withholding tax provision as of December 31, 2014 and 2015 are Rmb 133,788 and Rmb 113,805 (US$17,388) respectively. The Company estimated the withholding tax by taking into consideration the dividend payment history of Yuchai and the operating cash flow needs of the Company. 81 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 4. Investments in subsidiaries Details of significant subsidiaries of the Group are as follows: Name of significant subsidiary Place of incorporation/ business Group’s effective equity interest 31.12.2014 31.12.2015 Guangxi Yuchai Machinery Company Limited Guangxi Yulin Yuchai Accessories Manufacturing Company Limited (i) Guangxi Yuchai Accessories Manufacturing Company Limited Guangxi Yuchai Machinery Monopoly Development Co., Ltd Xiamen Yuchai Diesel Engines Co., Ltd (ii) Guangxi Yulin Hotel Company Limited Jining Yuchai Engine Company Limited (iii) Yuchai Remanufacturing Services (Suzhou) Co., Ltd. (iv) HL Global Enterprises Limited People’s Republic of China People’s Republic of China People’s Republic of China People’s Republic of China People’s Republic of China People’s Republic of China People’s Republic of China People’s Republic of China Singapore % 76.4 74.2 76.4 54.9 76.4 76.4 % 76.4 76.4 76.4 54.9 — 76.4 — — 76.4 50.2 76.4 50.2 Note: (i) On October 31, 2015, Yuchai acquired the remaining 2.86% of equity interest in YAMC. As a result, YAMC became a wholly owned subsidiary of Yuchai. (ii) On September 21, 2015, Yuchai disposed its 100% equity interest in Xiamen Yuchai Diesel Engines Co., Ltd. (iii) (iv) On September 28, 2014, Yuchai disposed its 70% equity interest in Jining Yuchai. Subsequently, through contractual arrangements, Yuchai obtained 100% control in Jining Yuchai. For details, please refer to Note 1.2(a). On September 4, 2014, Yuchai acquired the remaining 49% of equity interest in Yuchai Remanufacturing. Upon the completion of the equity transfer transaction, Yuchai became the legal and beneficial owner of 100% equity interest in Yuchai Remanufacturing. For details, please refer to Note 1.2(b). 82 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 4. Investments in subsidiaries (cont’d) The Group has the following subsidiaries that have non-controlling interests (“NCI”) that are material to the Group. Proportion of equity interest held by NCI Yuchai YMMC 31.12.2013 31.12.2014 31.12.2015 23.6% 28.2% 23.6% 28.2% 23.6% 28.2% Accumulated balances of material NCI Yuchai YMMC Profit allocated to material NCI Yuchai YMMC Dividends paid to material NCI Yuchai YMMC 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 1,931,591 1,965,207 120,567 153,865 300,252 23,508 237,658 28,958 248,789 31,984 129,088 36,349 19,723 5,554 72,526 218 105,991 56,340 100,412 — 15,341 1,237 Summarized financial information including goodwill on acquisition and consolidation adjustments but before intercompany eliminations of subsidiaries with material non-controlling interests are as follows: Summarized statement of comprehensive income Revenue 31.12.2013 Yuchai YMMC Rmb’000 Rmb’000 15,870,380 1,546,612 Profit for the year representing total comprehensive income 1,007,454 102,797 Attributable to NCI 237,658 28,958 Summarized statement of cash flows Operating Investing Financing Net decrease in cash and cash equivalents 83 621,561 (555,722) (583,757) (517,918) (13,376) (211,219) (4,218) (228,813) CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 4. Investments in subsidiaries (cont’d) Summarized statement of financial position Current assets Non-current assets, excluding goodwill Goodwill Current liabilities Non-current liabilities Net assets Less: Non-controlling interests of the subsidiaries Total equity Attributable to NCI Summarized statement of comprehensive income Revenue Profit for the year representing total comprehensive income Attributable to NCI Summarized statement of cash flows Operating Investing Financing Net decrease in cash and cash equivalents 31.12.2014 Yuchai YMMC Rmb’000 Rmb’000 12,413,177 5,343,418 212,636 (7,938,152) (1,449,541) 8,581,538 (180,724) 8,400,814 1,931,591 968,082 181,716 — (693,904) (3,280) 452,614 (24,616) 427,998 120,567 16,387,356 1,576,578 1,054,637 248,789 113,541 31,984 600,451 (603,771) (480,896) (484,216) 133,580 (55,697) (100,000) (22,117) 84 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 4. Investments in subsidiaries (cont’d) Summarized statement of financial position Current assets Non-current assets, excluding goodwill Goodwill Current liabilities Non-current liabilities Net assets 31.12.2015 Yuchai YMMC Rmb’000 US$’000 Rmb’000 US$’000 12,510,033 1,911,329 1,115,393 5,174,416 212,636 790,567 32,487 245,204 — 170,414 37,464 — (8,717,191) (1,331,845) (802,877) (122,667) (466,478) (71,270) 8,713,416 1,331,268 (771) 556,949 (10,746) 546,203 (118) 85,093 (1,642) 83,451 Less: Non-controlling interests of the subsidiaries (170,103) (25,989) Total equity 8,543,313 1,305,279 Attributable to NCI 1,965,207 300,252 153,865 23,508 Summarized statement of comprehensive income Revenue Profit for the year representing total comprehensive income 13,671,931 2,088,848 1,577,227 240,975 547,216 83,606 129,033 19,714 Attributable to NCI 129,088 19,723 36,349 5,554 Summarized statement of cash flows Operating Investing Financing 1,742,989 (33,515) 266,301 (5,121) (659,691) (100,790) 81,386 (57,777) — Net decrease in cash or cash equivalents 1,049,783 160,390 23,609 12,434 (8,827) — 3,607 The ability of certain subsidiaries of the Group to transfer funds to the Group in the form of cash dividend or to repay advances made by the Group is subject to the approval of the relevant authorities. 85 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 4. Investments in subsidiaries (cont’d) Acquisition of subsidiaries (i) On May 27, 2014, Augustland Sdn Bhd, the wholly-owned subsidiary of HLGE, entered into a sale and purchase agreement to purchase the remaining 55% issued ordinary shares and preference shares in the capital of Augustland Hotel Sdn Bhd (“AHSB”), which owns a hotel in Malaysia, from Amcorp Leisure Holdings Sdn and Hotel Equatorial (M) Sdn Bhd. Following the completion of the acquisition on July 8, 2014, AHSB becomes a wholly-owned subsidiary of HLGE. The acquisition allows HLGE to expand and strengthen its existing core business of hospitality operations. The control of the acquiree was obtained through the acquisition of 55% equity interest from its joint venture partner. (ii) On September 4, 2014, Yuchai, pursuant to an Equity Transfer Agreement entered into with Caterpillar, obtained 49% of equity interest in Yuchai Remanufacturing from Caterpillar. Upon the completion of the equity transfer transaction, Yuchai became legal and beneficial owner of 100% of the equity interest in Yuchai Remanufacturing. The acquisition enables Yuchai to have full ownership and control of Yuchai Remanufacturing which will bring significant advantages from the integration of the remanufacturing business with Yuchai’s manufacturing operations. 86 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 4. Investments in subsidiaries (cont’d) Assets acquired and liabilities assumed Upon acquisition of the remaining equity interest in the above entities, the Group re-measured the previously held equity interests at fair value on acquisition date, with the resulting gain or loss recognized in the statement of profit or loss. The fair value of the identifiable assets and liabilities at the acquisition dates were: Assets Property, plant and equipment Prepaid operating lease Inventories Trade and other receivables Cash and cash equivalents Liabilities Trade and other payables Interest-bearing loans and borrowings Deferred grant Other liabilities Preference shares AHSB Rmb’000 Yuchai Remanufacturing Total Rmb’000 Rmb’000 106,738 — 416 2,485 10,993 120,632 (23,852) (40,841) — (253) (9,068) (74,014) 92,923 28,609 16,958 11,999 3,794 199,661 28,609 17,374 14,484 14,787 154,283 274,915 (19,179) (53,812) (6,300) — — (43,031) (94,653) (6,300) (253) (9,068) (79,291) (153,305) Total identifiable net assets at fair value 46,618 74,992 121,610 Less: Fair value of equity interest in subsidiaries held by the Group immediately before the acquisitions Less: Consideration transferred excluding preference shares Cash consideration Less: Preference shares (21,266) 25,352 31,477 (9,068) 22,409 (38,247) 36,745 (59,513) 62,097 * — — 31,477 (9,068) 22,409 Negative goodwill recognized in the statement of profit or loss 2,943 36,745 39,688 * Cash consideration is immaterial. 87 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 4. Investments in subsidiaries (cont’d) Acquisition of subsidiaries (cont’d) Trade and other receivables acquired The carrying amounts of the acquired receivables reasonably approximate their fair value. At the acquisition date, it is expected that the full contractual amount of the trade and other receivables, expect for Rmb 312 (Note 20) of allowance for doubtful accounts that has already been provided, can be collected. The effect of the acquisitions of subsidiaries on cash flows is as follows: Consideration settled in cash Less: Cash and cash equivalents of subsidiaries acquired Net cash outflow / (inflow) on acquisitions AHSB Rmb’000 31,477 (10,993) 20,484 Yuchai Remanufacturing Total Rmb’000 Rmb’000 — (3,794) (3,794) 31,477 (14,787) 16,690 Gains on re-measuring previously held equity interests in subsidiaries to fair value at acquisition dates are as follows: AHSB Rmb’000 Yuchai Remanufacturing Total Rmb’000 Rmb’000 Fair value of initial equity interest Share of carrying amount Transfer of reserves on initial equity interest in joint venture on acquisition Share of carrying amount immediately before acquisitions Fair value gain on initial equity interest 21,266 (3,423) 469 (2,954) 18,312 38,247 (10,143) — (10,143) 28,104 59,513 (13,566) 469 (13,097) 46,416 88 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 4. Investments in subsidiaries (cont’d) Acquisition of subsidiaries (cont’d) Gain on deemed settlement of pre-existing contractual relationship A gain of Rmb 9,088 related to deemed settlement of pre-existing contractual relationship was recognized in the “Gains arising from acquisitions” in the Group’s statement of profit or loss for the year ended December 31, 2014. Gains arising from acquisition of subsidiaries are summarized as follows: Negative goodwill Fair value gain on existing interests Gain on de-recognition of liabilities Gains arising from acquisitions AHSB Rmb’000 Yuchai Remanufacturing Total Rmb’000 Rmb’000 2,943 18,312 9,088 30,343 36,745 28,104 — 64,849 39,688 46,416 9,088 95,192 The gains arising from acquisition relating to AHSB of Rmb 30,343 arose from the acquisition of the remaining 55% stake from Amcorp Leisure Holdings. The consideration was arrived at on a willing-buyer and willing-seller basis taking into considerations of the valuations commissioned by the seller and buyer, respectively. The Group believes that it is part of the business rationalization plan of the seller to reduce its involvement in Cameron Highlands, Malaysia as a new hotel is being built at Cameron Highlands. The gains arising from acquisition relating to Yuchai Remanufacturing of Rmb 64,849 arose from acquisition of the remaining 49% stake from Caterpillar (China) Investment Co. Ltd. The consideration was arrived at on a willing- buyer and willing-seller basis. The Group believes that it is part of the business rationalization plan of the seller to reduce its joint venture activities in the PRC. Impact of the acquisition on profit or loss From the acquisition date, AHSB has contributed Rmb 21,247 of revenue and gain of Rmb 4,181 to profit before tax of the Group. If the combination had taken place at the beginning of the year, revenue would have been Rmb 16,455,581 and profit before tax for the Group would have been Rmb 1,202,984. From the acquisition date, Yuchai Remanufacturing has contributed Rmb 12,069 of revenue and loss of Rmb 14,305 to profit before tax of the Group. If the combination had taken place at the beginning of the year, revenue would have been Rmb 16,461,480 and profit before tax for the Group would have been Rmb 1,189,468. 89 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 4. Investments in subsidiaries (cont’d) Acquisition of subsidiaries (cont’d) Acquisition of additional interest in HLGE In January and March 2014, Grace Star Services Ltd., an indirect wholly-owned subsidiary of the Company, has purchased in the open market an aggregate of 465,000 ordinary shares in the capital of HLGE, representing 0.05% of the total number of issued ordinary shares of HLGE, for an aggregate gross cash consideration of S$18 (the “Acquisition”). Following the Acquisition, the Company holds in aggregate 471,077,072 ordinary shares in the capital of HLGE, representing approximately 50.17% shareholding in HLGE, based on the total outstanding ordinary shares of HLGE, net of the ordinary shares held by the Trustee under the Trust. Disposal of a subsidiary On September 21, 2015, the Group disposed of one of its wholly-owned subsidiaries, Xiamen Yuchai Diesel Engines Co., Ltd. (“Xiamen Yuchai”) and the disposal consideration was settled in cash. The value of assets and liabilities of the disposal recorded in the consolidated financial statements and the cash flow effect of the disposals were: 31.12.2015 31.12.2015 Rmb’000 US$’000 66,597 17,661 6,354 110,681 970 244 18,797 221,304 (17,161) (996) 203,147 (13,647) 189,500 (18,797) 170,703 10,175 2,698 971 16,911 148 37 2,872 33,812 (2,622) (152) 31,038 (2,085) 28,953 (2,872) 26,081 Property, plant and equipment (Note 11) Land use rights (Note 13) Inventories Trade receivables Other receivables, deposits and prepayments Deferred taxation Cash and bank balances Payables and accruals Provision for taxation Carrying value of net assets Loss on disposal of a subsidiary (Note 8.2(b)) Total consideration Cash and cash equivalents of the subsidiary Net cash inflow on disposal of the subsidiary 90 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 5. Investment in associates Movement in the Group’s share of the associates’ post acquisition retained earnings is as follows: Unquoted equity shares, at cost Share of post-acquisition reserves At January 1 Share of results, net of tax Share of foreign currency translation At December 31 Investment in associates Details of the associates are as follows: 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 4,642 4,642 709 (2,412) (1,467) 956 (11) (1,467) 3,175 245 (41) (1,263) 3,379 (224) 37 (6) (193) 516 Name of company Principal activities Place of incorporation/ business Held by subsidiaries Sinjori Sdn. Bhd. (i) Property investment and Malaysia Guangxi Yuchai Quan Manufacture spare part and sales development Xing Machinery Co., Ltd. (“Quan Xing”) (ii) of auto spare part, diesel engine & spare part, metallic materials, generator & spare part, chemical products (exclude dangerous goods), lubricating oil Guangxi Yulin Yuchai Property management Property Management Co., Ltd. (“Property Management”) (iii) People’s Republic of China Group’s effective equity interest 31.12.2014 31.12.2015 % 14.0 14.8 % 14.0 15.3 People’s Republic of China 22.3 22.9 Note: (i) (ii) (iii) The Group has significant influence in this entity through HLGE who holds effective equity interests of 28% interest in this entity. The Group has significant influence in this entity through YAMC who holds direct equity interests of 20% interest in this entity. The Group has significant influence in this entity through YAMC who holds direct equity interests of 30% interest in this entity. 