China Yuchai International Limited
Annual Report 2021

Plain-text annual report

I N N O VAT I N G FOR THE FUTURE A N N U A L R E P O R T 2 0 2 1 CONTENTS 01 China Yuchai’s Core Ideals 02 Financial Highlights 04 President’s Statement 08 Corporate Background 09 Our Service Presence 10 Directors and Executive Officers of the Company 11 Board of Directors 13 Executive Officer of the Company 14 Corporate Governance The YCA07 is a high power rating, 6-cylinder off-road engine compliant with China off-road Tier 4 emission standard. YCA07 is jointly designed by Yuchai and German FEV. It is a classic power model of China’s domestic medium-duty engines for both industrial and agricultural markets. CHINA YUCHAI’S CORE IDEALS ANNUAL REPOR T 2021 01 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 玉柴国际的核心理念 愿景 成为卓越环保发动机和汽车系统制造商和提供优良产品及 一流服务的供应商 使命 • 利用卓越的产品和领导力满足客户在汽车和能源领域的 需求 创建高绩效的国际企业 成为具有良好社会责任及拥有公众诚信度的优秀企业 营造良好的员工工作环境 • • • 02 CHINA YUCHAI I NTER NAT ION A L LI MI T ED FINANCIAL HIGHLIGHTS Revenue 2021 RMB’000 2020 RMB’000 2019 RMB’000 21,265,930 20,581,170 18,016,085 Profit attributable to equity holders of the Company 272,673 548,903 604,914 Total assets 25,100,686 26,290,958 23,854,191 Equity attributable to equity holders of the Company 8,859,152 9,014,624 8,767,529 Earnings per share attributable to ordinary equity holders of the Company (RMB per share) 2021 RMB 6.67 2020 RMB 13.43 2019 RMB 14.81 Weighted average number of shares 40,858,290 40,858,290 40,858,290 WE SOLD 456,791 UNITS OF ENGINES The upgraded Yuchai S04 series of is a medium-duty engine engines compliant with  China’s  National VI emission standards for use in light- to medium-duty buses and trucks. It was the first engine in to be certified by the UN R49.07 Euro VI E stage emission standard. With this designation, Yuchai’s engine technology has reached the world class standard, facilitating greater access to European and North America markets. FINANCIAL HIGHLIGHTS ANNUAL REPOR T 2021 03 TOTAL ASSETS (RMB Million) EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY (RMB Million) REVENUE (RMB Million) 25,100.7 26,291.0 23,854.2 8,859.2 9,014.6 8,767.5 21,265.9 20,581.2 18,016.1 2021 2020 2019 2021 2020 2019 2021 2020 2019 PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY (RMB Million) EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY (RMB) 604.9 548.9 14.81 13.43 272.7 6.67 2021 2020 2019 2021 2020 2019 04 CHINA YUCHAI I NTER NAT ION A L LI MI T ED PRESIDENT’S STATEMENT Dear Shareholders, The year 2021 was a volatile period for the Chinese economy and commercial vehicle sales. China’s GDP grew by 12.7% in the first half-year but slowed to growth of 8.1% for 2021. Strong truck sales in the first half of the year gave way to a 39.5% sales decline year-over-year in the second half of 2021. There were a host of challenges during the year driven by external factors. Renewed COVID-19 restrictions, chip and component supply chain interruptions, coal shortage-driven power outages, a new emission standard implementation and lower construction activities all affected the economy and especially reduced demand for trucks in 2021. Despite these issues, our annual revenues increased by 3.3% to RMB 21.3 billion (US$ 3.4 billion), earnings per share was RMB 6.67 (US$ 1.06) and annual cash flow from operations remained positive. in sales the second According to statistics from the China Association of Automobile (“CAAM”), China’s Manufacturers commercial unit vehicle declined by 36.5% half of 2021 and was down by 6.9% for 2021. Truck sales decreased by 39.5% in the second half-year and by 8.7% for 2021. The Chinese truck market is the world’s largest, having produced over 3 million vehicles in 2021 alone. Serving the needs of approximately 1.4 billion people in China, trucking is essential to meet the demands of the world’s second largest economy and China’s global supply chain commitments. The implementation of the stricter National VI (a) emission standards in July substantially impacted truck demand. Bus and truck sales rose by 25.9% in the first half-year primarily due to a pre-buy of less expensive, less strict National V vehicles. However, a significant inventory of National V vehicles remained in the distribution channels after July resulting in much lower demand for National VI trucks in the second half of 2021. For 2021, truck sales decreased by 8.7% particularly with the heavy-duty segment 14.2% lower. However, our engine sales posted positive growth in virtually every major market segment except for trucks for 2021. Strong bus and off-road engine unit sales partly offset lower truck sales and resulted in total unit sales rising by 6.2% in 2021. Our annual bus sales grew by 53.8% as our market share grew in each size category, mainly due to the performance and increased acceptance of our emission-reducing National VI engines. Off-road engine unit sales were 32.7% ahead of last year, as both agriculture and industrial engines grew by over 25% and engine unit sales for marine & power generation applications surged by 53.3% in 2021 mainly due to transitory power shortages in China. Our sales of emerging new energy vehicle (“NEV”) products in 2021 increased as compared to a year ago, and our range extender systems achieved greater market penetration. it significantly Being among the first producers to meet new emission standards has been an anchor of our growth strategy. The National VI (a) emission standards were nationally implemented in July 2021 and reduces particulate matter and NOx emissions. These stricter standards are a major step up from prior systems to combat automotive pollutants and mitigate global climate change. We introduced 14 National VI engines for on-road markets as well as 10 Tier-4 engines for off-road markets in 2018, well before the national implementation periods for both new standards. In addition, in 2018 our model K08 engine passed the certification of the stricter National VI (b) standards which are scheduled for implementation in 2023. These accomplishments showcase our research and development capabilities and assure OEM customers of our technology prowess. Our exhaust emission control systems joint venture, Eberspaecher Yuchai Exhaust Technology Co., Ltd. (“Eberspaecher Yuchai”), ramped up production in 2021. These systems are critical for our engines to reduce emissions for the National VI and Tier-4 standards. Eberspaecher Yuchai has a promising future with expanded production as National VI and Tier-4 are becoming the national emission standards across China. PRESIDENT’S STATEMENT Our new engines compliant with the stricter emission standards and our burgeoning NEV products are a result of our research and development investments. The bulk of these expenditures was to further improve the performance, quality and profitability of our large portfolio of National VI engines and our emerging Tier-4 compliant engines. With these engines well positioned in their respective markets, more resources will be focused to accelerate the development of our NEV technologies and for research and development with our strategic partners. As we continue to build new advanced diesel and gas engines for today’s markets, we also plan for the future with NEV products for electric vehicles and hydrogen-powered systems. New powertrain platforms have been under development since 2019 including next-generation hybrid powertrains, fuel cell systems, electric bridges, e-CVT range extenders. Our 65kW and and 100kW range extenders have already generated sales, and a more powerful 150kW and even higher extenders are under development. These products have the potential to improve the performance of NEVs and increase customer satisfaction. Our promising NEV capabilities have led to new strategic initiatives with new partners to advance our NEV program development. A new joint venture with Beijing Xing Shun Da Bus Co., Ltd. will develop hydrogen energy applications for fuel cell powertrains, and our new energy powertrains will be used by Guangxi Sunlong Automobile Manufacturing to develop NEV vehicles. Another agreement with the Government of Nanning Municipality will extend our production capabilities for NEV technologies. We have already introduced China’s first operating hydrogen combustion engine for commercial vehicles, model YCK05, which is undergoing durability testing. As more NEV products are launched in the future, more potential strategic partners will emerge to add to our technology development and enhance commercialization. Our Eberspaecher Yuchai and MTU Yuchai Power joint ventures both realized higher sales and profitable operations during the year. MTU Yuchai Power, our joint venture with ANNUAL REPOR T 2021 05 MTU Friedrichshafen GmbH, produces larger diesel engines starting from 1400 kW, cementing our position in the high horsepower product category. Eberspaecher Yuchai, a joint venture with Eberspaecher Exhaust Technology International GmbH, on the other hand, enables us to lower costs through local manufacturing of key after-treatment components. In 2021, lower net profit mainly resulted from lower product gross profit. The unsettled truck market, a change in product mix, and National VI engines not attaining economy-of- scale production in the second half of the year all contributed to reduced net profit. We believe higher engine volumes of National VI engines are on the horizon which will enhance manufacturing efficiency. As of December 31, 2021, our cash and bank balances were RMB 5.3 billion (US$ 843.3 million) even after paying a cash dividend of US$ 1.70 per ordinary share in July 2021. Dividends have been paid consistently for many years to reward our shareholders. Maintaining financial strength continue as our top priorities. In summary, despite the challenges in 2021, we continued to generate profitable annual sales and strong cashflow in such a difficult market. Our National VI and Tier-4 engines are well positioned for the future and new and advanced technologies are being introduced to capture market share in specific markets for both on- and off-road applications. The impact of the National V truck inventory overhang will fade and the supply of chips and components has become more reliable for production. Additionally, while sales of our traditional powertrain products remain resilient, our NEV products are beginning to enter the marketplace with more products under development. Weng Ming HOH President May 31, 2022 06 CHINA YUCHAI I NTER NAT ION A L LI MI T ED 总裁致词 尊敬的股东们： 2021 GDP 年是中国经济和商用车销售不平稳的一年。中国上半年 。上半年卡车销量 增长 12.7% 8.1% ，但全年增速放缓至 39.5% 强劲，而下半年销量则同比下降 。 2 0 2 1 受 外 部 因 素 影 响， COVID-19 年 出 现 一 系 列 挑 战 。