91 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 5. Investment in associates (cont’d) The summarized financial information of the associates, based on their IFRS financial statements, and reconciliation with the carrying amount of the investment in consolidated financial statements are set out below: 31.12.2013 Quan Xing Total Rmb’000 Rmb’000 Revenue Profit for the year representing total comprehensive income Proportion of the Group’s ownership Group’s share of profit of significant associates Group’s share of loss of other associates, representing the Group’s share of total comprehensive loss of other associates Group’s share of profit for the year, representing the Group’s share of total comprehensive income for the year 74,029 751 20% 150 31.12.2014 Property Management Quan Xing 74,029 751 150 9 159 Total Rmb’000 Rmb’000 Rmb’000 Current assets Non-current assets Current liabilities Equity Proportion of the Group’s ownership Carrying amount of significant associate Carrying amount of other associates Carrying amount of investment in associates Revenue Profit for the year, representing total comprehensive income Group’s share of profit of significant associate Group’s share of profit of other associates, representing the Group’s share of total comprehensive income of other associates Group’s share of profit for the year, representing the Group’s share of total comprehensive income for the year 30,487 220 (23,537) 7,170 20% 1,434 63,113 442 88 8,528 1,215 (5,051) 4,692 30% 1,408 35,976 2,908 872 39,015 1,435 (28,588) 11,862 2,842 333 3,175 99,089 3,350 960 (4) 956 92 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 5. Investment in associates (cont’d) Current assets Non-current assets Current liabilities Equity Proportion of the Group’s ownership Carrying amount of significant associates Carrying amount of other associates Carrying amount of investment in associates 31.12.2015 Quan Xing Property Management Total Total Rmb’000 Rmb’000 Rmb’000 US$’000 30,219 294 (22,973) 7,540 20% 1,508 12,635 1,648 (9,003) 5,280 30% 1,584 42,854 1,942 (31,976) 12,820 3,092 287 3,379 6,547 297 (4,885) 1,959 472 44 516 Revenue 55,305 34,581 89,886 13,733 Profit for the year, representing total comprehensive income Group’s share of profit of significant associates Group’s share of profit of other associates, representing the Group’s share of total comprehensive income of other associates Group’s share of profit for the year, representing the Group’s share of total comprehensive income for the year 368 74 587 176 955 250 (5) 245 146 38 (1) 37 93 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 6. Investment in joint ventures Movement in the Group’s share of the joint ventures’ post-acquisition retained earnings is as follows: Unquoted equity shares, at cost At January 1 Addition Acquisition as subsidiaries Dissolved At December 31 Share of post-acquisition reserves and impairment losses At January 1 Share of results, net of tax (i) Dividend received Others Translation adjustment Acquisition as subsidiaries Losses in dilution in shareholding interest At December 31 Carrying amount of the investment Note: (i) Share of results, net of tax is composed of: 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 554,664 462 (103,368) — 451,758 451,758 2,591 — (1,552) 452,797 69,021 396 — (237) 69,180 (239,542) (179,542) (27,431) (30,711) (258) 912 (214) 90,271 (2,936) (1,190) 698 (195) — — (2,848) (448) (182) 106 (30) — (435) (179,542) (186,013) 272,216 266,784 (28,420) 40,760 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Share of joint venture losses Impairment of investment in joint ventures Fair value adjustments arising from purchase price allocation Share of results, net of tax (44,138) (32,303) (2,804) (79,245) (27,907) — (2,804) (30,711) (22,064) 21,932 (2,804) (2,936) (3,371) 3,351 (428) (448) 94 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 6. Investment in joint ventures (cont’d) The Group has interests in the following joint ventures: Place of incorporation/ business Percentage of interest held 31.12.2014 31.12.2015 Name of company Principal activities Held by subsidiaries Copthorne Hotel Qingdao Co., Ltd. (“Copthorne Qingdao”) Owns and operates a hotel in Qingdao, PRC Shanghai Equatorial Hotel Management Co., Ltd. (“SEHM”) (i) Hotel and property management HL Heritage Sdn. Bhd. (“HL Heritage”) (ii) Property development and Malaysia property investment holdings % 60 49 60 49 45 % 60 — 60 49 45 40 20 People’s Republic of China People’s Republic of China People’s Republic of China People’s Republic of China People’s Republic of China Hong Kong — 35 Shanghai Hengshan Equatorial Hotel Management Co., Ltd. (“SHEHM”) (iii) Hotel and property management Y & C Engine Co., Ltd. Manufacture and sale of heavy duty diesel engines, spare parts and after-sales services Guangxi Yineng IOT Science & Design, development, Technology Co., Ltd. (“Guangxi Yineng”) (iv) management and marketing of an electronic operations management platform YC Europe Co., Limited. (“YC Europe”) (v) Sales and after-sales service for diesel engines, gas engines and related components and parts 95 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 6. Investment in joint ventures (cont’d) Note: (i) (ii) (iii) (iv) (v) On May 8, 2015, SEHM was dissolved under members’ voluntary liquidation. HL Heritage was incorporated on June 12, 2013 with an initial capital of RM2.00. In 2014, HLGE increased its interest in HL Heritage to 60% pursuant to the joint venture agreement entered into with Heritage Hallmark Sdn Bhd (“Heritage Hallmark”) on November 2, 2012. HLGE together with Heritage Hallmark have joint control over HL Heritage. SHEHM was incorporated on January 10, 2014 in the PRC with a registered capital of Rmb 3.5 million. SHEHM is a joint venture company with 49% shareholding interest held by Equatorial Hotel Management Pte. Ltd. (“EHM”), a wholly-owned subsidiary of HLGE, and the remaining 51% shareholding interest held by Shanghai Hengshan (Group) Corporation (China) (“Shanghai Hengshan”). EHM together with Shanghai Hengshan have joint control over SHEHM. In 2015, both EHM and Shanghai Hengshan invested an additional share capital of Rmb 1.4 million into SHEHM. The equity interests of both parties remain unchanged. In July 2015, Shareholders’ Resolution of Guangxi Yineng approved the further capital injection from the other joint venture partner. As a result, Yuchai’s equity interest in Guangxi Yineng was diluted from 40% to 20%. Yuchai retains joint control of Guangxi Yineng. On April 9, 2015, Yuchai had entered into an agreement to form a new joint venture YC Europe in Hong Kong. YC Europe has a wholly owned subsidiary, YC Europe (Germany) GmbH base in Germany to market off- road engines (excluding marine engine) in Europe. During 2015, Yuchai had invested Rmb 1.2 million into the joint venture. The Group assess impairment of investments in affiliates when adverse events or changes in circumstances indicate that the carrying amounts may not be recoverable. If the recoverable amount of investment is below its carrying amount, an impairment charge is recognized. The Group typically perform evaluation of the value of its investment using a discounted cash flows projection. The projection will be performed using historical trends as a reference and certain assumptions to project the future streams of cash flows. In 2013, the Group performed impairment evaluation of its investments. As a result, the Group recognized impairment losses on investments in Yuchai Remanufacturing Services (Suzhou) Co., Ltd.(“Yuchai Remanufacturing”) amounting to Rmb 10.4 million and Copthorne Qingdao, an investment of HLGE, amounting to Rmb 21.9 million. The impairment in Copthorne Qingdao was made based on third party valuation and the Group considered a discount to the fair value of the joint venture due to restrictive clauses in the joint venture agreement. In 2014, the Group performed impairment evaluation of its investments and no further impairment was required. In the same year, the Group acquired the remaining 49% equity interest in Yuchai Remanufacturing and it became a wholly owned subsidiary of the Group. Purchase price allocation exercise was performed based on third party valuation and the assets and liabilities of Yuchai Remanufacturing were stated based on its fair value on acquisition date. In 2015, the Group performed impairment evaluation of its investments in joint ventures. As a result, the Group reversed the earlier impairment of Rmb 21.9 million for Copthorne Qingdao. The reversal was made because the fair value less cost to sell estimated in the latest independent valuation report is higher than the carrying amount and the management had obtained the consent from its joint venture partner to sell the joint venture. Copthorne Qingdao is identified as part of the HLGE segment (Note 31). 96 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 6. Investment in joint ventures (cont’d) The Group estimates the recoverable amounts of investment in Copthorne Qingdao based on its fair value less cost of disposal. The fair value is determined using recognised valuation technique, which is discounted cash flow method. The calculations require the use of key significant unobservable inputs (fair value level 3), which are occupancy rates, room rates, discount rates and gross margins of operating hotel. With regards to the valuation of the recoverable amount of Copthorne Qingdao, management believes that no reasonably possible changes in any of the key assumptions would cause the carrying value of the joint venture to materially exceed its recoverable amount. The Group has included in its consolidated financial statements its share of assets and liabilities incurred by the joint ventures and its share of the results of the joint ventures using equity method. The summarized financial information of the joint ventures, based on their IFRS financial statements, and reconciliation with the carrying amount of the investment in consolidated financial statements are set out below: 31.12.2013 Yuchai Remanufacturing Copthorne Qingdao Total Rmb’000 Rmb’000 Rmb’000 551,806 (44,297) (29,400) (94,548) 36,975 (8,143) (6,301) (49,890) 51% (25,444) (10,371) 67,707 (12,341) (7,473) (8,829) 60% (5,297) (21,932) — (2,804) Y & C Rmb’000 447,124 (23,813) (15,626) (35,829) 45% (16,123) — — Revenue Depreciation and amortization Interest expense Loss for the year, representing total comprehensive loss Proportion of the Group’s ownership Group’s share of loss Impairment loss Depreciation arising from fair value adjustment during purchase price allocation Group’s share of loss of significant joint ventures (16,123) (35,815) (30,033) (81,971) Group’s share of profit of other joint ventures, representing the Group’s share of total comprehensive income of other joint ventures Group’s share of loss for the year, representing the Group’s share of total comprehensive income for the year 97 2,726 (79,245) CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 6. Investment in joint ventures (cont’d) Non-current assets Current assets - Cash and cash equivalents - Others Total assets Non-current liabilities 31.12.2014 Copthorne Qingdao Y & C Total Rmb’000 Rmb’000 Rmb’000 623,846 328,006 951,852 67,105 237,074 928,025 9,864 2,262 76,969 239,336 340,132 1,268,157 - Interest-bearing loans and borrowings (90,000) (140,414) (230,414) Current liabilities - Interest-bearing loans and borrowings - Others Total liabilities Equity Proportion of the Group’s ownership Group’s share of net assets Cumulative impairment loss Unrealized profit on transactions between the Group and the joint venture Carrying amount of significant joint ventures Carrying amount of other joint ventures Carrying amount of the investment in joint ventures (20,000) (426,265) (536,265) 391,760 45% 176,292 — (1,576) (16,825) (158,815) 181,317 60% 108,790 (21,932) (639) — 175,653 86,858 (21,576) (443,090) (695,080) 573,077 262,511 9,705 272,216 98 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 6. Investment in joint ventures (cont’d) 31.12.2014 Yuchai Remanufacturing Copthorne Qingdao Total Rmb’000 Rmb’000 Rmb’000 25,338 (4,866) (3,434) 60,547 (12,092) (9,321) 573,074 (41,104) (39,397) Y & C Rmb’000 487,189 (24,146) (26,642) (12,726) (24,321) (13,123) (50,170) Revenue Depreciation and amortization Interest expense Loss for the year, representing total comprehensive loss Proportion of the Group’s ownership 45% 51% 60% Group’s share of loss * (5,727) (12,404) (7,874) Depreciation arising from fair value adjustment during purchase price allocation Group’s share of loss of significant joint — — (2,804) ventures (5,727) (12,404) (10,678) (28,809) Group’s share of profit of other joint ventures, representing the Group’s share of total comprehensive income of other joint ventures Group’s share of loss for the year, representing the Group’s share of total comprehensive income for the year (1,902) (30,711) * Group’s share of loss includes share of loss in Yuchai Remanufacturing from January 1, 2014 to September 3, 2014. 99 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 6. Investment in joint ventures (cont’d) 31.12.2015 Y & C Copthorne Qingdao Total Total Rmb’000 Rmb’000 Rmb’000 US$’000 638,726 312,885 951,611 145,391 51,634 112,340 802,700 (40,000) (19,102) 9,085 2,851 60,719 115,191 9,277 17,599 324,821 1,127,521 172,267 — — (40,000) (19,102) (175,181) (366,417) (600,700) 526,821 (6,111) (2,918) (26,765) (55,983) (91,777) 80,490 261,232 5,552 39,912 848 266,784 40,760 Non-current assets Current assets - Cash and cash equivalents - Others Total assets Non-current liabilities - Interest-bearing loans and borrowings - Others Current liabilities - Interest-bearing loans and borrowings (30,000) (145,181) - Others Total liabilities Equity Proportion of the Group’s ownership Group’s share of net assets Cumulative impairment loss Reversal of cumulative impairment loss Unrealized profit on transactions between the (343,209) (432,311) 370,389 45% 166,675 — — (23,208) (168,389) 156,432 60% 93,859 (21,932) 21,932 Group and the joint venture 698 — Carrying amount of significant joint ventures 167,373 93,859 Carrying amount of other joint ventures Carrying amount of the investment in joint ventures 100 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 6. Investment in joint ventures (cont’d) Revenue Depreciation and amortization Interest expense Loss for the year, representing total comprehensive loss 31.12.2015 Y & C Copthorne Qingdao Total Total Rmb’000 Rmb’000 Rmb’000 US$’000 356,697 (23,453) (19,612) 50,971 (12,079) (8,599) 407,668 (35,532) (28,211) 62,285 (5,429) (4,310) (19,952) (20,311) (40,263) (6,152) Proportion of the Group’s ownership 45% 60% Group’s share of loss (8,978) (12,187) Depreciation arising from fair value adjustment during purchase price allocation Reversal of cumulative impairment loss — — Group’s share of loss of significant joint ventures (8,978) (2,804) 21,932 6,941 Group’s share of profit of other joint ventures, representing the Group’s share of total comprehensive income of other joint ventures Group’s share of loss for the year, representing the Group’s share of total comprehensive income for the year Note: (2,037) (311) (899) (137) (2,936) (448) As of December 31, 2015, the Group’s share of joint ventures’ capital commitment that are contracted but not paid for and joint ventures’ contingent liabilities were Rmb 37,973 (US$5,802) (2014: Rmb 37,973) and Rmb 112,072 (US$17,123) (2014: Rmb 110,908) respectively. According to Qingdao Municipal Government’s regulation, all hotels in Qingdao, the People’s Republic of China, are imposed for tourism development levy and hotel augmentation levy which are equivalent to 1% of total revenue and 3% of room revenue respectively. According to releases made by the Qingdao Local Taxation Bureau, the tourism development levy and the hotel augmentation levy were withdrawn effective from January 1, 2009 and September 1, 2010 respectively. As at December 31, 2015, the estimated tourism development levy and hotel augmentation levy payable by the Group’s joint venture in Qingdao were Rmb 3,793 (US$580) (2014: Rmb 3,754) and Rmb 9,197 (US$1,405) (2014: Rmb 9,106) respectively. The joint venture, together with other hotel owners in Qingdao is currently negotiating with the Qingdao Municipal Government to waive such levies. The joint venture is of the view that the authority is unlikely to collect such levies. Hence, the above levies have not been provided in the accounts of the joint venture. 101 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 6. Investment in joint ventures (cont’d) Note: (cont’d) As of December 31, 2015, the Group’s share of outstanding bills receivables discounted with banks for which Y & C retained a recourse obligation totalled Rmb 94,188 (US$14,390) (2014: Rmb 79,327). As of December 31, 2015, the Group’s share of outstanding bills receivables endorsed to suppliers for which Y & C retained a recourse obligation were Rmb 4,894 (US$748) (2014: Rmb 18,721). The ability of certain joint ventures of the Group to transfer funds to the Group in the form of cash dividend or to repay advances made by the Group is subject to the approval of the lenders and relevant authorities. 7. Revenue Sale of goods Rendering of services Consisting of: 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 15,809,894 16,355,854 13,639,013 2,083,819 Revenue from hotel and restaurant operations Revenue from sale of development properties Rental income 85,164 6,758 539 92,461 78,815 94,053 14,370 865 608 — 371 — 57 80,288 94,424 14,427 Revenue 15,902,355 16,436,142 13,733,437 2,098,246 8.1 Depreciation and amortization, shipping and handling expenses Depreciation and amortization of property, plant and equipment and prepaid operating leases are included in the following captions. 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Cost of sales Research and development expenses Selling, general and administrative expenses 281,718 299,789 319,962 32,757 74,464 47,169 84,298 58,204 91,269 388,939 431,256 469,435 48,885 8,893 13,944 71,722 102 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 8.1 Depreciation and amortization, shipping and handling expenses (cont’d) Sales related shipping and handling expenses not separately billed to customers are included in the following caption: 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Selling, general and administrative expenses 221,103 208,439 172,865 26,411 8.2 (a) Other operating income 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Interest income Dividend income from held for trading investment Gain on disposal of prepaid operating leases Gain on disposal of held for trading investment Gain on disposal of assets classified as held for sale Gain on liquidation of joint venture Government grant income Fair value gain on foreign exchange forward Write off of trade and other payables Written back of impairment loss on development properties Bad debt recovered Others, net 78,939 1,009 11,437 3,484 7,292 — — — — 45,824 41,314 6,312 989 194 — — — — 2,511 — — 348 31,205 42,437 9 — — 2,976 4,257 8,805 106,931 — 384 — — 53 4,767 2,369 1 455 651 1,345 16,337 contract (Note 19) 12,198 — 15,506 50,978 26,151 14,550 179,887 6,306 121,901 103 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 8.2 (b) Other operating expenses 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Loss on disposal of property, plant and equipment Loss on disposal of subsidiary Loss on dilution of equity interest in joint venture Foreign exchange loss, net Fair value loss on held for trading investment Fair value loss on foreign exchange forward contract Others, net (3,427) (363) — (16,736) (2,866) — (143) (5,984) — — (13,044) (5,250) (2,731) — (14,874) (13,647) (2,848) (45,354) (10,871) — — (2,273) (2,085) (435) (6,929) (1,661) — — (23,535) (27,009) (87,594) (13,383) 8.3 Research and development costs Research and development costs recognized as an expense in the statement of profit or loss amounted to Rmb 506,955 (US$77,454) (2014: Rmb 494,594; 2013: Rmb 468,612). 8.4 Finance costs Interest expense for bank term loans Interest expense for corporate bonds Loss from de-recognition of bills receivable Bank charges Finance lease Less: Borrowing costs capitalized 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 65,458 60,143 58,738 4,266 — (27,394) 161,211 66,168 49,452 36,011 5,029 10 — 57,212 54,116 1,651 3,364 8 — 8,741 8,268 252 514 1 — 156,670 116,351 17,776 104 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 8.5 Staff costs 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 922,151 243,614 56,501 67,972 — 2,336 836,578 279,123 60,069 84,123 5,360 2,305 839,288 297,926 32,190 82,293 10,275 9,062 128,230 45,518 4,918 12,573 1,570 1,384 1,292,574 1,267,558 1,271,034 194,193 Wages and salaries Contribution to defined contribution plans (i) Executive bonuses Staff welfare Cost of share-based payment Others Note: (i) As stipulated by the regulations of the PRC, Yuchai and its subsidiaries participate in defined contribution retirement plans as legally mandated under applicable Chinese laws. All staffs are entitled to an annual pension equal to a fixed proportion of their final basic salary amount at their retirement date. For the years ended December 31, 2015, 2014 and 2013, Yuchai and its subsidiaries were required to make contributions to the retirement plan at a rate of 20.0% of the basic salary of their staff. Expenses incurred in connection with the plan were Rmb 293,516 (US$44,844) (2014: Rmb 275,019; 2013: Rmb 239,723). 9. Income tax expense Income tax expense in the consolidated statement of profit or loss consists of: Current income tax Current income tax charge Adjustments in respect of current income tax of previous year Deferred tax 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 234,064 158,420 104,584 15,979 684 (3,746) (47) (7) Relating to origination and reversal of temporary differences (12,601) 24,965 72,281 11,043 Income tax expense reported in the statement of profit or loss 222,147 179,639 176,818 27,015 105 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 9. Income tax expense (cont’d) Income tax expense reported in the consolidated statement of profit or loss differs from the amount computed by applying the PRC income tax rate of 15% (being tax rate of Yuchai) for the years ended December 31, 2013, 2014 and 2015 for the following reasons: Accounting profit before tax Computed tax expense of 15% Adjustments resulting from: Non-deductible expenses Tax-exempt income Utilization of deferred tax benefits previously not recognized Deferred tax benefits not recognized Tax credits for research and development expense Tax rate differential Under/(over) provision in respect of previous years current tax Withholding tax expense Others Total 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 1,162,119 1,201,385 174,318 180,208 686,139 102,921 104,831 15,725 17,296 (1,528) 11,310 (14,474) — (12,408) 6,015 — (18,010) 20,228 684 23,094 50 (27,024) 20,985 (3,746) 24,175 613 9,815 (5,574) (2,001) 61,299 (27,087) 24,249 (47) 13,126 117 222,147 179,639 176,818 1,500 (852) (306) 9,365 (4,138) 3,705 (7) 2,005 18 27,015 106 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 9. Income tax expense (cont’d) Deferred tax Deferred tax relates to the following: Consolidated statement of financial position Consolidated statement of profit or loss 31.12.2014 31.12.2015 31.12.2015 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 Rmb’000 Rmb’000 Rmb’000 US$’000 Deferred tax liabilities Accelerated tax depreciation (42) (10,894) (1,665) Unremitted earnings from overseas source income Expenditure currently (412) (412) (63) deferred for tax purpose 18 18 3 Derivatives not designated as hedges- foreign exchange forward contract PRC withholding tax on dividend income (i) Deferred tax assets Accelerated accounting depreciation Write down of inventories Allowance for doubtful accounts Accruals Deferred income Write down of intangible asset Others — — — — — — — (10,852) (1,658) — — — — — (2,326) (355) — (2,326) (355) (133,788) (113,805) (134,224) (127,419) (17,388) (19,468) (23,094) (23,094) (24,175) (24,175) (12,549) (25,727) (1,917) (3,930) 11,472 29,497 11,881 25,630 5,505 2,144 241,043 258,296 79,124 34,892 15,000 6,641 — 8,885 388,282 341,728 1,815 3,916 328 39,463 5,331 998 (2,307) (1,049) 44,840 (5,072) 2,614 700 409 (3,867) — (17,906) (3,361) 17,253 (561) (44,232) 62 (591) (513) 2,636 (6,758) — — 15,000 (15,000) (2,292) 1,358 52,211 (1,715) 35,695 12,601 (637) (790) (24,965) 2,244 (46,554) (72,281) 343 (7,113) (11,043) 107 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 9. Income tax expense (cont’d) Deferred tax (cont’d) Note: (i) The movement of PRC withholding tax on dividend income is as follows: At January 1 Provision made to consolidated statement of profit or loss Utilization Translation differences December 31 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 (141,172) (133,788) (20,441) (24,175) 31,052 507 (12,549) 32,616 (84) (1,917) 4,983 (13) (133,788) (113,805) (17,388) Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates, if any, is recognized in the statements of operations in the period that includes the enactment date. The Group has been granted tax credits in relation to approved research and development costs. According to relevant laws and regulations in the PRC prior to the new CIT law, the amount of credits relating to the purchase of certain domestic equipment entitled for deduction each year is limited to the incremental current income tax expense of the subsidiary for the year compared to the income tax expense of the subsidiary in the year immediately prior to the year the credit was approved. The CIT law also provides for a tax of 10% to be withheld from dividends paid to foreign investors of PRC enterprises. This withholding tax provision does not apply to dividends paid out of profits earned prior to January 1, 2008. Beginning on January 1, 2008, a 10% withholding tax is imposed on dividends paid to the Company, as a non-resident enterprise, unless an applicable tax treaty provides for a lower tax rate. The Company recognizes a provision for withholding tax payable for profits accumulated after December 31, 2007 for the earnings that the Company does not plan to indefinitely reinvest in the PRC enterprises. As of December 31, 2015, the provision for withholding tax payable was Rmb 113,805 (US$17,388) (2014: Rmb 133,788). 108 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 9. Income tax expense (cont’d) Deferred tax (cont’d) The following table represents the classification of the Group’s net deferred tax assets: Deferred tax assets Deferred tax liabilities 10. Earnings per share 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 388,282 341,728 (134,224) (127,419) 254,058 214,309 52,211 (19,468) 32,743 Basic earnings per share amounts are calculated by dividing the profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the profit attributable to ordinary equity holders of the parent (after adjusting for interest on the convertible preference shares) by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares. Basic earnings per share The calculation of basic earnings per share is based on: 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Profit attributable to ordinary equity holders of the parent for basic and diluted earnings per share calculations Weighted average number of ordinary shares for basic and diluted earnings per share calculations 700,423 730,280 341,108 52,116 37,267,673 37,720,248 38,712,282 38,712,282 109 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 10. Earnings per share (cont’d) Diluted earnings per share The weighted average number of ordinary shares adjusted for the effect of unissued ordinary shares under the Share Option Scheme is determined as follows: 31.12.2013 31.12.2014 31.12.2015 Weighted average number of shares issued, used in the calculation of basic earnings per share Diluted effect of share options 37,267,673 37,720,248 38,712,282 — — — Weighted average number of ordinary shares (diluted) 37,267,673 37,720,248 38,712,282 There were no dilutive potential ordinary shares in the year ended December 31, 2013. In 2015, 570,000 (2014: 570,000; 2013: Nil) share options granted to employees under the existing employee share option plan have not been included in the calculation of diluted earnings per share because they are anti-dilutive. 11. Property, plant and equipment Cost At January 1, 2014 Additions Acquisition of subsidiaries (Note 4) Disposals Transfers Write-off Freehold land Rmb’000 555 — 13,876 — — — Leasehold land, buildings and improvements Construction in progress Plant and machinery Office furniture, fittings and equipment Motor and transport vehicles Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 1,746,255 793,456 4,102,598 149,021 111,489 6,903,374 4,285 625,311 26,609 22,854 4,870 683,929 26,682 12,866 360 199,661 145,877 (23,288) — — (50,995) 294,179 (812,569) 511,650 — (2,432) — (5,608) 6,740 (39) (6,286) (86,177) — — (55) — (2,471) (8,852) Translation difference (570) (5,593) (4) (787) (1,843) At December 31, 2014 and January 1, 2015 Additions Disposal of subsidiary (Note 4)) Disposals Transfers Write-off 13,861 2,161,715 603,762 4,615,757 183,991 110,378 7,689,464 — — — — — 19,275 (82,065) (15,422) 368,620 13,967 17,641 10,387 429,890 — — — — — (82,065) (70,738) (16,906) (6,154) (109,220) 229,790 (639,453) 408,845 (165) (5,968) (4,812) (5) — 1,994 818 (2,045) (2,051) — — 70 — (7,027) (6,515) Translation difference (560) At December 31, 2015 13,301 2,307,160 328,117 4,969,820 181,448 114,681 7,914,527 110 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 11. Property, plant and equipment (cont’d) Leasehold land, buildings and improvements Construction in progress Plant and machinery Office furniture, fittings and equipment Motor and transport vehicles Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Freehold land Rmb’000 Accumulated depreciation and impairment At January 1, 2014 Charge for the year Disposals Write-off Impairment loss Translation difference At December 31, 2014 and January 1, 2015 Charge for the year Disposals of subsidiary (Note 4) Disposals Write-off Impairment loss Translation difference At December 31, 2015 Net book value At December 31, 2014 At December 31, 2015 US$’000 555 451,530 2,432 2,262,272 — — — — (24) 531 — — — — — (71) 460 65,605 (9,874) — — — (2,432) 6,404 (1,210) 512,455 79,042 (15,468) (4,392) (64) — 1,284 572,857 — — — — — — — — — — 323,769 90,975 20,246 59,447 2,867,211 10,783 420,403* (43,891) (5,832) (4,483) (64,080) — 4,015 (622) (24) 14 (999) — — (34) (2,456) 10,433 (2,889) 2,545,543 104,380 65,713 3,228,622 345,977 22,162 8,821 456,002 — — — (15,468) (63,720) (15,147) (4,485) (87,744) (5) (2,027) 2,873 694 — 807 — — 80 (2,096) 2,873 2,794 2,831,362 110,175 70,129 3,584,983 13,330 12,841 1,962 1,649,260 1,734,303 603,762 2,070,214 328,117 2,138,458 264,973 50,131 326,722 79,611 71,273 10,889 44,665 4,460,842 44,552 4,329,544 6,807 661,484 * An amount of Rmb Nil (US$Nil) (2014: Rmb 1,728) was capitalized as intangible assets. An impairment loss of Rmb 2,873 (US$439) (2014: Rmb 10,433; 2013: Rmb 9,163) was charged to the consolidated statement of profit or loss under “Cost of sales” and “Selling, distribution and administrative costs” for the Group’s property, plant and equipment within the Yuchai segment. The impairment loss for 2013, 2014 and 2015 was due to assets that were not in use. As of December 31, 2015, property, plant and equipment with a carrying amount of Rmb 90,045 (US$13,757) (2014: Rmb 113,878) are pledged to secure bank facilities. Capitalized borrowing costs The Group assessed that none of the borrowing cost qualified for capitalization during the year ended December 31, 2015 and December 31, 2014. 