再 度 实 行 的 疫情管制、芯片和生产零部件件供应链中断、煤炭 短缺导致的用电紧张、新排放标准的实施及建筑项目减少均 2021 对经济造成冲击，尤其导致 尽管存在这些困难，我们的年收入仍增长 213 亿美元），每股收益为人民币 ，达到人民币 美元）， 年市场对卡车需求的减少。 3.3% 6.67 亿元（ 1.06 元（ 34 年度运营现金保持正流入。 根据中国汽车工业协会（ 年中国商用车销量下降 2021 年下半年下降 39.5% 2021 最大的卡车市场，仅在 足世界第二大经济体——中国约 对全球供应链的承诺，卡车至关重要。 14 2021 “ 36.5% 中汽协 ” ，全年下降 8.7% ，全年下降 年卡车生产超过 6.9% ）统计数据， 年下半 。卡车销量在 。中国拥有全世界 300 万辆。对于满 亿人口的需求，以及中国 7 a 月份实施的更为严格的国六（ ）排放标准，相当程度上影 响了卡车的市场需求。上半年，客车和卡车销量增长 ， 主要是因为市场抢购价格和排放要求相对较低的国五车 7 月份之后，分销渠道中积压大量国五车辆库存，导致 辆。 2021 年下半年国六卡车的市场需求大幅下降。 全年， 14.2% 25.9% 2021 8.7% 卡车销量下降 ，其中重型卡车销量下降 。 2021 尽管如此，除卡车板块以外， 年我们的发动机销售几乎 在每个主要细分市场均实现正增长。客车和非道路用途发 动机销量强劲，部分抵消了卡车销量疲软带来的消极影响， 实现全年总销量增长 6.2% 。 2021 53.8% 32.7% 年我们的 随着我们在各个车型板块的市场份额提高， 客车年销量增长 ，主要归因于我们的国六减排发动机 的优良性能和客户接受度的提高。非道路用途发动机销量同 比增长 ， 同时，受中国暂时性的电力短缺影响，船用和发电用途发动 机销量激增 。我们的新能源汽车产品销量同比增长， 增程器动力系统实现了更大的市场渗透。 ，农用和工业用发动机销量增长均超过 53.3% 25% 2021 年我们的 除卡车板块以外， 发动机销售几乎在每个主要细分 市场均实现正增长。客车和非道路 用途发动机销量强劲，部分抵消了 卡车销量疲软带来的消极影响， 实现全年总销量增长 6.2% 。 a 7 年 2021 成为行业中首批满足新排放标准的生产企业是我们一直以 a 月在全国范 ）排放标准于 来的战略增长支柱。国六（ 围内实施，大大减少了颗粒物和氮氧化物的排放。相较之前 ）排放标准在防治汽车污染 的排放标准，更为严格的国六（ 物及减缓全球气候变化方面迈出了重要一步。我们于 年 款非道路四阶段发 推出了 动机，远远提前于此两项新标准的全国实施期限。此外，我们 年通过了更为严格的国六（ 的 ）标准认 型发动机于 证，该标准计划于 年实施。这些成绩展示了我们的研发 能力，并向原始设备制造商客户保证了我们的技术实力。 款道路用途的国六发动机和 2018 2023 2018 K08 10 14 b ” ）于 埃贝赫玉柴 我们的排气控制系统合资企业——埃贝赫玉柴排放处理系统 2021 “ 有限公司（ 年加大了产量。这些排放处 理系统对减少发动机排放，满足国六和非道路四阶段标准至 关重要。随着国六和非道路四阶段排放标准在中国范围内实 施，埃贝赫玉柴生产规模扩大，前景可期。 AGV are widely used for logistics support, such as sending engine components to the lines, or collection after machining. ANNUAL REPOR T 2021 07 总裁致词 我们的发动机产品符合减排标准，新能源汽车产品迅速发 展，是我们研发投资的成果见证。我们大部分的研发支出用 于国六和非道路四阶段发动机产品性能、质量及盈利能力的 进一步提升。凭借这些产品在各自市场的良好定位，我们将 集中更多资源加快新能源汽车产品技术的开发，以及与战略 伙伴的共同研发。 我们将继续生产适用于当今市场需求的新型先进柴油和燃 气发动机，与此同时，我们未来计划推出针对电动汽车和氢 动力系统的新能源汽车产品。自 年以来，我们一直在开 发新的动力系统平台，包括新一代混合动力系统、燃料电池 系统、电桥、 千瓦增程 千瓦甚至更高功率的增程器正在开发 器已经投放市场， 中。这些产品将提高新能源汽车的性能，提升客户满意度。 及增程器。我们的 150 千瓦和 e-CVT 2019 100 65 7 2021 31 在 12 月 月支付每股 年 日，我们的现金和银行存款为人民币 美元的现金股息后，截至 亿元（ 53 1.70 2021 8.43 年 亿 美元）。多年来，我们一直坚持派发股息，以回报我们的股东。 保持财务实力仍然是我们的首要任务。 2021 尽管 年挑战重重，我们仍取得了年度销售盈利，保持了 强劲的现金流。我们的国六和非道路四阶段发动机已经为未 来做好了充分的准备，同时，我们引进先进技术，藉以占领道 路及非道路用途发动机特定领域的市场份额。国五卡车库存 过剩的影响会逐渐消失，芯片和生产零部件的供应也在逐步 稳定扩大生产。另外，尽管我们的传统动力系统产品销售仍 具韧性，但我们的新能源汽车产品已经开始推出市场，更多 产品也正在开发进行中。 我们雄厚的新能源研发实力已促成与新合作伙伴达成战略 举措，助力新能源汽车产品的开发。我们与北京市兴顺达客 运有限责任公司成立的合资企业将开发氢能在燃料电池动 力系统的应用。我们的新能源动力系统将被广西申龙用于新 能源整车开发。与南宁市政府签订的另一项协议将扩大我们 在新能源汽车技术方面的生产能力。我们推出了中国首台商 用车燃氢发动机 ，目前正在进行耐久性测试。随着未 来更多新能源汽车产品的推出，更多潜在战略伙伴将加入到 我们的技术开发，提高商业化水平。 YCK05 何永明 总裁 2022 年 31 5 月 日 “ ” 玉柴安特优 MTU Friedrichshafen GmbH 我们的合资企业，埃贝赫玉柴和玉柴安特优动力有限公司 （ ）在这一年均实现了销售额和利润的增长。 的合 玉柴安特优是我们与德国 1,400 资企业，主营及生产 千瓦以上的大型柴油发动机，巩固 我们在大马力产品中的地位。另一方面，我们与德国埃贝赫 排气技术国际有限公司的合资企业——埃贝赫玉柴，通过在 本地生产关键后处理系统零件来降低产品成本。 2021 年净利润下降主要是由于产品毛利下降。卡车市场的波 动、产品结构发生变化、国六发动机下半年未能实现规模生 产，均导致了净利润下降。我们相信，随着国六发动机产量契 机的来临，制造效率将会提高。 The YCK05N Hydrogen Engine is the first operating hydrogen engine for China’s commercial vehicle market. It adopts a number of advanced special technologies such as high-pressure multi-point inlet air injection technology, high-efficiency low-inertia turbocharging lean burn combustion technology, high-efficiency technology, etc. This successful achievement is another Yuchai hydrogen technology milestone in the development of hydrogen energy as an environmentally friendly alternative propulsion system, following the introduction of Yuchai’s hydrogen fuel cell technology. 08 CHINA YUCHAI I NTER NAT ION A L LI MI T ED CORPORATE BACKGROUND China Yuchai International Limited (“China Yuchai”) is a Bermuda holding company established on April 29, 1993 and listed on the New York Stock Exchange under symbol “CYD”, with major operations in China. It is a subsidiary of Singapore-based Hong Leong Asia Ltd. extenders, electric drive axle, etc. Through its regional sales offices and authorized customer service centers, Yuchai distributes its engines directly to OEMs, retailers and agents, and provides maintenance and retrofitting services throughout China. China Yuchai, through six wholly owned subsidiaries, owns a controlling 76.4% equity interest in its principal operating subsidiary, Guangxi Yuchai Machinery Company Limited (“Yuchai”). With its headquarter and primary manufacturing facilities in Yulin City, Guangxi Zhuang Autonomous Region, Yuchai engages in the manufacture, assembly and sale of a wide variety of light-, medium- and heavy-duty engines for trucks, buses, passenger vehicles, construction equipment, marine and agriculture applications. Yuchai also produces engines for diesel- powered generators. The engines produced by Yuchai range from diesel and natural gas engines, fuel cells, hybrid-powered systems, pure electric systems, range Found in 1951, Yuchai has established a reputable brand name, strong research and development team and significant market share in China with high-quality products and reliable after-sales support. In 2021, Yuchai sold 456,791 engines and is recognized as a leading manufacturer and distributor of engines in China. China Yuchai also holds a 48.9% shareholding interest in HL Global Enterprises Limited (“HLGE”) which is listed on the main board of the Singapore Exchange. HLGE currently operates the Copthorne Hotel Cameron Highlands, a hotel in Cameron Highlands, Malaysia. 公司背景 29 “ 中国玉柴国际有限公司（ 4 月 CYD 年 日的百慕大控股公司，在纽约证券交易所上市，代号为 ，主要业务在中国。它是新加坡丰隆亚洲有限公司的子 ）是一家成立于 玉柴国际 1993 ” 公司。 6 ” ） 玉柴 76.4% 家全资子公司，拥有其主要运营子公司广西 的股权。玉柴的总部 玉柴国际通过 “ 玉柴机器股份有限公司（ 和生产基地位于中国广西壮族自治区玉林市，从事各种轻、 中、重型的卡车、客车、乘用车、建筑设备、船舶和农业用发动 机的制造、组装和销售。玉柴也生产柴油动力发电发动机。 它的产品包括柴油机、燃气机、燃料电池、混合动力系统、 纯电动系统、增程器、电驱动桥等。通过地区销售点和授权客 服中心，玉柴直接销售发动机给原始设备制造商、代理商和 经销商，并提供全国维修和改装服务。 1951 创建于 年，玉柴凭借高质量的产品和可靠的售后支持， 在中国建立了声誉良好的品牌、强大的研发团队和可观的市 台，被认为是中国 场份额。 领先的发动机制造商和销售商之一。 年，玉柴销售发动机 456,791 2021 A worker was operating CNC equipment. 48.9% “HLGE” 玉柴国际还持有新加坡交易所主板上市的丰隆环球有限公司 目前经营着位于马来西亚金 （ 马伦高原国敦大酒店。 的股权。 HLGE ） OUR SERVICE PRESENCE ANNUAL REPOR T 2021 09 276 Overseas Service Agents Appointed 18 Overseas Offices Guangxi Yuchai Machinery Company Limited 广西玉柴机器股份有限公司总部 51 regional offices 51 个玉柴办事处 4,058 authorized customer service stations 4,058 家玉柴授权服务站 10 CHINA YUCHAI I NTER NAT ION A L LI MI T ED DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 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 28, 2022, there were nine 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, Stephen Ho Kiam Kong and Hoh Weng Ming as its nominees. Messrs. Li Hanyang and Wu Qiwei 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) STEPHEN HO Kiam Kong LI Hanyang (1) WU Qiwei (1) NEO Poh Kiat (1)(2)(3) HO Raymond Chi-Keung (2)(3) XIE Tao (1)(3) LOO Choon Sen (1) Position President and Director Director Director Director Director Director Director Director Director Chief Financial Officer Conyers Corporate Services (Bermuda) Limited (5) Secretary Mr. Yan Ping retired as Director at the Annual General Meeting of the Company on July 23, 2021. Dr. Han Yiyong resigned from his positon as Director of the Company effective April 30, 2021. Year First Elected or Appointed Director or Officer 2011 1995 1994 2020 2021 2012 2005 2004 2019 2021 2015 Dr. Phung Khong Fock Thomas resigned as Chief Financial Officer of the Company with effect from June 1, 2021. (1) Also a Director of Yuchai. (2) Member of the Compensation Committee. (3) Member of the Audit Committee. (4) Also a Director of HLGE. (5) Codan Services Limited was renamed to Conyers Corporate Services (Bermuda) Limited with effect from April 1, 2017. 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 2008 to November 2011. He is also a Director of Yuchai and HLGE. Mr. Hoh has more than 35 years of working experience with extensive regional experience in Singapore, Malaysia, New Zealand, Hong Kong and China. He has worked in various roles with companies including Johnson Electric Industrial Manufactory Limited as well as Henan Xinfei Electric Co., Ltd. Previously, he held the position of Financial Controller of the Company from 2002 to 2003 and the Chief Financial Officer of Hong Leong Asia from 2011 to 2013. Mr. Hoh has a Bachelor of Commerce Degree majoring in Accountancy from the University of Canterbury, Christchurch, New Zealand and an MBA degree from Massey University, New Zealand. He is a Chartered Accountant in New Zealand and a Fellow Member of the Hong Kong Institute of Certified Public Accountants. Dato’ Gan Khai Choon is a Director of the Company, Yuchai, Grace Star, Venture Delta and Millennium & (Shanghai) Limited. Copthorne Hotels Management He is also the Non-Executive Chairman of HLGE and Beijing Fortune Hotel Co., Ltd., as well as the Managing Director of Hong Leong International (Hong Kong) Limited and Executive Director of Hong Leong Hotel Development Limited. Dato’ Gan 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. Dato’ Gan is related to Mr. Kwek Leng Peck. Mr. Kwek Leng Peck is a Director of the Company. He is the Executive Chairman of Hong Leong Asia and an Executive Director of Hong Leong Investment Holdings Pte. Ltd. and Hong Leong Corporation Holdings Pte. Ltd. He also sits on the boards of HL Technology, Hong Leong China, Well Summit Investments Limited, Yuchai, and Hong Leong Finance Limited, as well as other affiliated companies. Mr. Kwek has extensive experience in trading, manufacturing, property investment and development, hotel operations, corporate finance and management. Mr. Kwek is related to Dato’ Gan Khai Choon. ANNUAL REPOR T 2021 11 Mr. Stephen Ho Kiam Kong is a Director of the Company, Grace Star, Venture Delta. He is also the Chief Executive Officer and a Director of Hong Leong Asia. He was previously the Group Chief Financial Officer for Wilmar International Limited, an agribusiness group, for more than eight years. Before this, he was with Philips Electronics for 12 years and his last position was the Senior Vice President and Chief Financial Officer of Philips Electronics China Group, Greater China operation based in Shanghai. Prior to his corporate roles, Mr. Ho held regional managerial positions in business development, risk management and trading functions with several large international banks based in Singapore. Mr. Ho was awarded the Best Chief Financial Officer for the Year 2018 for large-cap companies in the Singapore Corporate Awards. During his tenure in Shanghai, Mr. Ho served as the Chairman of the Shanghai Board of the European Chamber of Commerce of China and received the Magnolia Silver Award from the Shanghai Municipality Government. Mr. Ho holds a Bachelor of Commerce and Administration Degree from Victoria University of Wellington, New Zealand and had completed the Advanced Management Program at the Harvard Business School, Boston, United States. Mr. Li Hanyang was appointed as Director of the Company on May 12, 2021. He was also Chairman of Yuchai’s Board and Chairman of the GY Group (a 17.20% shareholder of the Company). Mr. Li started his career with Yuchai as a production preparation section chief in 1993 and was gradually promoted to deputy general manager of Yuchai in 2000. He was transferred to GY Group in 2002 and since then he has served in various managerial position including chief engineer, director, chairman and party secretary of GY Group and its subsidiaries. Mr. Li holds a Bachelor’s degree in mechanical design and manufacturing from Tsinghua University and an MBA from the School of Management, Huazhong University of Science and Technology. Dr. Wu Qiwei was elected as Director of the Company on July 23, 2021 after serving as Alternate Director of the Company to Mr. Yan Ping since 2012. Dr. Wu is also 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. 