111 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 11. Property, plant and equipment (cont’d) Finance leases The carrying value of property, plant and equipment held under finance leases at December 31, 2015 was Rmb 161 (US$25) (2014: Rmb 324). Additions during the year include Rmb Nil (US$Nil) (2014: Rmb 2,117) of property, plant and equipment under finance leases. Leased assets will be returned to lessor at the end of the lease term. 12. Investment property Cost Transfer from development properties and balance at December 31 Accumulated depreciation Transfer from development properties and balance at December 31 Net carrying amount Fair value 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 — 31,323 4,786 — — — 23,886 3,650 7,437 1,136 7,437 1,136 During the year ended December 31, 2015, the commercial building with carrying amount of Rmb 7,437 (US$1,136) was transferred from development properties to investment property as this property was leased to third parties to generate rental income. The Group has no restrictions on the realisability of its investment property and no contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancement. The fair value is determined by independent professional valuer that has appropriate recognised professional qualifications and recent experience in the location and category of the property being valued. The fair value of investment property is based on market value between a willing buyer and a willing seller in an arm’s length transaction. For comparison method, it compares the subject property with similar properties that were either transacted recently or listed for sale within the same location or other comparable localities. In comparing properties, due consideration is given to factors such as location, size, building differences, improvements and amenities, time element and other relevant factors to arrive at their opinion of value. The assumption used in determination of fair value, with key significant unobservable inputs (fair value level 3), was rental yield of 3% based on valuer’s assessment. 112 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 13. Prepaid operating leases Yuchai and its subsidiaries are granted land use rights of 15 to 50 years in respect of such land. Prepaid operating leases represent those amounts paid for land use rights to the PRC government. The prepaid operating leases charged to expense were Rmb 12,581 and Rmb 13,433 (US$2,052) for the years ended December 31, 2014 and 2015, respectively. Current Non-current Total Cost At January 1 Additions Acquisition of subsidiaries (Note 4) Disposals of subsidiary (Note 4) Disposals At December 31 Accumulated amortization At January 1 Charge for the year Disposals of subsidiary (Note 4) Disposals At December 31 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 13,498 424,591 438,089 12,546 392,455 405,001 1,917 59,961 61,878 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 520,745 556,613 85,041 9,777 28,609 — (2,518) 556,613 — — (24,760) (2,276) 529,577 106,137 12,581 — (194) 118,524 13,433 (7,099) (282) 118,524 124,576 — — (3,783) (347) 80,911 18,109 2,052 (1,085) (43) 19,033 Net carrying amount 438,089 405,001 61,878 As of December 31, 2015, prepaid operating leases with a carrying amount of Rmb 74,377 (US$ 11,364) (2014: Rmb 77,733) are pledged to secure bank facilities. 113 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 14. Goodwill Cost Rmb’000 US$’000 At January 1, 2014, December 31, 2014 and December 31, 2015 218,311 33,354 Accumulated impairment At January 1, 2014, December 31, 2014 and December 31, 2015 5,675 867 Net book value At December 31, 2014 and December 31, 2015 212,636 32,487 Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill acquired through business combinations have been allocated to two cash-generating units for impairment testing as follows: • • Yuchai Yulin Hotel. Goodwill allocated to Yulin Hotel was fully impaired in 2008. Carrying amount of goodwill allocated to the cash-generating unit: Yuchai Yuchai unit 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 212,636 212,636 32,487 The Group performs its impairment test annually. The recoverable amount of the unit was determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management covering an eight-year period. The business of Yuchai is stable since the Group has control in 1994 and the business model of Yuchai is unlikely to change in the foreseeable future. The pre-tax discount rate applied to the cash flow projections was 11.46% (2014: 12.66%). No impairment was identified for this unit. 114 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 14. Goodwill (cont’d) Key assumptions used in value in use calculations The calculation of value in use for the cash-generating unit is most sensitive to the following assumptions: • • • Profit from operation Discount rate Growth rate used to extrapolate cash flows beyond the forecast period Profit from operation – Profit from operation is based on management’s estimate with reference to historical performance of Yuchai unit. Discount rate – Discount rate reflects management’s estimate of the risks specific to the cash-generating unit and is estimated based on weighted average cost of capital (“WACC”). The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by the Group’s investors. The cost of debt is based on the interest-bearing borrowings the cash-generating unit is obliged to service. This rate is weighted according to the optimal debt/equity structure arrived on the basis of the capitalization structure of the peer group. Growth rate estimate – Growth rate is based on management’s estimate with reference to general available indication of long-term gross domestic product growth rate of China. The long term rates used to extrapolate the budget for Yuchai are 6.7% and 7.0% for 2015 and 2014 respectively. Sensitivity to changes in assumptions The implications of the key assumptions for the recoverable amount are discussed below: Profit from operation – A decreased demand can lead to a decline in profit from operation. A decrease in profit from operation by 17.30% (2014: 28.66%) would result in impairment. Discount rate – A rise in pre-tax discount rate to 12.96% (2014: 15.07%) in the Yuchai unit would result in impairment. Growth rate assumptions – Management recognizes that the speed of technological change and the possibility of new entrants can have a significant impact on growth rate assumptions. A reduction to 4.40% (2014: 2.69%) in the long-term growth rate in Yuchai unit would result in impairment. With regard to the assessment of value in use of the Yuchai unit, management believes that no reasonably possible change in any of the above key assumptions would cause the recoverable amount to materially fall below the carrying value of the unit. 115 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 15. Intangible assets Cost At January 1, 2014 Additions – Internally developed At December 31, 2014, January 1, 2015 and December 31, 2015 Impairment At January 1, 2014 Charge to consolidated statement of profit or loss At December 31, 2014 and January 1, 2015 Charge to consolidated statement of profit or loss At December 31, 2015 Net carrying value At December 31, 2014 At December 31, 2015 US$’000 Development costs Rmb’000 145,283 23,243 168,526 — (60,000) (60,000) (26,700) (86,700) 108,526 81,826 12,502 The development costs are related to intellectual property right, technical skills and knowledge of building a new technology of heavy duty diesel engines. The Group has an intangible asset representing technology development costs held by Jining Yuchai with carrying amount of Rmb 50,122 (US$7,658) (2014: Rmb 76,822). The Group performs an impairment review on intangible assets when there is a triggering event. In 2014, the impairment test was triggered when the non-controlling interest disposed its equity interest to an independent third party at a value below the net asset value of Jining Yuchai. In addition, modification has to be made to the existing technology that may delay the commercial deployment of this technology. As a result, an impairment charge of Rmb 60,000 was made in respect of the technology development cost held by Jining Yuchai. In 2015 the Group performed impairment review based on the updated business plan after due considerations of a slowdown in the PRC economy. As a result, a further impairment loss of Rmb 26,700 (US$4,079) was charged to consolidated statement of profit or loss under the line item “selling, distribution and administrative costs” in respect of this technology development costs. 116 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 15. Intangible assets (cont’d) The Group use discounted cash flow method to assess the recoverable amount of asset. Cash flows were projected based on historical growth and past experience and did not exceed the estimated long-term average growth rate of the business in the PRC market. The recoverable amount of the intangible asset was based on its value in use. The Group used a 15-year forecast, from 2016 to 2030 using pre-tax discount rate of 12.34%. The revised business plan projected 6 years, year 2021, to reach commercial deployment of the technology. The revenue growth rate is estimated at 11.10% from 2021 to 2026. Thereafter, the growth rate is at 0% from 2026 to 2030. In 2014, the Group used a 10-year forecast, using pre-tax discount rate of 12.24% and growth rate of 0% from 2025, 5 years after the expected commercial deployment of the technology till the end of the useful life of the technology. If the pre-tax discount rate increased by 1% (2014: 1%) from management estimates, the Group’s impairment loss on intangible asset in Jining Yuchai will increase by Rmb 18,447 (US$2,818) (2014: Rmb 24,131). 16. Other financial liabilities (a) Other liabilities Finance lease liabilities (Note 30) 220 114 17 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 Current Non-current Total 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 92 128 220 59 55 114 9 8 17 117 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 16. Other financial liabilities (cont’d) (b) Interest-bearing loans and borrowings Current Renminbi denominated loans Euro denominated loans Malaysian Ringgit denominated loans Non-current Renminbi denominated loans Singapore Dollar denominated loans(ii) Malaysian Ringgit denominated loans Current Renminbi denominated loans Euro denominated loans Malaysian Ringgit denominated loans Non-current Renminbi denominated loans Singapore Dollar denominated loans(ii) Malaysian Ringgit denominated loans Effective interest rate Maturity 31.12.2014 % 5.81 1.01 6.35 5.00 1.31 6.35 2015 2015 2015 2016 2017 2020 Rmb’000 1,161,300 41,162 6,539 1,209,001 1,015,948 32,431 29,337 1,077,716 Effective interest rate % 4.72 0.95 6.05 8.28 2.15 6.05 Maturity 31.12.2015 31.12.2015 Rmb’000 US$’000 2016 2016 2016 2,113,691 280,922 4,582 322,938 42,920 700 2,399,195 366,558 2017 2017 2020 3,751 32,138 20,620 56,509 574 4,910 3,150 8,634 Note: (i) The Group has the discretion to refinance or rollover the obligations for at least 12 months after the reporting period for the existing loan facilities. All loans balances as stated above do not have a callable feature. 118 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 16. Other financial liabilities (cont’d) (b) Interest-bearing loans and borrowings (cont’d) Note: (cont’d) (ii) The loans are comprised of: Issuer bank December 31, 2014 Facility limit Usage Rmb’000 Bank of Tokyo-Mitsubishi, UFJ Ltd (“BOTM”) Sumitomo Mitsui Banking Corporation (“Sumitomo”) S$ 30 million US$ 30 million December 31, 2015 Bank of Tokyo-Mitsubishi, UFJ Ltd (“BOTM”) Sumitomo Mitsui Banking Corporation (“Sumitomo”) S$ 30 million US$ 30 million 16,215 16,216 32,431 16,069 16,069 32,138 US$’000 4,910 S$30.0 million credit facility with DBS On November 10, 2011, the Company entered into a three year revolving credit facility agreement with DBS with a committed aggregate value of S$30.0 million. Among other things, the terms of the facility required that HLA retains ownership of the special share and that the Company remain a consolidated subsidiary of HLA. The terms of the facility also included certain financial covenants with respect to the company tangible net worth (as defined in the agreement) not being less than US$350 million, and the ratio of the Company total net debt (as defined in the agreement) to tangible net worth not exceeding 1.0 times. This arrangement was used to finance the Company general working capital requirements and was repaid in full upon expiration of the facility on November 10, 2014. On May 22, 2015, the Company entered into a three year revolving uncommitted credit facility agreement with the bank with an aggregate value of S$30.0 million. The terms and conditions of this facility remain similar to the facility agreement dated November 10, 2011. 119 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 16. Other financial liabilities (cont’d) (b) Interest-bearing loans and borrowings (cont’d) S$30.0 million credit facility with BOTM, Singapore Branch On March 11, 2011, the Company entered into a new facility agreement with BOTM to refinance the existing revolving credit facility. The new unsecured, multi-currency revolving credit facility has a committed aggregated value of S$30.0 million with three-year duration from March 18, 2011 to March 18, 2014. The new facility will be used to finance the Company’s long-term general working capital requirements. Among other things, the terms of the facility require that HLA retains ownership of the Company’s special share and that the Company remains a consolidated subsidiary of HLA. The terms of the facility also include certain financial covenants with respect to the Company’s tangible net worth (as defined in the agreement) as at June 30 and December 31 of each year not being less than US$120 million and the ratio of the Company’s total net debt (as defined in the agreement) to tangible net worth as at June 30 and December 31 of each year not exceeding 2.0 times, as well as negative pledge provisions and customary drawdown requirements. On March 13, 2014, the Group entered into a new agreement with the bank on similar terms to refinance the existing revolving credit facility that matured on March 18, 2014. The new unsecured multi-currency revolving credit facility has a committed aggregate value of S$30.0 million and is for a three-year duration. The terms and conditions of this facility agreement remained similar to the facility agreement dated March 11, 2011. US$30.0 million credit facility with Sumitomo, Singapore Branch On March 18, 2011, the Company entered into an unsecured multi-currency revolving credit facility agreement with Sumitomo for an aggregate of US$30.0 million to refinance the US$30.0 million facility that was due to mature on March 25, 2011. The facility is available for three years from the date of the facility agreement and will be utilized by the Company to finance its long-term general working capital requirements. The terms of the facility require, among other things, that HLA retains ownership of the special share and that the Company remains a principal subsidiary (as defined in the facility agreement) of HLA. The terms of the facility also include certain financial covenants with respect to the Company’s consolidated tangible net worth (as defined in the agreement) as at June 30 and December 31 of each year not less than US$200 million and the ratio of our total consolidated net debt (as defined in the agreement) to consolidated tangible net worth as at June 30 and December 31 of each year not exceeding 2.0 times, as well as negative pledge provisions and customary drawdown requirements. The Company has also undertaken to make available to the bank within 180 days after the end of its financial year (beginning with financial year 2007), copies of its audited consolidated accounts as at the end of and for that financial year. On March 12, 2014, the Group entered into a supplemental agreement with the bank to renew the existing US$30.0 million facility that matured on March 18, 2014. The new unsecured multi-currency revolving credit facility has a committed aggregate value of US$30.0 million and is for a three-year duration. The terms and conditions of this facility agreement remained similar to the facility agreement dated March 18, 2011. 120 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 16. Other financial liabilities (cont’d) (b) Interest-bearing loans and borrowings (cont’d) Yuchai Rmb 1 billion medium-term notes Yuchai received approval from China’s National Association of Financial Market Institutional Investors (“NAFMII”) for the issuance of RMB-denominated three-year unsecured medium-term notes (“Notes”) amounting to Rmb 1.6 billion. On May 28, 2013, Yuchai issued the first tranche of the Notes amounting to Rmb 1 billion. The par value and issue price of each Note is Rmb 100. The fixed annual interest payable on the Notes is 4.69% which is the rate as of May 30, 2013. The maturity date of the Notes is May 30, 2016. Subscription to and trading of the Notes is only available in China to institutional investors of China’s National Inter-bank Bond Market. The first tranche of the Notes was underwritten by China CITIC Bank Corporation Limited. The proceeds from the issuance of the Notes are to be used by Yuchai to repay bank loans and for working capital purposes. Yuchai Rmb 2 billion ultra short-term bonds On April 8, 2015, Yuchai received approval from its board of directors, shareholders and China’s National Association of Financial Market Institutional Investors (“NAFMII”) to issue ultra short-term bonds (“USTB”) amounting to Rmb 2 billion with a term not exceeding 270 days, Yuchai issued the first tranche of the USTB amounting to Rmb 400 million. The first tranche of the USTBs bear a fixed annual interest rate of 4.9% and matured on May 9, 2015. All the proceeds from the issuance of the USTBs were used by Yuchai as working capital and repayment of loans. On September 16, 2015, Yuchai issued the second tranche of the USTB amounting to Rmb 400 million. The second tranche of the USTBs bear a fixed annual interest rate of 3.9% and will mature on June 13, 2016. All the proceeds from the issuance of the USTBs are to be used by Yuchai for the repayment of loans. NAFMII’s approval to issue USTB of Rmb 2 billion is valid for two years commencing from February 28, 2015. 17. Deferred grants At January 1 Received during the year Released to consolidated statement of profit or loss Acquisition of subsidiaries (Note 4) At December 31 Current (Note 27) Non-current 121 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 346,110 14,562 (26,151) 6,300 340,821 27,817 313,004 340,821 340,821 39,558 (19,596) — 52,072 6,044 (2,994) — 360,783 55,122 26,455 334,328 360,783 4,042 51,080 55,122 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 18. Inventories Inventories are comprised of: Raw materials Work in progress Finished goods 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 1,222,833 21,004 677,343 986,051 14,499 710,780 150,652 2,215 108,596 Total inventories at the lower of cost and net realizable value 1,921,180 1,711,330 261,463 Inventories recognized as an expense in “Cost of sales” are Rmb 11,283,308, Rmb 11,781,032 and Rmb 9,531,439 (US$1,456,249) for the years ended December 31, 2013, 2014 and 2015 respectively. An analysis of the inventory reserve accounts is as follows: At January 1 Inventories written down Reversal of write-down of inventories Written off Acquisition of subsidiaries At December 31 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 105,610 21,297 (24,694) (1,626) 7,766 108,353 59,339 (24,079) (11,307) — 16,555 9,066 (3,679) (1,728) — 108,353 132,306 20,214 The inventories written down and reversal of write-down of inventories recognized as an expense and included in “Cost of sales” amounted to Rmb 20,604, Rmb 3,397 and Rmb 35,260 (US$5,387) for the years ended December 31, 2013, 2014 and 2015 respectively. The reversal of write-down of inventories was made when the related inventories were sold above their carrying amounts in 2014 and 2015. As of December 31, 2015, inventories with a carrying amount of Rmb Nil (US$Nil) (2014: Rmb 26,677) are pledged to secure bank facilities. 122 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 19. Other current assets Development properties Held for trading investment (Note 1.3) Derivative not designated as hedges – foreign exchange forward contract Foreign exchange forward contract 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 33,435 22,855 — 56,290 22,609 11,984 15,506 50,099 3,454 1,831 2,369 7,654 On December 22, 2015, Yuchai entered into a non-deliverable forward foreign exchange contract (“NDF”) with Industrial and Commercial Bank of China (“ICBC”) to purchase Euro 39.1 million at the forward exchange rate (Rmb/ Euro) of 6.6987 on April 13, 2016. The Group accounted this NDF at fair value through “Other operating income” in the statement of profit or loss (Note 8.2(a)). There was no outstanding foreign exchange forward contract as of December 31, 2014. 20. Trade and bills receivables Trade receivables (net) Bills receivable (i) Total (Note 35) 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 394,763 7,718,331 8,113,094 385,801 6,792,712 7,178,513 58,944 1,037,816 1,096,760 (i) As of December 31, 2015, bills receivable includes bills receivable from joint venture and other related parties amounted Rmb 50,000 (US$7,639) (2014: Rmb 101,255) and Rmb 2,000 (US$306) (2014: Rmb 200), respectively. Trade receivables (net) are non-interest bearing and are generally on 60 days’ term. They are recognized at their original invoice amounts which represent their fair values on initial recognition. As of December 31, 2014 and 2015, outstanding bills receivables discounted with banks for which the Group retained a recourse obligation totalled Rmb 730,736 and Rmb Nil (US$Nil) respectively. All bills receivables discounted have contractual maturities within 12 months at time of discounting. As of December 31, 2014 and 2015, outstanding bills receivables endorsed to suppliers with recourse obligation were Rmb 812,537 and Rmb 859,679 (US$131,345) respectively. 123 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 20. Trade and bills receivables (cont’d) An analysis of the allowance for doubtful accounts is as follows: At January 1 (Credit)/charge to consolidated statement of profit or loss Written off Acquisition of subsidiaries Translation differences December 31 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 28,533 (2,361) (4,552) 312 (5) 21,927 30,192 (827) — (4) 3,350 4,613 (126) — (1) 21,927 51,288 7,836 The Group’s historical experience in the collection of trade receivables falls within the recorded allowances. Due to this factor, management believes that no additional credit risks beyond the amount provided for collection losses are inherent in the Group’s trade receivables. As of December 31, 2014 and 2015, gross trade receivables due from a major customer, Dongfeng Automobile Co., Ltd. and its affiliates (the “Dongfeng companies”) were Rmb 176,461 and Rmb 19,914 (US$3,043), respectively. See Note 32 for further discussion of customer concentration risk. Neither past due nor impaired Total Past due but not impaired 0 – 90 days 91-180 days 181-365 days >365 days Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 Rmb’000 At 31.12.2015 At 31.12.2014 7,178,513 6,914,279 8,113,094 7,979,625 161,642 96,069 52,442 15,760 39,052 21,456 11,098 184 124 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 21. Other receivables Staff advances Associates and joint ventures Other related parties Interest receivables Bills receivable in transit Others Impairment losses – other receivables (i) Loans and receivables (Note 35) Tax recoverable Total 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 12,939 135,850 7,240 12,036 2,513 15,472 (2,041) 184,009 60,731 244,740 7,853 176,422 6,300 7,280 2,998 16,719 (4,662) 212,910 135,241 348,151 1,200 26,954 962 1,112 458 2,555 (712) 32,529 20,663 53,192 For terms and conditions relating to related parties, refer to Note 29. Note: (i) An analysis of the impairment losses – other receivables is as follows: At January 1 Charge to consolidated statement of profit or loss Written off At December 31 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 1,275 766 — 2,041 2,041 2,746 (125) 4,662 312 419 (19) 712 The Group’s historical experience in the collection of other receivables falls within the recorded allowances. Due to this factor, management believes that no additional credit risks beyond the amount provided for collection losses are inherent in the Group’s other receivables. 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 Other receivables (non-current) (i) (Note 35) 1,261 1,519 232 (i) Non-current other receivables relate to non-trade receivables from joint ventures which are not expected to be settled next 12 months. 125 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 22. Cash and cash equivalents Short-term bank deposits Restricted cash Long-term bank deposits Non-current Long-term bank deposits (i) Current Cash and cash equivalents Short-term bank deposits (ii) Restricted cash Cash and bank balances 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 — 60,000 9,167 2,291,345 3,474,364 530,827 193,440 24,249 2,509,034 2,509,034 7,195 300,564 3,782,123 3,842,123 1,099 45,921 577,847 587,014 Note: (i) (ii) In 2015, YMMC placed two-year time deposits of Rmb 60,000 (US$9,167) (2014: Rmb Nil) at an annual interest rate of 4.03% (2014: Nil) with banks. These long-term fixed deposits are not considered as cash equivalents. Short-term bank deposits relate to bank deposits with initial maturities of more than three months and subject to more than insignificant risk of changes in value upon withdrawal before maturity. The interest rate of these bank deposits as of December 31, 2015 for the Group ranged from 0.66% to 3.63% (2014: 0.35% to 3.75%). These short-term bank deposits are not considered as cash equivalents. Cash at banks earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods, depending on the immediate cash requirements of the Group, and earn interests at the respective short-term deposit rates. The interest rate of the bank deposits (excluding long-term bank deposits and short-term bank deposits) as at December 31, 2015 for the Group ranged from 0.70% to 2.80% (2014: 0.21% to 5.06%). Cash and bank balances denominated in various currencies are mainly held in bank accounts in Singapore. As of December 31, 2015, the Group has restricted cash of Rmb Nil (US$Nil) (2014: Rmb 24,249) which was used as collateral by the banks for the issuance of bills to suppliers and would mature after three months. 126 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 22. Cash and cash equivalents (cont’d) Short-term bank deposits Restricted cash Long-term bank deposits As at December 31, 2015, the Group has restricted cash of Rmb 300,564 (US$45,921) which was deposited by Yuchai with ICBC as guarantee of short–term Euro loan granted by the same bank amounting to Euro 39.1 million, equivalent to Rmb 275.8 million (US$ 42.1 million) at annual interest rate of 0.30%. As of December 31, 2014 and 2015, the Group had available Rmb 692,250 and Rmb 300,404 (US$45,897), respectively, of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. The commitment fees incurred for 2013, 2014 and 2015 were Rmb 539, Rmb 466 and Rmb 368 (US$56) respectively. 23. Issued capital and reserves Authorized shares Ordinary share of par value US$0.10 each Ordinary shares issued and fully paid At January 1, 2014 Issued on July 7, 2014 as dividend payment (Note 24) At December 31, 2014 and January 1, 2015 Issued on July 14, 2015 as dividend payment (Note 24) At December 31, 2015 US$’000 31.12.2014 31.12.2015 thousands thousands 100,000 100,000 Number of shares Rmb’000 37,267,673 1,724,196 928,033 116,031 38,195,706 1,840,227 1,102,634 115,493 39,298,340 1,955,720 298,802 Special share issued and fully paid One special share issued and fully paid at US$0.10 per share Non-redeemable convertible cumulative preference shares * 21 * 21 * 3 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 * Less than Rmb 1 (US$1) 127 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 23. Issued capital and reserves (cont’d) On July 14, 2015, based on the elections by shareholders, the dividend of US$1.10 per share of common stock for the financial year 2014 was paid in the form of approximately US$23.4 million in cash and 1,102,634 shares, at the volume weighted average trading price of US$16.8792 per share, with total value equivalent to Rmb 115,493. On July 7, 2014, based on the elections by shareholders, the dividend of US$1.20 per share of common stock for the financial year 2013 was paid in the form of approximately US$26 million in cash and 928,033 shares, at the volume weighted average trading price of US$20.1343 per share, with total value equivalent to Rmb 116,031. The holders of ordinary shares are entitled to such dividends as the Board of Directors of the Company may declare from time to time. All ordinary shares are entitled to one vote on a show of hands and carry one vote per share on a poll. The holder of special share is entitled to elect a majority of directors of the Company. In addition, no shareholders resolution may be passed without the affirmative vote of the special share, including any resolution to amend the Memorandum of Association or Bye-laws of the Company. The special share is not transferable except to HLA, HLC or any of its affiliates. The Bye-Laws of the Company provides that the special share shall cease to carry any rights in the event that HLA and its affiliates cease to own, directly or indirectly, at least 7,290,000 ordinary shares in the capital of the Company. HLGE issued 197,141,190 NCCPS at an issue price of S$0.02 each on July 4, 2006, expiring on the 10th anniversary of the NCCPS issue date, and 196,982,796 NCCPS have been converted into ordinary shares in the capital of HLGE. The NCCPS shall, subject to the terms and conditions thereof, carry the right to receive, out of the profits of HLGE available for payment of dividends, a fixed cumulative preferential dividend of 10% per annum of the issue price for each NCCPS (the “Preference Dividend”). Other than the Preference Dividend, the NCCPS holders shall have no further right to participate in the profits or assets of HLGE. NCCPS holders shall have no voting rights except under certain circumstances referred to in the Singapore Companies Act, Chapter 50 set out in the terms of the NCCPS. The NCCPS are not listed and quoted on the Official List of the Singapore Exchange. However, the holders of the NCCPS are able to exercise their rights to convert the NCCPS into new ordinary shares at a 1 for 1 ratio, subject to the terms and conditions of the NCCPS. Such new ordinary shares will be listed and quoted on the Official List of the Singapore Exchange when issued. Foreign currency translation reserve The foreign currency translation reserve represents exchange differences arising from the translation of the financial statements of foreign operations whose functional currencies are different from that of the Group’s presentation currency. 