12 CHINA YUCHAI I NTER NAT ION A L LI MI T ED BOARD OF DIRECTORS Mr. Neo Poh Kiat is a Director of the Company and Yuchai. 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 also a director of Cambodia Post Bank Plc, Fullerton Credit (Sichuan) Ltd., Fullerton Credit (Chongqing) Ltd., Fullerton Credit (Hubei) Ltd., Fullerton Credit (Yunnan) Ltd. and CapitaLand China Trust Management Limited (formerly known as CapitaLand Retail China Trust Management Limited). 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. Ho Raymond Chi-Keung 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. Mr. Ho is a practicing arbitrator. From 2008 to 2011, he was the Secretary General of the Law Society of Hong Kong and prior to joining the Law Society secretariat in 2006, he had practiced law as a solicitor for 23 years with a wide range of experience in transactional and contentious matters. Mr. Ho holds Bachelor of Laws and Master of Social Sciences degrees 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 U.K. Chartered Institute of Arbitrators and a Member of Silicon Valley Arbitration and Mediation Center. Mr. Ho is currently listed on the Panel of Arbitrators of Hong Kong International Arbitration Centre. He was admitted as a Solicitor in Hong Kong and England & Wales; and was a Barrister and Solicitor in the Australian Capital Territory and the Province of British Columbia, Canada; and is currently a non-practicing member of the Law Societies in these jurisdictions. Mr. Ho is also 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. Xie Tao is a Director of the Company and Yuchai. He is also an Independent Director of Zhengjiang Wanfeng Auto Wheel Co., Ltd and Gongniu Group Co., Ltd, a listed company in China, as well as a Non-independent Non-executive Director of Shanghai Vico Precision Mold & Plastics Co., Ltd. Mr. Xie has more than 30 years of experience in corporate management and financial advisory, including mergers and acquisitions, corporate finance and transaction services. He has spent the major part of his career with PricewaterhouseCoopers (PwC) for nearly 23 years as a lead partner of the Advisory practice in PwC China and as the Senior Partner of Corporate Finance serving on the Executive Board of the China, Singapore and Hong Kong member firms of PwC. Between 2012 and 2014, he was a partner at Ernst & Young, then Deloitte, as a leader of transaction services and corporate finance business. He was also a financial advisor for the 2008 Beijing Olympic Games. Between 2010 and 2017, Mr. Xie held several executive and non-executive management roles of private and public companies in China and abroad. Mr. Xie holds a Bachelor’s degree in Physics from Beijing University in China and was a member of the UK Chartered Association of Certified Accountants. Our Board of Directors has determined that Mr. Xie is independent within the meaning of the NYSE’s corporate governance standards, on the basis that the Company has no material relationship with him. Intelligent display screen of cylinder head processing workshop. EXECUTIVE OFFICER OF THE COMPANY ANNUAL REPOR T 2021 13 Mr. Loo Choon Sen was appointed Chief Financial Officer of the Company on June 3, 2021 and a Director of Yuchai effective November 30, 2021. Mr. Loo has over 23 years of experience as a leader in financial operations. Since he joined Cameron International Corporation in 2001, he had held various positions within the group including the positions as Director of Finance for Canada and Director of Financial Services for Asia Pacific Middle East. In 2016, Schlumberger Limited acquired Cameron International Corporation and since then he was the Director of Finance for Schlumberger Limited’s Cameron Product Lines for Asia Pacific Middle East. His last job was with TechnipFMC covering the Asia Pacific region for Surface International. Mr. Loo started his career as an auditor and he was the Financial Controller for a subsidiary of a listed Company in KLSE based out of Papua New Guinea in his early career. Mr. Loo holds a Bachelor of Commerce degree in Finance and Accounting from Curtin University of Technology, Australia and is a CPA in Australia. The YCY24 engine compliant with China National VI emission standards is for use in light-duty trucks, light-duty buses and pick-up trucks. The engine is built with aluminum alloy casting and provides a lighter dry weight on installation. YCY24 has a displacement volume of 2.36 liter and a maximum power output of 150 PS with a maximum torque of 380 N-m. Yuchai’s Office Building in Yunlin. 14 CHINA YUCHAI I NTER NAT ION A L LI MI T ED 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 U.S. 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 U.S. companies. The following table compares the Company’s principal corporate governance practices, which are in compliance with Bermuda law, to those required of U.S. companies. Standard for U.S. Domestic Listed Companies China Yuchai International Limited’s Practice Director Independence • A majority of the board must consist of independent directors. 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 US$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. • Three of our nine directors, Messrs. Xie Tao, Neo Poh Kiat and Ho Raymond Chi-Keung are independent within the meaning of the NYSE standards. • 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. CORPORATE GOVERNANCE ANNUAL REPOR T 2021 15 Standard for U.S. Domestic Listed Companies China Yuchai International Limited’s Practice • 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 meet the independence requirements of both the NYSE rules and Rule 10A-3 under the Exchange Act. • Our Audit Committee has a charter outlining the committee’s purpose and responsibilities, which are similar in scope to those required of U.S. companies. • Our Audit Committee’s charter outlines the committee’s purpose and responsibilities which are similar in scope to those required of U.S. companies. • The audit committee must have a written charter that addresses the committee’s purpose and responsibilities. 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. Cylinder head finishing line. 16 CHINA YUCHAI I NTER NAT ION A L LI MI T ED CORPORATE GOVERNANCE Standard for U.S. Domestic Listed Companies China Yuchai International Limited’s Practice Audit Committee 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. • Each listed company must have an internal audit function. • Our Audit Committee assesses former employees of 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 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. Xie Tao as our Audit Committee Financial Expert. • 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, reviews 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. relevant • These responsibilities include (i) reviewing and approving corporate goals and objectives 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 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. the board non-CEO compensation, • Our compensation committee reviews among other things the Company’s general compensation structure, and reviews, 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. CORPORATE GOVERNANCE ANNUAL REPOR T 2021 17 Standard for U.S. Domestic Listed Companies China Yuchai International Limited’s Practice 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, U.S. 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. • 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. • Our Equity Incentive Plan was approved by our shareholders in 2014. • 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. 18 CHINA YUCHAI I NTER NAT ION A L LI MI T ED FINANCIAL REPORT CONTENTS 19 Report of Independent Registered Public Accounting Firm 22 Consolidated Statement of Profit or Loss 23 Consolidated Statement of Comprehensive Income 24 Consolidated Statement of Financial Position 26 Consolidated Statement of Changes in Equity 29 Consolidated Statement of Cash Flows 31 Notes to the Consolidated Financial Statements ANNUAL REPORT 2021 19 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of China Yuchai International Limited Opinion on the Financial Statements financial position of China Yuchai We have audited the accompanying consolidated statements of International Limited (the “Company”) as of December 31, 2021 and 2020, 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, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, 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 22, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as the financial statements. We believe that our audits provide a evaluating the overall presentation of reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 20 CHINA YUCHAI INTERNATIONAL LIMITED Capitalization of development costs Description of the Matter Prior to the financial year ended December 31, 2020, the Group has commenced the process to research and develop new engine models to comply with the new engine emission standards as promulgated by the People’s Republic of China (the “Development Projects”). The efforts to develop such new engines continued during the financial year ended December 31, 2021. The Group has determined that the Development Projects met the capitalization criteria as stated in Note 2.3 (l) to the consolidated financial statements and has capitalized RMB 992.3 million (US$ 157.0 million) of development costs as of December 31, 2021, as disclosed in Note 12 to the consolidated financial statements. Auditing management’s recognition of capitalized development costs was complex because the capitalization of development costs requires the application of management to determine, amongst others, what continues to constitute development activities and when a Development Project should cease further capitalization