128 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 23. Issued capital and reserves (cont’d) Performance shares reserve The performance shares reserve comprises the cumulative value of employee services received for the issue of share options. The amount in the reserve is retained when the option is exercised or expired. 24. Dividends declared and paid Declared and paid during the year Dividends on ordinary shares: Final dividend paid in 2015: US$1.10 per share (2014: US$1.20 per share) Dividend paid in cash Dividend paid in shares (Note 23) 25. Statutory reserves Statutory general reserve (ii) At January 1 Transfer from retained earnings Reduced due to liquidation of a subsidiary Disposal of a subsidiary At December 31 Statutory public welfare fund (iii) At January 1 and December 31 General surplus reserve (iv) At January 1 and December 31 Total 129 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 274,524 274,524 158,493 116,031 274,524 257,500 257,500 142,007 115,493 257,500 39,342 39,342 21,696 17,646 39,342 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 189,371 2,064 (2) — 191,433 191,433 1,332 — (5,891) 186,874 29,248 204 — (900) 28,552 85,641 85,641 13,085 25,706 302,780 25,706 298,221 3,927 45,564 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 25. Statutory reserves (cont’d) Note: (i) (ii) (iii) In accordance with the relevant regulations in the PRC, Yuchai and its subsidiaries are required to provide certain statutory reserves which are designated for specific purposes based on the net income reported in the PRC GAAP financial statements. The reserves are not distributable in the form of cash dividends. In accordance with the relevant regulations in the PRC, a 10% appropriation to the statutory general reserve based on the net income reported in the PRC financial statements is required until the balance reaches 50% of the authorized share capital of Yuchai and its subsidiaries. Statutory general reserve can be used to make good previous years’ losses, if any, and may be converted into share capital by the issue of new shares to stockholders in proportion to their existing shareholdings, or by increasing the par value of the shares currently held by them, provided that the reserve balance after such issue is not less than 25% of the authorized share capital. Yuchai and its subsidiaries shall determine to transfer 5% to 10% of its net income reported in the PRC financial statements to the statutory public welfare fund. There is no limit on the amount that may be allocated to this fund. This fund can only be utilized on capital expenditure for the collective welfare of Yuchai and its subsidiaries’ employees, such as the construction of dormitories, canteen and other welfare facilities, and cannot be utilized to pay staff welfare expenses. The transfer to this fund must be made before the distribution of a dividend to stockholders. Since January 1, 2006, in accordance with the amended Yuchai’s policy, the contribution to the fund ceased. (iv) General surplus reserve is appropriated in accordance with Yuchai’s Articles and resolution of the board of directors. General surplus reserve may be used to offset accumulated losses or increase the registered capital. 26. Share-based payment The Company’s Equity Incentive Plan (“Equity Plan”) was approved by the shareholders at the Annual General Meeting of the Company held on July 4, 2014 for duration of 10 years (from July 29, 2014 to July 28, 2024). All options granted under the Equity Plan are subject to a vesting schedule as follows: (1) one year after the date of grant for up to 33% of the shares over which the options are exercisable; (2) (3) two years after the date of grant for up to 66% (including (1) above) of the shares over which the options are exercisable; and three year after the date of grant for up to 100% (including (1) and (2) above) of the shares over which the options are exercisable. 130 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 26. Share-based payment (cont’d) The expense recognized for employee services received during the year is shown in the following table: 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 Expense arising from equity-settled share-based payment transactions 5,360 10,275 1,570 Total expense arising from share-based payment transactions 5,360 10,275 1,570 There were no cancellations or modifications to the awards in 2014 and 2015. Movements during the year The following table illustrates the number and weighted average exercise prices (“WAEP”) of, and movements in, share options during the year: Number of shares 2014 WAEP 2014 Number of shares 2015 WAEP 2015 Outstanding at January 1 Granted during the year Outstanding at December 31 Exercisable at December 31 — — 570,000 US$21.11 570,000 570,000 — US$21.11 US$21.11 US$21.11 — 570,000 — — US$21.11 US$21.11 The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured based on the Black- Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. 131 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 26. Share-based payment (cont’d) Fair value of share options and assumptions Date of grant of options Fair value at measurement date (US$) Share price (US$) Exercise price (US$) Expected volatility (%) Expected option life (years) Expected dividends (%) Risk-free interest rate (%) On July 29, 2014 5.70 – 6.74 21.11 21.11 47.4 3.5 – 5.5 5.81 1.4 – 2.0 The exercise price for options outstanding at the end of the year was US$21.11 (2014: US$21.11). The weighted average remaining contractual life for the share options outstanding as at December 31, 2015 was 8.6 (2014: 9.6) years. The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome. There are no market conditions associated with the share options grants. Service conditions and non-market performance conditions are not taken into account in the measurement of the fair value of the service to be received at the grant date. 132 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 27. Trade and other payables Trade and bills payables (i) Other payables Interest payable Accrued staff costs Dividend payable Associates and joint ventures Other related parties Financial liabilities at amortized cost (Note 35) Accrued contribution to defined contribution plans Other tax payable 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 4,214,289 1,279,830 3,841,756 1,300,439 28,148 431,070 27,767 15,771 33,492 338,437 41,377 18,909 108,325 142,932 6,105,200 5,717,342 33,258 39,600 27,820 39,064 586,958 198,686 5,117 51,707 6,322 2,889 21,838 873,517 4,250 5,968 Trade and other payables with liquidity risk (Note 32) 6,178,058 5,784,226 883,735 Deferred grants (Note 17) Deferred income (ii) Advance from customers 27,817 170,000 50,833 26,455 170,000 96,168 4,042 25,973 14,693 Total trade and other payables (current) 6,426,708 6,076,849 928,443 (i) (ii) As of December 31, 2015, the trade and bills payables include bills payable to associates and other related parties amounted Rmb 7,230 (US$1,105) (2014: Rmb 12,500) and Rmb 192,927 (US$29,476) (2014: Rmb 165,183), respectively. This relates to the Group’s transfer of technology know-how to a joint venture of which revenue has not been recognized. 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 Other payables (non-current) (i) (Note 32, Note 35) 120,588 115,341 17,622 (i) Non-current other payables relate to provision for bonus which is not expected to be settled next 12 months. 133 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 27. Trade and other payables (cont’d) Terms and conditions of the above financial liabilities: • • • Trade payables are non-interest bearing and are normally settled on 60-day terms. Other payables (current) are non-interest bearing and have an average term of three months. Interest payable is normally settled throughout the financial year. Interest payable related to outstanding medium-term notes and ultra short-term bonds were Rmb 27,679 (US$4,229) (2014: Rmb 27,626) and Rmb 4,576 (US$699) (2014: Rmb Nil) respectively. • For terms and conditions relating to related parties, refer to Note 29. 28. Provision for product warranty At January 1 Provision made Provision utilized At December 31 29. Related party disclosures The ultimate parent 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 305,938 394,940 298,552 307,575 (402,326) (372,550) 298,552 233,577 45,614 46,993 (56,920) 35,687 As of December 31, 2015, the controlling shareholder of the Company, HLA, indirectly owned 15,189,528, or 38.7%, of the ordinary shares in the capital of the Company, as well as a special share that entitles it to elect a majority of directors of the Company. HLA controls the Company through its wholly-owned subsidiary, HLC, and through HLT, a wholly-owned subsidiary of HLC. HLT owns approximately 22.5% of the ordinary shares in the capital of the Company and is, and has since August 2002 been, the registered holder of the special share. HLA also owns, through another wholly-owned subsidiary, Well Summit Investments Limited, approximately 16.2% of the ordinary shares in the capital of the Company. HLA is a member of the Hong Leong Investment Holdings Pte. Ltd., or Hong Leong Investment group of companies. Prior to August 2002, the Company was controlled by Diesel Machinery (BVI) Limited, which, until its dissolution, was a holding company controlled by HLC and was the prior owner of the special share. Through HLT’s stock ownership and the rights accorded to the special share under Bye- Laws of the Company and various agreements among shareholders, HLA is able to effectively approve and effect most corporate transactions. There were transactions other than dividends paid, between the Group and HLA of Rmb 98, Rmb 297 and Rmb 32 (US$5) during the financial years ended December 31, 2013, 2014 and 2015 respectively. 134 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 29. Related party disclosures (cont’d) Entity with significant influence over the Group As of December 31, 2015, the Yulin City Government through Coomber Investment Ltd. owned 18.4% (2014: 18.4%) of the ordinary shares in the capital of the Company. The following provides the significant amount of transactions that have been entered into with related parties for the relevant financial year at terms agreed between the parties (for information regarding outstanding balances at December 31, 2014 and 2015, refer to Note 21 and Note 27): 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Sales of diesel engines to State Holding Company, its subsidiaries and affiliates (i) 1,665 1,462 185 28 Sales of raw materials to State Holding Company, its subsidiaries and affiliates (i) 970,950 802,715 516,494 78,912 Hospitality and restaurant service charged to State Holding Company, its subsidiaries and affiliates (i) Sales to associates and joint ventures (i) Purchase of raw materials and supplies from subsidiaries and affiliates of State Holding Company (i) Purchases of raw materials and supplies from 5,286 278,935 1,700 237,203 3,247 156,444 496 23,902 (1,608,698) (1,460,956) (1,181,852) (180,568) associates and joint ventures (i) (107,802) (87,509) (90,354) (13,805) Delivery expense charged by subsidiaries of State Holding Company (ii) (214,752) (213,747) (164,690) (25,162) Storage and distribution expenses charged by a subsidiary of State Holding Company (iii) (49,885) (32,131) (30,462) (4,654) Purchases of vehicles and machineries from State Holding Company and its subsidiary (iv) Purchases of additional shareholding in a subsidiary of State Holding Company (v) General and administrative expenses — — (16,725) (1,963) — (4,170) - Charged by State Holding Company (vi) (24,876) (24,713) - Charged by State Holding Company (vii) - Charged by HLA (viii) - Charged by affiliates of HLA (ix) - Charged to joint ventures (x) — (98) (6,489) 1,745 (4,853) (297) (6,821) 1,383 (26,500) (12,951) (32) (6,271) — (230) (637) (4,049) (1,979) (5) (958) — 135 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 29. Related party disclosures (cont’d) Entity with significant influence over the Group (cont’d) Note: (i) Sale and purchase of raw materials, supplies, scraps and diesel engines to/from State Holding Company, its subsidiaries and affiliates, and Yuchai’s associates and joint ventures. Hospitality and restaurants services provided to State Holding Company. Certain subsidiaries and affiliates of State Holding Company have acted as suppliers of raw materials and supplies to the Group and certain subsidiaries of State Holding Company have acted as sales agents of the Group. Management considers that these transactions were entered into in the normal course of business and expects that these transactions will continue at terms agreed between the parties. (ii) Delivery expense charged by subsidiaries of State Holding Company. The fee is for the delivery of spare parts charged, which were recorded in “Cost of sales” and “Selling, distribution and administrative costs” respectively. Management considers that these transactions were entered into in the normal course of business and expects that these transactions will continue at terms agreed between the parties. (iii) Storage and distribution expenses charged by a subsidiary of State Holding Company for the storage of engines, components and parts for Yuchai and distribution to the production facilities. (iv) Vehicles and machineries were purchased by Yuchai from State Holding Company and its subsidiary. (v) (vi) In October 2015, Yuchai acquired 2.86% of equity interest in YAMC from State Holding Company with a purchase consideration of Rmb 4.2 million. General and administrative expenses charged by subsidiary and associate of State Holding Company. The subsidiary is also an associate of Yuchai, for property management services rendered. (vii) General and administrative expenses charged by State Holding Company for rental of apartment to Yuchai’s newly graduated employees. (viii) General and administrative expenses charged by HLA for consultancy fees. (ix) General and administrative expenses charged by affiliates of HLA. The fees mainly relate to office rental, secretarial fees, insurance fees, professional and consultancy fees, and miscellaneous office expenses. (x) Hotel management fees, rental, administrative fees and license fees charged to joint ventures. In addition to the above, Yuchai also entered into transactions with other PRC Government owned enterprises. Management considers that these transactions were entered into in the normal course of business and expects that these transactions will continue on normal commercial terms. Balances with other PRC entities are excluded from this caption. 136 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 29. Related party disclosures (cont’d) Terms and conditions of transactions with related parties The sales to and purchases from related parties are made on normal commercial terms. Outstanding balances at the year-end are unsecured and interest free and settlement occurs in cash. Compensation of key management personnel of the Group 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 Short-term employee benefits Contribution to defined contribution plans Cost of share-based payment 34,949 313 — 35,262 39,812 294 4,455 44,561 27,331 305 8,477 36,113 4,176 47 1,295 5,518 The non-executive directors do not receive pension entitlements from the Group. 