of development costs. Management is also required to ascertain the nature of expenses that qualify for capitalization. judgment judgment How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested controls over the authorization, approval and recording of expenses the on-going and controls over monitoring of Development Projects. the status of audit others, among included, procedures Our evaluating management’s judgment related to the determination of the research and development phases, and the determination of which development costs can be capitalized by conducting inquiries of the engineers in the Research and Development (“R&D”) department to understand the progress of the Development Projects. In addition, for a sample of Development Projects, we evaluated the status of each project, and the costs capitalized by comparing the supporting documents to the Company’s capitalization criteria. We evaluated management’s assessment that the Development Projects continued to be in-progress by inspecting the testers’ feedback and responses from the R&D department on a sample basis. Ernst & Young LLP We have served as the Company’s auditor since 2009 Singapore April 22, 2022 ANNUAL REPORT 2021 21 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of China Yuchai International Limited Opinion on Internal Control over Financial Reporting We have audited China Yuchai International Limited’s internal control over financial reporting as of December 31, 2021, 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”). In our opinion, China Yuchai International Limited (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statements of financial position of the Company as of December 31, 2021 and 2020, 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, 2021, and the related notes and our report dated April 22, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company’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 Annual Report on 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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. Definition and Limitations of Internal Control Over Financial Reporting 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 generally accepted accounting principles. 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 generally accepted accounting principles, 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. Ernst & Young LLP Singapore April 22, 2022 22 CHINA YUCHAI INTERNATIONAL LIMITED CONSOLIDATED STATEMENT OF PROFIT OR LOSS Revenue Cost of sales Gross profit Other operating income Other operating expenses Research and development expenses Selling, general and administrative expenses Operating profit Finance costs Share of (loss)/profit of associates, net of tax Share of profit/(loss) of joint ventures, net of tax Profit before tax Income tax expense Profit for the year Attributable to: Equity holders of the Company Non-controlling interests Note 6 7.1 7.2(a) 7.2(b) 7.1 7.1 7.3 5 8 31.12.2019 RMB’000 31.12.2020 RMB’000 31.12.2021 31.12.2021 US$’000 RMB’000 18,016,085 (14,910,244) 20,581,170 (17,391,599) 21,265,930 (18,313,817) 3,363,691 (2,896,747) 3,105,841 347,161 (8,675) (492,204) (1,806,042) 1,146,081 (131,796) (181) 19,215 1,033,319 (172,619) 3,189,571 400,269 (21,322) (626,478) (1,760,036) 1,182,004 (151,170) 452 (59,422) 971,864 (192,538) 2,952,113 326,171 (9,982) (848,812) (1,755,957) 663,533 (115,928) 90 (95,985) 451,710 (43,816) 860,700 779,326 407,894 466,944 51,591 (1,579) (134,259) (277,745) 104,952 (18,337) 14 (15,182) 71,447 (6,930) 64,517 604,914 255,786 860,700 548,903 230,423 779,326 272,673 135,221 407,894 43,129 21,388 64,517 Earnings per share (dollar per share) - Basic - Diluted 9 9 14.81 14.81 13.43 13.43 6.67 6.67 1.06 1.06 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. ANNUAL REPORT 2021 23 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Profit for the year 860,700 779,326 407,894 64,517 Other comprehensive income Items that may be reclassified to profit or loss in subsequent periods, net of tax: Foreign currency translation Net fair value change on debt instruments at fair value through 8,467 (63,864) (36,685) (5,802) other comprehensive income 3,050 (2,752) 63,890 10,106 Net other comprehensive income that may be reclassified to profit or loss in subsequent periods, representing other comprehensive income for the year, net of tax 11,517 (66,616) 27,205 Total comprehensive income for the year, net of tax 872,217 712,710 435,099 Attributable to: Equity holders of the Company Non-controlling interests 610,369 261,848 872,217 492,966 219,744 712,710 293,240 141,859 435,099 4,304 68,821 46,383 22,438 68,821 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 24 CHINA YUCHAI INTERNATIONAL LIMITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS Non-current assets Property, plant and equipment Investment property Intangible assets Investment in associates Investment in joint ventures Deferred tax assets Long-term bank deposits Right-of-use assets Capitalized contract cost Current assets Inventories Trade and other receivables Other current assets Cash and cash equivalents Short-term bank deposits Restricted cash Total assets Note 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 10 11 12 5 8 16 17 6.2 13 15 14 16 16 16 4,258,760 5,829 1,483,968 2,393 227,120 400,198 140,000 384,001 127,704 4,197,909 5,086 1,758,582 2,467 151,095 398,174 110,000 344,814 147,499 663,995 804 278,160 390 23,899 62,980 17,399 54,540 23,330 7,029,973 7,115,626 1,125,497 4,471,195 8,459,088 23,164 5,877,647 258,756 171,135 5,208,636 7,538,096 16,773 4,788,219 357,335 76,001 823,864 1,192,322 2,653 757,366 56,521 12,021 19,260,985 17,985,060 2,844,747 26,290,958 25,100,686 3,970,244 ANNUAL REPORT 2021 25 CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Cont’d) EQUITY AND LIABILITIES Equity Issued capital Statutory reserves Capital reserves Retained earnings Other components of equity Equity attributable to equity holders of the Company Non-controlling interests Total equity Non-current liabilities Loans and borrowings Lease liabilities Contract liabilities Deferred tax liabilities Deferred grants Other payables Current liabilities Trade and other payables Loans and borrowings Lease liabilities Contract liabilities Provision for taxation Provision Total liabilities Total equity and liabilities Note 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 18 20 20 20 26 25 24 8 27 22 22 26 25 24 23 2,081,138 307,165 30,704 6,756,976 (161,359) 2,081,138 309,237 30,704 6,578,865 (140,792) 329,179 48,913 4,857 1,040,597 (22,269) 9,014,624 2,818,086 8,859,152 2,756,192 1,401,277 435,955 11,832,710 11,615,344 1,837,232 500,000 17,023 67,269 112,456 518,142 191,563 100,000 13,406 69,173 65,544 411,658 188,725 15,817 2,120 10,941 10,367 65,113 29,851 1,406,453 848,506 134,209 10,110,968 1,730,000 22,755 868,193 50,801 269,078 9,639,115 2,103,000 27,125 573,259 41,309 253,028 1,524,646 332,637 4,290 90,674 6,534 40,022 13,051,795 12,636,836 1,998,803 14,458,248 13,485,342 2,133,012 26,290,958 25,100,686 3,970,244 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 26 CHINA YUCHAI INTERNATIONAL LIMITED 0 0 7 , 0 6 8 6 8 7 , 5 5 2 4 1 9 , 4 0 6 7 1 5 , 1 1 2 6 0 , 6 5 5 4 , 5 7 1 2 , 2 7 8 8 4 8 , 1 6 2 9 6 3 , 0 1 6 – – – – 1 3 3 , 2 1 3 3 , 2 ) 8 5 7 , 8 3 2 ( – ) 8 5 7 , 8 3 2 ( – ) 4 1 5 , 7 0 2 ( ) 4 1 5 , 7 0 2 ( – – – – ) 4 1 1 ( ) 3 8 1 ( 9 6 – 9 6 – – – – – – – – – – – – – 4 1 9 , 4 0 6 4 2 1 , 3 – 4 2 1 , 3 4 1 9 , 4 0 6 – – – – – – – ) 8 5 7 , 8 3 2 ( – – – ) 3 0 9 , 1 ( – – – – – – – – – 3 0 9 , 1 – – – – – – – 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 - n o n f o n o i t i s i u q c a e c n a m r o f r e P y c n e r r u c n g i e r o F y n a p m o c e h t l f o s r e d o h y t i u q e e h t o t e l b a t u b i r t t A s t s e r e t n i e v r e s e r g n i l l o r t n o c e u l a v r i a F s e r a h s 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 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 y r o t u t a t S s e v r e s e r 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 4 5 5 , 7 4 1 , 1 1 5 0 7 , 1 5 7 , 2 9 4 8 , 5 9 3 , 8 ) 1 4 5 , 1 1 ( ) 8 4 9 , 9 7 ( 8 5 7 , 9 1 ) 5 1 2 , 9 3 ( 9 4 5 , 2 9 0 , 6 4 0 7 , 0 3 4 0 4 , 2 0 3 8 3 1 , 1 8 0 2 , e h t r o f e m o c n i i e v s n e h e r p m o c r e h t O x a t f o t e n , r a e y 9 1 0 2 , 1 y r a u n a J t A 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 i e v s n e h e r p m o c l a t o T o t s n o i t i u b i r t s d d n a y b s n o i t u b i r t n o C s r e n w o i d a p d n a d e r a c e d l 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 - n o n h t i w n o i t c a s n a r T ) 9 1 e t o N ( ) e r a h s r e p 5 8 . 0 $ S U ( g n i l l o r t n o c - n o n o t d e r a c e d l 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 - n o n f o n o i t i s u q c A i s e v r e s e r y r o u t t a t s o t r e f s n a r T r e h t O n i s t s e r e n t i i p h s r e n w o n i s e g n a h C s t s e r e t n i i y r a d s b u s i 5 8 3 , 3 7 5 , 1 1 6 5 8 , 5 0 8 , 2 9 2 5 , 7 6 7 , 8 ) 2 7 4 , 1 1 ( ) 7 1 6 , 7 7 ( 8 5 7 , 9 1 ) 1 9 0 , 6 3 ( 2 0 8 , 6 5 4 , 6 4 0 7 , 0 3 7 0 3 , 4 0 3 , 8 3 1 1 8 0 , 2 9 1 0 2 , 1 3 r e b m e c e D t A . s t n e m e t a t s l i a 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 d n a s e c l i i l o p g n i t n u o c c a g n y n a p m o c c a e h T i I Y T U Q E N I S E G N A H C F O T N E M E T A T S D E T A D I L O S N O C 6 2 3 , 9 7 7 3 2 4 , 0 3 2 3 0 9 , 8 4 5 ) 6 1 6 , 6 6 ( ) 9 7 6 , 0 1 ( ) 7 3 9 , 5 5 ( 0 1 7 , 2 1 7 4 4 7 , 9 1 2 6 6 9 , 2 9 4 – – – – ) 3 0 1 , 2 ( ) 3 0 1 , 2 ( ) 1 7 8 , 5 4 2 ( – ) 1 7 8 , 5 4 2 ( – – – ) 4 1 5 , 7 0 2 ( ) 4 1 5 , 7 0 2 ( – – – – – – – – – – – – – – 3 0 9 , 8 4 5 ) 4 3 8 , 3 5 ( – ) 4 3 8 , 3 5 ( 3 0 9 , 8 4 5 – – – – – – ) 1 7 8 , 5 4 2 ( – – ) 8 5 8 , 2 ( – – – – – – – 8 5 8 , 2 – – – – – – 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 - n o n f o n o i t i s i u q c a e c n a m r o f r e P y c n e r r u c n g i e r o F y n a p m o c e h t l f o s r e d o h y t i u q e e h t o t e l b a t u b i r t t A s t s e r e t n i e v r e s e r g n i l l o r t n o c e u l a v r i a F s e r a h s 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 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 y r o t u t a t S s e v r e s e r 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 5 8 3 , 3 7 5 , 1 1 6 5 8 , 5 0 8 , 2 9 2 5 , 7 6 7 , 8 ) 2 7 4 , 1 1 ( ) 7 1 6 , 7 7 ( 8 5 7 , 9 1 ) 1 9 0 , 6 3 ( 2 0 8 , 6 5 4 , 6 4 0 7 , 0 3 7 0 3 , 4 0 3 8 3 1 , 1 8 0 2 , e h t r o f e m o c n i i e v s n e h e r p m o c r e h t O x a t f o t e n , r a e y 0 2 0 2 , 1 y r a u n a J t A 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 i e v s n e h e r p m o c l a t o T o t s n o i t i u b i r t s d d n a y b s n o i t u b i r t n o C s r e n w o i d a p d n a d e r a c e d l 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 - n o n h t i w n o i t c a s n a r T ) 9 1 e t o N ( ) e r a h s r e p 5 8 . 