30. Commitments and contingencies Operating lease commitments - Group as lessee The Group has entered into commercial leases on a land, and certain motor vehicles, office space and items of machinery. These leases have an average life of between one and five years with no renewal option included in the contracts. There are no restrictions placed upon the Group by entering into these leases. Future minimum rentals payable under non-cancellable operating leases as at December 31 are as follows: Within one year - With related parties - With third parties After one year but not more than five years - With related parties - With third parties More than five years - With related parties - With third parties 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 673 11,469 820 9,023 — 113 5,405 7,858 1,859 5,131 — — 825 1,201 284 784 — — 22,098 20,253 3,094 The minimum lease payments recognized as an expense in the period ended December 31, 2013, 2014 and 2015 amounted to Rmb 51,115, Rmb 52,728 and Rmb 60,201 (US$9,198). 137 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 30. Commitments and contingencies (cont’d) Operating lease commitments - Group as lessor The Group has leased out some of its assets, including surplus office and manufacturing buildings. All leases include a clause to enable upward revision of the rental charge on an annual basis according to prevailing market conditions. Future minimum rentals receivable under non-cancellable operating leases as at December 31 are as follows: Within one year - With related parties - With third parties After one year but not more than five years - With related parties - With third parties More than five years - With related parties - With third parties Finance lease commitments 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 828 2,299 628 6,224 — 17,505 27,484 1,319 2,537 — 9,128 — 18,967 31,951 201 388 — 1,395 — 2,898 4,882 The Group has finance lease for plant and equipment and motor vehicles. The lease has term of renewal but no purchase options and escalation clause. Renewal is at the option of the Group. Future minimum lease payments under finance lease together with the present value of the net minimum lease payments are as follows: 31.12.2014 Minimum lease payments Present value of payments 31.12.2015 Minimum lease payments Present value of payments Rmb’000 Rmb’000 Rmb’000 US$’000 Rmb’000 US$’000 Not later than one year Later than one year but not later than five years Total minimum lease payments Less: Amount representing finance charges Present value of minimum lease 101 142 243 92 128 220 64 59 123 (23) — (9) payments 220 220 114 9 9 18 (1) 17 59 55 114 — 114 9 8 17 — 17 138 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 30. Commitments and contingencies (cont’d) Capital commitments As of December 31, 2014 and 2015, Yuchai had capital expenditure (mainly in respect of property, plant and equipment) contracted for but not recognized in the financial statements amounting to Rmb 989,107 and Rmb 570,650 (US$87,168), respectively. The Group’s share of joint venture’s capital commitment is disclosed in Note 6. Investment commitments As of December 31, 2014 and 2015, the Group has commitment of Rmb Nil and Rmb 6,195 (US$ 946) relating to the Group’s interest in joint venture, respectively. Letter of credits As of December 31, 2014 and 2015, Yuchai had issued irrevocable letter of credits of Rmb 50,671 and Rmb 3,981 (US$608), respectively. Product liability The General Principles of the Civil Law of China and the Industrial Product Quality Liability Regulations imposes that manufacturers and sellers are liable for loss and injury caused by defective products. Yuchai and its subsidiaries do not carry product liability insurance. Yuchai and its subsidiaries have not had any significant product liability claims brought against them. Environmental liability China adopted its Environmental Protection Law in 1989, and the State Council and the Ministry of Environmental Protection promulgate regulations as required from time to time. The Environmental Protection Law addresses issues relating to environmental quality, waste disposal and emissions, including air, water and noise emissions. Environmental regulations have not had a material impact on Yuchai’s results of operations. Yuchai delivers, on a regular basis, burned sand and certain other waste products to a waste disposal site approved by the local government and makes payments in respect thereof. Yuchai expects that environmental standards and their enforcement in China will, as in many other countries, become more stringent over time, especially as technical advances make achievement of higher standards more feasible. Yuchai has built an air filter system to reduce the level of dust and fumes resulting from its production of diesel engines. Yuchai is subject to Chinese national and local environmental protection regulations which currently impose fees for the discharge of waste substances, require the payment of fines for pollution, and provide for the closure by the Chinese government of any facility that fails to comply with orders requiring Yuchai to cease or improve upon certain activities causing environmental damage. Due to the nature of its business, Yuchai produces certain amounts of waste water, gas, and solid waste materials during the course of its production. Yuchai believes its environmental protection facilities and systems are adequate for it to comply with the existing national, provincial and local environmental protection regulations. However, Chinese national, provincial or local authorities may impose additional or more stringent regulations which would require additional expenditure on environmental matters or changes in Yuchai’s processes or systems. 139 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 31. Segment information For management purposes, the Group is organized into business units based on their products and services, and has two reportable operating segments as follows: • • Yuchai primarily conducts manufacturing and sale of diesel engines which are mainly distributed in the PRC market. The HLGE is engaged in hospitality and property development activities conducted mainly in the PRC and Malaysia. HLGE is listed on the Main Board of the Singapore Exchange. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the consolidated financial statements. Group financing (including finance costs) and income taxes are managed on a group basis and are not allocated to operating segments. Inter-segment revenues are eliminated upon consolidation and reflected in the “Adjustments and eliminations” column. All other adjustments and eliminations are part of detailed reconciliations presented further below. Year ended December 31, 2013 Revenue External customers Inter-segment Total revenue Results Interest income Adjustments and eliminations Consolidated financial statements HLGE Rmb’000 Rmb’000 Rmb’000 Yuchai Rmb’000 15,870,380 31,975 — — 15,870,380 31,975 — — — 15,902,355 — 15,902,355 76,634 980 1,325(1) 78,939 Interest expense and loss from de-recognition of bills receivable (155,787) (7,321) 6,163(1) (156,945) Impairment of property, plant and equipment Depreciation and amortization Share of profit/(loss) of associates Share of (loss)/profit of joint ventures Income tax expense (9,163) (383,788) 164 (51,921) (196,089) — (4,611) (5) 554 (2,617) — (9,163) (540)(2) (388,939) — (27,878)(9) (23,441)(3) 159 (79,245) (222,147) Segment profit 1,228,728 (25,922) (40,687)(4) 1,162,119 140 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 31. Segment information (cont’d) Year ended December 31, 2014 Revenue External customers Inter-segment Total revenue Results Interest income Adjustments and eliminations Consolidated financial statements HLGE Rmb’000 Rmb’000 Rmb’000 Yuchai Rmb’000 16,387,356 48,786 — — 16,387,356 48,786 — — — 16,436,142 — 16,436,142 42,014 1,463 2,347(1) 45,824 Interest expense and loss from de-recognition of bills receivable (149,797) (7,700) 5,866(1) (151,631) Impairment of property, plant and equipment Impairment of technology development cost Depreciation and amortization Share of profit/(loss) of associates Share of losses of joint ventures Income tax expense (10,433) (60,000) (422,777) 960 (19,067) (156,861) — — (7,872) (4) (8,840) (2,115) — — (10,433) (60,000) (607)(2) (431,256) — (2,804)(9) (20,663)(3) 956 (30,711) (179,639) Segment profit 1,249,021 15,937 (63,573)(4) 1,201,385 Total assets 17,756,594 374,511 642,231(5) 18,773,336 Total liabilities (9,387,693) (375,564) 141,735(6) (9,621,522) Other disclosures Investment in associates Investment in joint ventures Capital expenditure 2,842 181,933 677,767 333 19,708 6,082 — 70,575(8) 80(7) 3,175 272,216 683,929 141 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 31. Segment information (cont’d) Year ended December 31, 2015 Yuchai HLGE Adjustments and eliminations Consolidated financial statements Consolidated financial statements Rmb’000 Rmb’000 Rmb’000 Rmb’000 US$’000 Revenue External customers 13,671,931 61,506 — — 13,671,931 61,506 — — — 13,733,437 2,098,246 — — 13,733,437 2,098,246 Inter-segment Total revenue Results Interest income Interest expense and loss from de-recognition of bills receivable Impairment of property, plant 35,557 1,415 4,342(1) 41,314 6,312 (110,618) (7,587) 5,226(1) (112,979) (17,261) and equipment (2,873) Impairment of technology development cost (26,700) — — — — (2,873) (439) (26,700) (4,079) Depreciation and amortization Share of profit/(loss) of associates Share of losses of joint ventures Income tax expense (458,759) (10,060) (616)(2) (469,435) (71,722) 250 (5) — 245 37 (10,480) (161,731) (11,584) (2,491) 19,128(9) (12,596)(3) (2,936) (176,818) (448) (27,015) Segment profit 744,846 (7,564) (51,144)(4) 686,138 104,831 Total assets 17,684,449 343,236 787,917(5) 18,815,602 2,874,718 Total liabilities (9,183,670) (359,796) 157,933(6) (9,385,533) (1,433,957) Other disclosures Investment in associates Investment in joint ventures Capital expenditure 3,092 170,484 428,917 287 6,597 929 — 89,703(8) 44(7) 3,379 266,784 429,890 516 40,760 65,680 142 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 31. Segment information (cont’d) Note: (1) (2) (3) (4) (5) (6) (7) (8) (9) Included here are interest income and expense of the holding entity’s interest income and expense and inter-segment interest income and expense that are eliminated on consolidation. Included here are the depreciation of the holding entity’s property, plant and equipment and additional depreciation on HLGE’s property, plant and equipment valued at fair value in excess of costs. This relates mainly to the withholding tax provisions for dividends that are expected to be paid from income earned after December 31, 2007 by Yuchai that has not been remitted. Profit/(loss) for each operating segment does not include income tax expense. Segment assets included goodwill and other assets of holding entity and increase in value of HLGE’s property, plant and equipment based on fair value in excess of costs. Included here are mainly the liabilities of the holding entity and cumulative withholding tax provision for dividends that are expected to be paid from income earned after December 31, 2007 by Yuchai that has not been remitted. Included here are capital expenditures incurred by the holding entity. Included here are HLGE’s share of its joint ventures’ property, plant and equipment valued at fair value in excess of costs and impairment or reversal of impairment. Included here are HLGE’s share of additional depreciation on its joint ventures’ property, plant and equipment valued at fair value in excess of costs and impairment or reversal of impairment. There has been no change to the Group’s measurement of segment profit for each reportable operating segment. Geographic information Revenue from external customers: China Other countries 31.12.2013 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 Rmb’000 US$’000 15,846,051 16,359,873 13,630,979 2,082,592 56,304 76,269 102,458 15,654 15,902,355 16,436,142 13,733,437 2,098,246 The revenue information above is based on the location of the customer. Revenue from one customer group amounted to Rmb 2,900,332 (US$443,124) (2014: Rmb 3,687,953; 2013: Rmb 3,298,400), arising from sales by Yuchai segment. 143 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 31. Segment information (cont’d) Non-current assets China Other countries 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 5,374,624 5,194,164 104,187 96,518 5,478,811 5,290,682 793,584 14,746 808,330 Non-current assets for this purpose consist of property, plant and equipment, prepaid operating leases, investment in joint ventures, investment property, intangible asset and goodwill. 32. Financial risk management objectives and policies The Group’s principal financial liabilities comprise loans and borrowings, trade and other payables. The main purpose of these financial liabilities is to finance the Group’s operations. The Group has trade and other receivables, and cash and bank deposits that derive directly from its operations. The Group also holds held for trading investment and enters into derivative transactions. The Group is exposed to market risk, credit risk and liquidity risk. The Group’s senior management oversees the management of these risks. There has been no change to the Group’s exposure to these financial risks or the manner in which it manages and measures the risks. Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprise three types of risk: interest rate risk, currency risk and other price risk, such as equity price risk. Financial instruments affected by market risk include loans and borrowings, deposits, held for trading investment and derivative financial instrument. The sensitivity analyses in the following sections relate to the position as at December 31, 2014 and 2015. The sensitivity analyses have been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and the proportion of financial instruments in foreign currencies are all constant at December 31, 2015. The analyses exclude the impact of movements in market variables on provisions and on the non-financial assets and liabilities of foreign operations. 144 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 32. Financial risk management objectives and policies (cont’d) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s interest-bearing bank deposits and loans and borrowings from banks and financial institutions. The interest-bearing loans and borrowings of the Group are disclosed in Note 16(b). As certain rates are based on interbank offer rates, the Group is exposed to cash flow interest rate risk. This risk is not hedged. Interest-bearing bank deposits are short to medium-term in nature but given the significant cash and bank balances held by the Group, any variation in the interest rates may have a material impact on the results of the Group. The Group manages its interest rate risk by having a mixture of fixed and variable rates for its deposits and borrowings. Interest rate sensitivity The sensitivity analyses below have been determined based on the exposure to interest rates for bank deposits and interest-bearing financial liabilities at the end of the reporting period and the stipulated change taking place at the beginning of the year and held constant throughout the reporting period in the case of instruments that have floating rates. A 50 basis point increase or decrease is used and represents management’s assessment of the possible change in interest rates. If interest rate had been 50 basis points higher or lower and all other variables were held constant, the profit for the year ended December 31, 2015 of the Group would increase/decrease by Rmb 6,632 (US$1,013) (2014: increase/decrease by Rmb 1,110). Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s sales, purchases and financial liabilities that are denominated in currencies other than the respective functional currencies of entities within the Group. The Group also holds cash and bank balances and other investments denominated in foreign currencies. The currencies giving rise to this risk are primarily the Singapore Dollar, Renminbi, US Dollar and Euro. Foreign currency translation exposure is managed by incurring debt in the operating currency so that where possible operating cash flows can be primarily used to repay obligations in the local currency. This also has the effect of minimizing the exchange differences recorded against income, as the exchange differences on the net investment are recorded directly against equity. 145 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 32. Financial risk management objectives and policies (cont’d) Foreign currency risk (cont’d) The Group’s exposures to foreign currency are as follows: Held for trading investment Trade and other receivables Cash and bank balances Financial liabilities Trade and other payables Net assets/(liabilities) Singapore Dollar 31.12.2014 US Dollar Euro Rmb’000 Rmb’000 Rmb’000 22,855 814 138,540 (32,467) (51,898) 77,844 Singapore Dollar — 31,546 — (41,162) — (9,616) — 6,738 2,041 — (19,608) (10,829) 31.12.2015 US Dollar Euro Rmb’000 Rmb’000 Rmb’000 Renminbi Rmb’000 Others Rmb’000 — 31,933 — — (1,518) 30,415 — 5 357 — — 362 Renminbi Rmb’000 Others Rmb’000 Held for trading investment Trade and other receivables Cash and bank balances Financial liabilities Trade and other payables Net assets/(liabilities) US$’000 11,984 565 124,034 (32,163) (12,978) 91,442 13,971 — 407 — (280,924) (50) (280,567) (42,866) — 12,762 2,177 — (5,051) 9,888 1,511 — 32,651 29,520 — (2,020) 60,151 9,190 — — 938 — — 938 143 146 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 32. Financial risk management objectives and policies (cont’d) Foreign currency risk (cont’d) Foreign currency risk sensitivity A 10% strengthening of the following major currencies against the functional currency of each of the Group’s entities at the reporting date would increase/(decrease) profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. Profit before tax 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 7,784 (962) (1,083) 3,042 9,144 (28,057) 989 6,015 1,397 (4,287) 151 919 Singapore Dollar Euro US Dollar Renminbi Equity price risk The Group has investment in TCL which is quoted. Equity price risk sensitivity A 10% increase/(decrease) in the underlying prices at the reporting date would increase/(decrease) Group’s profit by the following amount: 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 Statement of profit or loss 2,286 1,198 183 147 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 32. Financial risk management objectives and policies (cont’d) Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. Trade receivables Customer credit risk is managed by each business unit subject to the Group’s established policy, procedures and control relating to customer credit risk management. Credit limits are established for all customers based on internal rating criteria. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed for all customers requiring credit over a certain amount. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistic for similar financial assets. The allowance account in respect of trade and other receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible. At that point, the financial asset is considered irrecoverable and the amount charged to the allowance account is written off against the carrying amount of the impaired financial asset. At December 31, 2015, the Group had top 20 customers (2014: top 20 customers) that owed the Group more than Rmb 196,537 (US$30,028) (2014: Rmb 236,491) and accounted for approximately 45% (2014: 57%) of accounts receivables (excluding bills receivables) owing respectively. These customers are located in the PRC. There were 47 customers (2014: 43 customers) with balances greater than Rmb 1,000 (US$153) accounting for over 88.4% (2014: 88.0%) of total accounts receivable (excluding bills receivables). The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets mentioned in Note 20 and Note 21. The Group does not hold collateral as security. Cash and fixed deposits are placed with banks and financial institutions which are regulated. 148 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 32. Financial risk management objectives and policies (cont’d) Liquidity risk The Group monitors its liquidity risk and maintains a level of cash and cash equivalents deemed adequate by management to finance the Group’s operations and to mitigate the effects of fluctuations in cash flows, and having adequate amounts of committed credit facilities. The table below summarizes the maturity profile of the Group’s financial assets and liabilities based on contractual undiscounted payments. As at December 31, 2014 Financial assets Trade and bills receivables Other receivables, excluding tax recoverable Cash and bank balances Held for trading investment Financial liabilities Interest-bearing loans and borrowings Trade and other payables (Note 27) Other liabilities One year or less Rmb’000 Two to five years More than five years Total Rmb’000 Rmb’000 Rmb’000 8,135,021 186,050 2,509,034 22,855 — 1,261 — — 10,852,960 1,261 — — — — — 8,135,021 187,311 2,509,034 22,855 10,854,221 1,330,421 6,178,058 101 1,107,525 120,588 142 31,200 — — 2,469,146 6,298,646 243 7,508,580 1,228,255 31,200 8,768,035 149 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 32. Financial risk management objectives and policies (cont’d) Liquidity risk (cont’d) As at December 31, 2015 Financial assets One year or less Rmb’000 Two to five years More than five years Total Total Rmb’000 Rmb’000 Rmb’000 US$’000 Trade and bills receivables 7,229,801 — Other receivables, excluding tax recoverable Cash and bank balances Held for trading investment and derivative not designated as hedges – foreign exchange forward contract 217,572 3,782,123 1,519 60,000 27,490 — 11,256,986 61,519 Financial liabilities Interest-bearing loans and borrowings Trade and other payables (Note 27) Other liabilities 2,473,654 59,673 5,784,226 115,341 64 59 8,257,944 175,073 — — — — — — — — — 7,229,801 1,104,596 219,091 3,842,123 33,473 587,014 27,490 4,200 11,318,505 1,729,283 2,533,327 387,051 5,899,567 901,357 123 18 8,433,017 1,288,426 150 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 33. Capital management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximizing the return to stakeholders through the optimization of the debt and equity balance except where decisions are made to exit businesses or close companies. The capital structure of the Group consists of debts (which includes the borrowings and trade and other payables, less cash and bank balances) and equity attributable to equity holders of the parent (comprising issued capital and reserves). 31.12.2014 31.12.2015 31.12.2015 Rmb’000 Rmb’000 US$’000 Interest-bearing loans and borrowings (current and non-current) (Note 16) Trade and other payables (current and non-current) (Note 27) Less: Cash and bank balances (Note 22) Net debts Equity attributable to equity holders of the parent Total capital and net debts 2,286,717 6,547,296 2,455,704 6,192,190 375,192 946,065 (2,509,034) (3,842,123) (587,014) 6,324,979 6,988,432 4,805,771 7,239,617 13,313,411 12,045,388 734,243 1,106,096 1,840,339 The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the years ended December 31, 2014 and 2015. As disclosed in Note 25, certain subsidiaries of the Group are required by the relevant authorities in the PRC to contribute and maintain a non-distributable statutory reserve fund whose utilization is subject to approval by the relevant authorities in the PRC. This externally imposed capital requirement has been complied with by the subsidiaries of the Group for the financial years ended December 31, 2014 and 2015. 151 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 34. Fair value measurement The following table provides the fair value measurement hierarchy of the Group’s assets and liabilities. Quantitative disclosures fair value measurement hierarchy for assets and liabilities as at December 31, 2014: Fair value measurement using Quoted prices in active markets (Level 1) Rmb’000 Significant observable inputs Significant unobservable inputs (Level 2) Rmb’000 (Level 3) Rmb’000 Date of valuation Total Rmb’000 Assets measured at fair value Held for trading investment: Quoted equity shares – TCL (Note 19) December 31, 2014 22,855 22,855 — — Quantitative disclosures fair value measurement hierarchy for assets and liabilities as at December 31, 2015: Fair value measurement using Quoted prices in active markets (Level 1) Rmb’000 Significant observable inputs Significant unobservable inputs (Level 2) Rmb’000 (Level 3) Rmb’000 Date of valuation Total Rmb’000 Assets measured at fair value Held for trading investment: Quoted equity shares – TCL (Note 19) Derivative financial asset: Foreign exchange forward contract - Euro (i) (Note 19) December 31, 2015 December 31, 2015 11,984 11,984 — 15,506 — 15,506 — — Note: (i) Forward currency contracts are valued using a valuation technique with market observable inputs. The most frequently applied valuation techniques include forward pricing, using present value calculations. The models incorporate various inputs including the foreign exchange spot and forward rates. There have been no transfers between Level 1 and Level 2 during the period. 152 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 35. Financial assets and financial liabilities Financial assets at fair value through profit or loss Rmb’000 Other financial liabilities at amortized cost Loans and receivables Total Rmb’000 Rmb’000 Rmb’000 22,855 — — — — 8,113,094 185,270 2,509,034 22,855 10,807,398 — — — — — 22,855 8,113,094 185,270 2,509,034 10,830,253 — — — — — — — — 6,225,788 2,286,717 220 6,225,788 2,286,717 220 8,512,725 8,512,725 Note 19 20 21 22 27 16(b) 16(a) As at December 31, 2014 Financial assets Held for trading investment Trade and bills receivables Other receivables Cash and bank balances Financial liabilities Trade and other payables Loans and borrowings Other liabilities 153 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 35. Financial assets and financial liabilities (cont’d) As at December 31, 2015 Financial assets Held for trading investment Trade and bills receivables Other receivables Cash and bank balances Financial liabilities Trade and other payables Loans and borrowings Other liabilities Note 19 20 21 22 27 16(b) 16(a) Financial assets at fair value through profit or loss Loans and receivables Other financial liabilities at amortized cost Total Total Rmb’000 Rmb’000 Rmb’000 Rmb’000 US$’000 11,984 — — — — 7,178,513 214,429 3,842,123 — — — — 11,984 1,831 7,178,513 1,096,760 214,429 3,842,123 32,761 587,014 11,984 11,235,065 — 11,247,049 1,718,366 — — — — — — — — 5,832,683 5,832,683 2,455,704 2,455,704 114 114 891,139 375,192 17 8,288,501 8,288,501 1,266,348 Held for trading investment relates to the Group’s investment in TCL, which is a company listed on the main board of the Singapore Exchange and is involved in the manufacture, assembly and distribution of high-end consumer electronic products and home entertainment products in the PRC. Fair values of the quoted equity shares are determined by reference to published price quotations in an active market. Financial assets/liabilities through profit or loss reflect the positive/negative change in fair value of the foreign exchange forward contract that is not designated in hedge relationships, but are, nevertheless, intended to reduce the level of foreign currency risk. Fair value of financial instruments by classed that are not carried at fair value and whose carrying amounts are reasonable approximation of fair value The management assessed that cash and cash equivalents, short-term deposits, restricted cash, trade and bills receivables, other receivables, trade and other payables and interest-bearing loans and borrowings (current) approximate their carrying amounts largely due to the short-term maturities of these instruments. The management assessed that long-term bank deposits, non-current other receivables, interest-bearing loans and borrowings (non-current), non-current other payables and other liabilities approximate their fair value as their interest rates approximate the market interest rates. 154 ENGINEERED FOR CLEAN ENERGY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 36. Events after the reporting period (a) HLGE intention to dispose 60% equity interest in Copthorne Hotel Qingdao Co., Ltd. On February 22, 2016, HLGE announced that its wholly-owned subsidiary, LKN Investment International Pte. Ltd. (“LKNII”) intends to dispose of its 60% equity interest in Copthorne Hotel Qingdao Co., Ltd. (“CHQ”) (“LKNII Equity Interest”). The remaining 40% equity interest in CHQ is currently held by the CAAC East China Regional Administration Authority Service Center (“CAAC”) (the “CAAC Equity Interest”). LKNII and CAAC will dispose CHQ together by way of public tender (the “Proposed Transaction”) on the Shanghai United Assets and Equity Exchange (“SUAEE”). The reserve or floor price for the Proposed Transaction set by the seller is approximately Rmb 546.2 million. The actual aggregate consideration for the Proposed Transaction will be based on the bid price of the successful bidder which will be specified in the Sales and Purchase Agreement. On March 22, 2016, HLGE announced that the public tender on SUAEE received no bid when the tender expired on March 21, 2016. LKNII and CAAC intend to list the LKNII Equity Interest and the CAAC Equity Interest, respectively again on the SUAEE for sale pursuant to the public tender process on March 28, 2016 for another period of 20 business days. (b) Cooperation with MTU On February 19, 2016, the Company’s main operating subsidiary, Guangxi Yuchai Machinery Company Limited (“GYMCL”), have signed an agreement to set up a 50/50 joint venture with MTU Friedrichshafen GmbH (“MTU”), a subsidiary of Rolls-Royce Power Systems. The joint venture is set up for the production, under license from MTU, of MTU diesel engines in China. Each party will invest Rmb 75 million (approximately Euro 10.5 million) in the joint venture. 155 CHINA YUCHAI INTERNATIONAL LIMITED | ANNUAL REPORT 2015 This page has been intentionally left blank. 156 REFERENCE INFORMATION US TRANSFER AGENT AND REGISTRAR Computershare P.O. BOX 30170 College Station, TX 77842 United States of America SHAREHOLDER WEBSITE www.computershare.com/investor INVESTOR RELATIONS BlueFocus Communication Group of America, Inc. 1451 Grant Road, Suite 200 Mountain View, CA 94040, USA COMMON STOCK China Yuchai International Limited Stock is listed on the New York Stock Exchange (NYSE: CYD) AUDITORS Ernst & Young LLP One Raffles Quay North Tower, Level 18, Singapore 048583 Produced by Group Corporate Affairs Hong Leong Group Singapore Designed and typeset by Xpress Print Pte Ltd Operating Office China Yuchai International Limited 16 Raffles Quay, #39-01A Hong Leong Building Singapore 048581 Manufacturing Location Guangxi Yuchai Machinery Company Limited 88 Tianqiao West Road, Yulin, Guangxi 537005 People’s Republic of China