0 $ S U ( g n i l l o r t n o c - n o n o t d e r a c e d l s d n e d v D i i s e v r e s e r y r o u t t a t s o t r e f s n a r T s t s e r e t n i r e h t O ) d ’ t n o C ( I Y T U Q E N I S E G N A H C F O T N E M E T A T S D E T A D I L O S N O C ANNUAL REPORT 2021 27 . s t n e m e t a t s l i a 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 d n a s e c l i i l o p g n i t n u o c c a g n y n a p m o c c a e h T i 0 1 7 , 2 3 8 , 1 1 6 8 0 , 8 1 8 , 2 4 2 6 , 4 1 0 , 9 ) 2 7 4 , 1 1 ( ) 0 2 7 , 9 7 ( 8 5 7 , 9 1 ) 5 2 9 , 9 8 ( 6 7 9 , 6 5 7 , 6 4 0 7 , 0 3 5 6 1 , 7 0 3 , 8 3 1 1 8 0 , 2 0 2 0 2 , 1 3 r e b m e c e D t A 28 CHINA YUCHAI INTERNATIONAL LIMITED 4 9 8 , 7 0 4 1 2 2 , 5 3 1 3 7 6 , 2 7 2 5 0 2 , 7 2 8 3 6 , 6 7 6 5 , 0 2 9 9 0 , 5 3 4 9 5 8 , 1 4 1 0 4 2 , 3 9 2 – – – – 8 1 8 , 8 4 8 1 8 , 8 4 ) 2 1 7 , 8 4 4 ( – ) 2 1 7 , 8 4 4 ( – – – ) 3 5 7 , 3 0 2 ( ) 3 5 7 , 3 0 2 ( – – – – – – – – – – – – – – 3 7 6 , 2 7 2 ) 1 5 2 , 8 2 ( – ) 1 5 2 , 8 2 ( 3 7 6 , 2 7 2 – – – – – – ) 2 1 7 , 8 4 4 ( – – ) 2 7 0 , 2 ( – – – – – – – 2 7 0 , 2 – – – – – – 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 - n o n f o n o i t i s i u q c a e c n a m r o f r e P y c n e r r u c n g i e r o F y n a p m o c e h t l f o s r e d o h y t i u q e e h t o t e l b a t u b i r t t A s t s e r e t n i e v r e s e r g n i l l o r t n o c e u l a v r i a F s e r a h s 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 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 y r o t u t a t S s e v r e s e r 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 1 7 , 2 3 8 , 1 1 6 8 0 , 8 1 8 , 2 4 2 6 , 4 1 0 , 9 ) 2 7 4 , 1 1 ( ) 0 2 7 , 9 7 ( 8 5 7 , 9 1 ) 5 2 9 , 9 8 ( 6 7 9 , 6 5 7 , 6 4 0 7 , 0 3 5 6 1 , 7 0 3 8 3 1 , 1 8 0 2 , e h t r o f e m o c n i i e v s n e h e r p m o c r e h t O x a t f o t e n , r a e y 1 2 0 2 , 1 y r a u n a J t A 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 i e v s n e h e r p m o c l a t o T o t s n o i t i u b i r t s d d n a y b s n o i t u b i r t n o C s r e n w o i d a p d n a d e r a c e d l 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 - n o n h t i w n o i t c a s n a r T ) 9 1 e t o N ( ) e r a h s r e p 0 7 . 1 $ S U ( g n i l l o r t n o c - n o n o t d e r a c e d l s d n e d v D i i s e v r e s e r y r o u t t a t s o t r e f s n a r T s t s e r e t n i r e h t O 2 3 2 , 7 3 8 , 1 5 5 9 , 5 3 4 7 7 2 , 1 0 4 , 1 ) 4 1 8 , 1 ( ) 8 8 8 , 4 ( 5 2 1 , 3 ) 2 9 6 , 8 1 ( 7 9 5 , 0 4 0 , 1 7 5 8 , 4 3 1 9 , 8 4 9 7 1 9 2 3 , ’ 0 0 0 $ S U 4 4 3 , 5 1 6 , 1 1 2 9 1 , 6 5 7 , 2 2 5 1 , 9 5 8 , 8 ) 2 7 4 , 1 1 ( ) 2 0 9 , 0 3 ( 8 5 7 , 9 1 ) 6 7 1 , 8 1 1 ( 5 6 8 , 8 7 5 , 6 4 0 7 , 0 3 7 3 2 , 9 0 3 , 8 3 1 1 8 0 , 2 1 2 0 2 , 1 3 r e b m e c e D t A . s t n e m e t a t s l i a 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 d n a s e c i l i l o p g n i t n u o c c a g n y n a p m o c c a e h T i ) d ’ t n o C ( I Y T U Q E N I S E G N A H C F O T N E M E T A T S D E T A D I L O S N O C ANNUAL REPORT 2021 29 CONSOLIDATED STATEMENT OF CASH FLOWS 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Operating activities Profit before tax Adjustments: Amortization of intangible asset Bad debt written off/(recovered) Depreciation of: - investment property - property, plant and equipment - right-of-use assets Dividend income from quoted equity securities Exchange (gain)/loss Fair value loss/(gain) on foreign exchange forward contract Fair value (gain)/loss on quoted equity securities Finance costs (Gain)/loss on disposal of: - property, plant and equipment - quoted equity securities - right-of-use assets Government grants Interest income Impairment losses on: - development property - property, plant and equipment Impairment losses /(reversal of impairment losses) on trade 1,033,319 971,864 451,710 71,447 1,012 – 1,012 40 38,957 (5) 380 422,859 40,958 (959) (4,679) 5,529 (1,118) 131,796 645 (11,528) (9,237) (122,371) (177,261) 376 450,092 43,127 (166) (1,827) (999) 1,196 151,170 4,183 (874) (2,574) (209,793) (166,970) 355 492,826 41,458 (168) 3,271 – (138) 115,928 (1,224) (5,416) (14,714) (152,932) (132,083) 6,162 (1) 56 77,952 6,558 (26) 518 – (22) 18,337 (194) (857) (2,327) (24,190) (20,892) 3,039 3,950 – 3,920 – 7,227 – 1,143 receivables 32,340 (13,849) (7,987) (1,263) Impairment losses /(reversal of impairment losses) on non-trade receivables Impairment losses/(reversal of write-down) of inventories, net Inventories written off Property, plant and equipment written off Provision for onerous contract, net Share of (profit)/loss of associates and joint ventures, net of tax Write-back of trade and other payables – 17,022 – 4,137 2,316 (19,034) (2,087) 638 27,978 – 7,417 11,323 58,970 (1,052) (538) (9,010) 10,085 1,134 (8,810 ) 95,895 – (85) (1,425) 1,595 179 (1,394) 15,168 – Profit before tax after adjustments 1,351,028 1,335,202 925,821 146,439 Changes in working capital Increase in inventories (Increase)/decrease in trade and other receivables and (314,904) (1,687,639) (740,835) (117,179) capitalized contract cost (514,163) (238,571) 1,105,093 174,796 Increase/(decrease) in trade and other payables and contract liabilities Increase in development properties Cash flows from operating activities Income taxes paid 1,294,214 (71) 2,241,327 (75) 1,816,104 (233,088) 1,650,244 (234,876) (614,601) (202) 675,276 (170,720) (97,213) (31) 106,812 (27,003) Net cash flows from operating activities 1,583,016 1,415,368 504,556 79,809 The accompanying accounting policies and explanatory notes form an integral part of the financial statements. 30 CHINA YUCHAI INTERNATIONAL LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS (Cont’d) 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Investing activities Payment for trademarks usage fee Additional investment in subsidiaries Additional investment in a joint ventures Development costs Dividend received from: - joint ventures - quoted equity securities Interest received Proceeds from disposal of: - property, plant and equipment - quoted equity securities - right-of-use assets Proceeds from government grants Purchase of property, plant and equipment Tax and relevant expenses in relation to disposal of subsidiary (i) Withdrawal/(placement) of fixed deposits with banks, net (169,811) (114) (41,160) (345,128) 821 959 173,745 1,178 16,429 11,008 191,491 (749,087) – – – (500,147) – 166 171,556 2,385 1,354 5,772 123,178 (584,676) – – (17,640) (287,480) – 135 125,004 405 6,485 34,123 51,862 (572,047) – – (2,790) (45,472) – 21 19,772 64 1,026 5,397 8,203 (90,482) (38,887) 138,079 – (5,341) – (79,695) – (12,606) Net cash flows used in investing activities (810,477) (785,753) (738,848) (116,867) Financing activities Dividends paid to: - equity holders of the company - non-controlling interests Interest paid and discounting on bills receivable Payment of principal portion of lease liabilities Proceeds from borrowings Repayment of borrowings (238,758) (203,167) (139,118) (48,365) 2,040,752 (2,000,773) (245,871) (205,525) (148,793) (35,363) 2,230,000 (2,056,280) (448,712) (223,917) (115,813) (23,121) 1,938,920 (1,965,920) (70,974) (35,418) (18,318) (3,657) 306,684 (310,955) Net cash flows used in financing activities (589,429) (461,832) (838,563) (132,638) Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at January 1 Effect of exchange rate changes on balances in foreign currencies 183,110 5,559,890 167,783 5,753,268 (1,072,855) 5,877,647 (169,696) 929,684 10,268 (43,404) (16,573) (2,622) Cash and cash equivalents at December 31 5,753,268 5,877,647 4,788,219 757,366 Note: (i) This relates to retention money deposited in a joint signatory account with the buyer of LKNII for payment of tax payable for the disposal of LKNII in 2018, which had been settled in 2019. The accompanying accounting policies and explanatory notes form an integral part of the financial statements. ANNUAL REPORT 2021 31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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, 2021 were authorized for issue in accordance with a resolution of the directors on April 22, 2022. China Yuchai International Limited is a limited company incorporated under the laws of Bermuda on April 29, 1993 whose shares are publicly traded. The registered office of the Company is located 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 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 Company owns, through six wholly-owned subsidiaries, 361,420,150 shares or 76.41% of the issued share capital of Yuchai. Guangxi Yuchai Machinery Group Company Limited (“GY Group”), a state-owned enterprise, owns 22.09% of the issued share capital of Yuchai. As of December 31, 2021, Yuchai has 11 (2020: nine) direct and 33 (2020: 33) indirectly owned subsidiaries, four (2020: four) joint ventures and one (2020: one) associate. Guangxi Yuchai Machinery Monopoly Development Co., Ltd. (“YMMC”) and Guangxi Yuchai Accessories Manufacturing Company Limited (“GYAMC”) are the two most significant subsidiaries of Yuchai. YMMC has 29 (2020: 29) wholly-owned subsidiaries (collectively “YMMC Group”) located at various provinces in the PRC. The principal business of YMMC Group are trading and distribution of components of diesel engines and automobiles. GYAMC has two wholly-owned subsidiaries (collectively “GYAMC Group”). The principal business of GYAMC Group are sales and manufacturing of components of diesel engines. In December 2021, Yuchai incorporated a new wholly owned subsidiary, Guangxi Yuchai Deyou Engine Systems Co.,Ltd to succeed the trading business previously conducted by another wholly owned subsidiary, Guangxi Yuchai Deyou Engine Co., Ltd (“YDEC”). YDEC will take over the operations of Yuchai’s marine and power generation unit under the new name of Guangxi Yuchai Marine and Genset Power Co., Ltd. The detailed information of Yuchai’s significant subsidiaries and joint ventures are disclosed in Notes 4 and 5. As used in this Consolidated Financial Statements, the term “Yuchai” refer to Guangxi Yuchai Machinery Company Limited and its subsidiaries. 1.3 Investment in HL Global Enterprises Limited In February 2006, the Group acquired debt and equity securities interest in HL Global Enterprises Limited (“HLGE”) through the Group’s wholly-owned subsidiaries, Grace Star Limited (“Grace Star”) and Venture Lewis Limited (“Venture Lewis’). HLGE is a public company listed on the Main Board of the Singapore Exchange Securities Trading Limited (“Singapore Exchange”) and primarily engaged in investment holding, and through its group companies, invests in rental property, hospitality and property developments in Asia. 32 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. CORPORATE INFORMATION (cont’d) 1.3 Investment in HL Global Enterprises Limited (cont’d) The Group’s shareholding has changed through various transactions, the Group’s equity interest in HLGE was 49.4% as of December 31, 2011. On January 13, 2012, Grace Star transferred 24,189,170 Series B redeemable convertible preference shares (“RCPS”), representing 100% of remaining unconverted Series B RCPS, in the capital of HLGE (the “Trust Preference Shares”) to the Trustee pursuant to a trust deed entered into between HLGE and the Trustee. On January 16, 2012, the Trust Preference Shares were mandatorily converted into 24,189,170 new ordinary shares in the capital of HLGE (the “Trust Shares”) resulting in the Group’s shareholding interest in HLGE decreased from 49.4% to 48.1%. On April 4, 2012, as a result of the conversion of all the outstanding Series A redeemable convertible preference shares held by Venture Delta Limited and Grace Star, into new ordinary shares in the capital of HLGE, the Group’s shareholding interest in HLGE increased from 48.1% to 48.9%. The Trust Shares are accounted for as treasury shares by HLGE, issued by HLGE and held by the Trust, which is considered as part of HLGE. As a result, the Group’s shareholding interest in HLGE is stated as 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. In 2015, HLGE undertook a share consolidation exercise to consolidate every 10 ordinary shares in the capital of HLGE into one ordinary share. Upon completion of the share consolidation exercise, the Group held 47,107,707 ordinary shares of HLGE. As of December 31, 2015, the Group’s interest in HLGE was 50.2%, net of the ordinary shares held by the Trustee under the Trust. As of December 31, 2020 and 2021, the Group’s shareholding interest in HLGE remains at 50.2%, net of the ordinary shares held by the Trustee under the Trust. 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. ANNUAL REPORT 2021 33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 as disclosed in the accounting policies below. The consolidated financial statements are presented in Renminbi (“RMB”) and all values are rounded to the nearest thousand (“RMB’000”), except when otherwise indicated. Translation of amounts from Renminbi to the United States Dollar (“US Dollar”) is solely for the convenience of the reader. Translation of amounts from Renminbi to US Dollar has been made at the rate of RMB 6.3222 = US$ 1.00, the rate quoted by the People’s Bank of China at the close of business on February 28, 2022 and all values are rounded to the nearest thousand (“US$’000”), except when otherwise indicated. The consolidated financial statements provide comparative information in respect of the previous period. 2.2 Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as of December 31, 2021. 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 results 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 subsidiary. the date the Group ceases to control 34 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 company 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 derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, while any resultant gain or loss is recognized in profit or loss. Any investment retained is recognized 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, which is 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. The Group determines that it has acquired a business when the acquired set of activities and assets include an input and a substantive process that together significantly contribute to the ability to create outputs. The acquired process is considered substantive if it is critical to the ability to continue producing outputs, and the inputs acquired include an organized workforce with the necessary skills, knowledge, or experience to perform that process or it significantly contributes to the ability to continue producing outputs and is considered unique or scarce or cannot be replaced without significant cost, effort, or delay in the ability to continue producing outputs. 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 of the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Any contingent consideration to be transferred by the acquirer will be recognized at the acquisition date. Contingent consideration classified as equity is not re-measured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes in fair value recognized in the statement of profit or loss in accordance with IFRS 9. fair value at ANNUAL REPORT 2021 35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 (“CGU”) 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 these circumstances 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. 36 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 the statement of profit or loss outside operating profit and represents profit or loss after tax and of 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. loss on its investment After application of the equity method, the Group determines whether it is necessary to recognize an the Group impairment 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 within “Share of profit/(loss) of associates and joint ventures, net of tax” in the statement of profit or loss. in its associate or joint venture. At each reporting date, 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 the statement of financial position based on current/non-current classification. An asset is current when it is: • • • • Expected to be realized or intended to be 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. All other assets are classified as non-current. ANNUAL REPORT 2021 37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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) 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 terms of the liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification. 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 foreign exchange forward contract, at fair value at each balance sheet date. instruments, such as quoted equity securities and bills receivable and a 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. 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. 38 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (d) Fair value measurement (cont’d) 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 measurement is directly or indirectly observable input that is significant to the fair value Level 3 – Valuation techniques for which the lowest level measurement is unobservable input that is significant to the fair value For assets and liabilities that are recognized in the financial statements at fair value 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. Fair value related disclosures for financial instruments that are measured at fair value are summarized in the following notes: • • • Quoted equity securities Bills receivable Foreign exchange forward contract Note 33 Note 33 Note 33 (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. 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. ANNUAL REPORT 2021 39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 (cont’d) 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 is reclassified to profit or loss. Tax charges and credits attributable to exchange cumulative amount 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). In determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the de-recognition of a non-monetary asset or non-monetary liabilities relating to advance consideration, the date of the transaction is the date on which the Group initially recognizes the non-monetary asset or non-monetary liability arising from advance consideration. If there are multiple payments or receipts in advance, the Group determines the transaction date for each payment or receipt of advance consideration. 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 average exchange rates during the reporting period. 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 reclassified to profit or loss. 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. 40 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (f) Revenue from Contracts with Customers Revenue from contracts with customers is recognized when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services. The Group has generally concluded that it is the principal in its revenue arrangements because it typically controls the goods or services before transferring them to the customer. The disclosures of significant accounting judgements, estimates and assumptions relating to revenue from contracts with customers are provided in Note 3. Sale of engines Revenue from sale of engines is recognized at the point in time when control of the engine is transferred to the customer, generally on delivery of the engines, or, in some cases, when the engines are installed by the customers. The Group considers whether there are other promises in the contract that are separate performance obligations to which a portion of the transaction price needs to be allocated (e.g. warranties). In determining the transaction price for the sale of engines, the Group considers the effects of variable consideration and the existence of significant financing components. (i) Variable consideration includes a variable amount, the consideration in a contract the Group estimates the amount of If consideration to which it will be entitled in exchange for transferring the goods to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probably that a significant revenue reversal in the amount of cumulative revenue recognized will not occur when the associated uncertainty with the variable consideration is subsequently resolved. Some contracts for the sale of engines provide customers with volume rebates. The volume rebates give rise to variable consideration. Volume rebates The Group provides certain customers with retrospective volume rebates when the quantity of products purchased during the period exceeds a threshold specified in the contract. To estimate the variable considerations for the expected future rebates, the Group applies the most likely amount method for each individual contract. The Group then applies the requirements on constraining estimates of variable consideration in order to determine the amount of variable consideration that can be included in the transaction price and recognized as revenue. A refund liability is recognized in “Trade and other payables” (Note 22) for the expected future rebates (i.e., the amount not included in the transaction price). ANNUAL REPORT 2021 41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (f) Revenue from Contracts with Customers (cont’d) Sale of engines (cont’d) (i) Variable consideration (cont’d) Sales Returns The Group does not extend its sales returns policy to all customers. However the Group allows for certain returns, only on a case-by-case basis. The Group uses the expected value method to estimate the provision for such returns based on the historical return rates and account for it as a reduction in revenue and form part of refund liability that is recognized in “Trade and other payables” (Note 22). A corresponding right of return assets is recognized in “Trade and other receivables” (Note 15). (ii) Significant financing component The Group receives advance payments from customers for the sale of engines. The Group applies the practical expedient for short-term advances received from customers. That is, the promised amount of consideration is not adjusted for the effects of a significant financing component if the period between the transfer of the promised good or service and the payment is one year or less. Warranty obligations The Group typically provides warranties for general repairs of defects as part of the sale of engines. These assurance-type warranties are accounted for as warranty provisions. Refer to the accounting policy on warranty provisions in Section (s) Provisions. Certain contracts provide a customer with maintenance service, i.e. a distinct service to the customer in addition to the assurance that the product complies with agreed upon specification. These service-type warranties are bundled together with the sale of engines. Contracts for bundled sale of engines and a service-type warranty comprise two performance obligations because the promises to transfer the engines and to provide the service-type warranty are capable of being distinct. Using a combination of expected cost- plus margin and residual approaches, the transaction price is allocated to the service-type warranty and engines with the former performance obligation recognizing a corresponding contract liability. Revenue for service-type warranties is recognized at the point in time when the service-type warranty is provided. 42 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (f) Revenue from Contracts with Customers (cont’d) Sale of completed development properties Revenue is recognized when control of the property has been transferred to the customer, either over time or at a point in time, depending on the contractual terms and the practices in the legal jurisdictions. For development properties whereby the Group is restricted contractually from directing the properties for another use as they are being developed and has an enforceable right for performance completed to date, revenue is recognized over time, based on the construction and other costs incurred to-date as a proportion of the estimated total construction and other costs to be incurred. to payment For development properties whereby the Group does not have an enforceable right performance completed to date, revenue is recognized when the customer obtains control of the asset. to payment for Rendering of services Revenue from rendering 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. Contract balances Trade receivables A receivable is recognized if an amount of consideration that is unconditional is due from the customer (i.e. only the passage of time is required before payment of the consideration is due). Refer to accounting policies of financial assets in Section (m) Financial instruments – Initial recognition and subsequent measurement. Contract liabilities A contract liability is recognized if a payment is received or a payment is due (whichever is earlier) from a customer before the Group transfers the related goods or services. Contract liabilities are recognized as revenue when the Group performs under the contract (i.e., transfers control of the related goods or services to the customer). ANNUAL REPORT 2021 43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (f) Revenue from Contracts with Customers (cont’d) Right of return assets A right-of-return asset is recognised for the right to recover the goods expected to be returned by customers. The asset is measured at the former carrying amount of the inventory, less any expected costs to recover the goods and any potential decreases in value. The Group updates the measurement of the asset for any revisions to the expected level of returns and any additional decreases in the value of the returned products. Refund liabilities A refund liability is recognized for the obligation to refund some or all of the consideration received (or receivable) from a customer. The Group’s refund liabilities arise from customers’ right of return and volume rebates. The liability is measured at the amount the Group ultimately expects it will have to return to the customer. The Group updates its estimates of refund liabilities (and the corresponding change in the transaction price) at the end of each reporting period. Costs to fulfil a contract Costs to fulfil a contract are capitalized if the costs relate directly to the contract, generate or enhance resources used in satisfying the contract and are expected to be recovered. Other contract costs are expensed as incurred. Capitalized contract costs are subsequently recognized in profit or loss as the Group recognizes the related revenue. An impairment loss is recognized in profit or loss to the extent that the carrying amount of the capitalized contract costs exceeds the remaining amount of consideration that the Group expects to receive in exchange for the goods or services to which the contract costs relates less the costs that relate directly to providing the goods and that have not been recognized as expenses. (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. 44 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (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 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 ANNUAL REPORT 2021 45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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) 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. 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. The Group offsets deferred tax assets and deferred tax liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. Sales tax 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. 46 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (i) Cash dividend and non-cash distribution to equity holders of the company The Company recognizes a liability to make cash or non-cash distributions to equity holders of the company 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 measurement recognized directly in equity. the fair value of the assets to be distributed with fair value 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. (j) Property, plant and equipment Construction in progress is stated at cost, net of accumulated impairment losses, if any. Property, plant and equipment are 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 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. Freehold land has an unlimited useful life and therefore is not depreciated. Asset under construction included in property, 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 buildings and improvements Plant, machinery and equipment Office furniture, fittings and equipment Motor and transport vehicles 50 years : : Shorter of 15 to 50 years or lease term : : : 3 to 20 years 3 to 20 years 3.5 to 15 years 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 de-recognition 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. ANNUAL REPORT 2021 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (j) Property, plant and equipment (cont’d) 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. (k) 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. investment properties are carried at cost to initial Investment properties are initially recognized at cost, recognition, less accumulated depreciation and impairment losses. Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of the investment properties. The estimated useful lives and residual values of investment properties are reassessed at each reporting date. life is 30 years. Depreciation methods, useful including transaction costs. Subsequent Investment properties are derecognized either when they have been disposed of (i.e., at the date recipient obtains control) or when they are permanently withdrawn from use and no future economic benefit is expected from its disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognized in profit or loss in the period of de-recognition. In determining the amount of consideration from the de-recognition of investment property the Group considers the effects of variable consideration, existence of a significant financing component, non-cash consideration, and consideration payable to the buyer (if any). Transfers are made to (or from) investment property only when there is a change in use. Under cost model, the transfer does not change the carrying amount of the property transferred. (l) Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial less any accumulated amortization and accumulated recognition, impairment Internally generated intangibles, excluding capitalized development costs, are not capitalized and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred. intangible assets are carried at cost losses. 48 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (l) Intangible assets (cont’d) The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the statement of profit or loss in the expense category that is consistent with the function of the intangible assets. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. An intangible asset is derecognized upon disposal (i.e., at the date the recipient obtains control) or when no future economic benefits are expected from its use or disposal. Any gain or loss arising upon de-recognition 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. Research and development costs Research costs are expensed as incurred. 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 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. During the period of development, the asset is tested for impairment annually. losses. Amortization of ANNUAL REPORT 2021 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (l) Intangible assets (cont’d) Goodwill Accounting policy for goodwill is separately discussed in Note 2.3(a). A summary of the policies applied to the Group’s intangible assets is as follows: Useful lives Amortization method used Internally generated or acquired Trademarks Technology know-how Development costs Indefinite 8 years No amortization Amortized on a straight-line basis over the period of the technology know-how Internally generated Acquired * * Internally generated * Development costs relate to on-going development projects that have not been completed and are not available for use. (m) 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 subsequently measured at amortized cost, fair value through other comprehensive income (“OCI”), and fair value through profit or loss. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash trade flow characteristics and the Group’s business model receivables that do not contain a significant financing component or which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or which the Group has applied the practical expedient are measured at the transaction price as disclosed in Section (f) Revenue from Contracts with Customers. for managing them. With the exception of In order for a financial asset to be classified and measured at amortized cost or fair value through OCI, it needs to give rise to cash flows that are “solely payments of principal and interest (“SPPI”)” on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. Financial assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective of the business model. 50 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (m) Financial instruments – Initial recognition and subsequent measurement (cont’d) Financial assets (cont’d) Initial recognition and measurement (cont’d) The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets classified and measured at amortized cost are held within a business model with the objective to hold financial assets in order to collect contractual cash flows while financial assets classified and measured at fair value through OCI are held within a business model with the objective of both holding to collect contractual cash flows and selling. 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. Subsequent measurement For purposes of subsequent measurement, financial assets are classified in four categories: • • • • Financial assets at amortized cost (debt instruments) Financial assets at instruments) fair value through OCI with recycling of cumulative gains and losses (debt Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon de-recognition (equity instruments) Financial assets at fair value through profit or loss Financial assets at amortized cost (debt instruments) Financial assets at amortized cost are subsequently measured using the effective interest (“EIR”) method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired. The Group’s financial assets at amortized cost receivables that are held to maturity. includes trade and other receivables, and certain bills ANNUAL REPORT 2021 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (m) Financial instruments – Initial recognition and subsequent measurement (cont’d) Financial assets (cont’d) Subsequent measurement (cont’d) Financial assets at fair value through OCI (debt instruments) For debt instruments at fair value through OCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognized in the statement of profit or loss and computed in the same manner as for financial assets measured at amortized cost. The remaining fair value changes are recognized in OCI. Upon de-recognition, the cumulative fair value change recognized in OCI is recycled to profit or loss. The Group’s debt instruments at fair value through OCI includes certain bills receivable that are not held to maturity. Financial assets designated at fair value through OCI (equity instruments) the Group can elect Upon initial recognition, to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-instrument basis. Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognized as other income in the statement of profit or loss when the right of payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment. The Group does not have equity instruments measured under this category. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognized in statement of profit or loss. This category includes derivative instruments and listed equity investments which the Group had not irrevocably elected to classify at fair value through OCI. Dividends on listed equity investments are also recognized as other income in the statement of profit or loss when the right of payment has been established. 52 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (m) 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 (cont’d) A derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative if: the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit or loss. Embedded derivatives are measured at fair value with changes in fair value recognized in profit or loss. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss category. Derecognition 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 has 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 its 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. Continuing involvement that takes the form a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. ANNUAL REPORT 2021 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (m) Financial instruments – Initial recognition and subsequent measurement (cont’d) Financial assets (cont’d) Impairment Further disclosures relating to impairment of financial assets are also provided in the following notes: • • Debt instruments at fair value through OCI represented by bills receivable (Note 15) Trade receivables (Note 15) The Group recognizes an allowance for expected credit losses (“ECLs”) for all debt instruments not held at fair value through profit or loss and financial guarantee contracts. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms. ECLs are recognized in two stages. For credit exposure for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12 months (a “12-month ECL”). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is recognized for credit losses expected over the remaining life of the exposure irrespective of timing of the default (a “lifetime ECL”). For trade receivable, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience adjusted for forward-looking factors specific to the debtors and the economic environment. For debt instruments at fair value through OCI, the Group applies the low credit risk simplifications. At every reporting date, the Group evaluate whether the debt instrument is considered to have low credit risk using all reasonable and supportable information that In making the evaluation, the Group reassesses the external credit rating of the debt instrument. In addition, the Group considers that there has been a significant increase in credit risk when contractual payments are more than 30 days past due. is available without undue cost or effort. The Group’s debt instruments at fair value through OCI comprise solely of bills receivable. It is the Group’s policy to measure ECLs on such instruments on a 12-month basis. However, when there has been a significant increase in credit risk since origination, the allowance will be based on the lifetime ECL. 54 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (m) Financial instruments – Initial recognition and subsequent measurement (cont’d) Financial assets (cont’d) Impairment (cont’d) The Group considers a financial asset in default when contractual payments are more than 360 days from the invoice date. However, in certain cases the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering contractual cash flow. 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 payables, net of directly attributable transaction costs. liabilities are recognized initially at fair value and, in the case of loans and borrowings and The Group’s financial liabilities include trade and other payables, loans and borrowings, lease liabilities, other liabilities and derivative financial instruments. Subsequent measurement For purposes of subsequent measurement, financial liabilities are classified in two categories: • • Financial liabilities at fair value through profit or loss Financial liabilities at amortized cost 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 IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. ANNUAL REPORT 2021 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (m) Financial instruments – Initial recognition and subsequent measurement (cont’d) Financial liabilities (cont’d) Subsequent measurement (cont’d) Financial liabilities at fair value through profit or loss (cont’d) 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 or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. The Group has not designated any financial liability as at fair value through profit or loss. Financial liabilities at amortized cost This is the category most relevant to the Group. After initial recognition, financial liabilities that are not carried at fair value through profit or loss 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 as finance costs in the statement of profit or loss. This category generally applies to loans and borrowings, lease liabilities, other liabilities and payables. For more information, refer to Note 22, 25 and 26. De-recognition liability is derecognized when the obligation under the liability is discharged or cancelled or A financial liability is replaced by another from the same lender on substantially expires. When an existing financial 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 is reported in the consolidated liabilities are offset and the net amount 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. 56 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (n) 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. (o) Impairment of non-financial assets Further disclosures relating to impairment of non-financial assets are also provided in the following notes: • • • • • • Disclosures for significant assumptions (Note 3) Investment in joint ventures (Note 5) Property, plant and equipment (Note 10) Investment property (Note 11) Intangible assets (Note 12) Right-of-use assets (Note 17) 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 CGU’s 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. ANNUAL REPORT 2021 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (o) Impairment of non-financial assets (cont’d) The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of eight to ten years. A long-term growth rate is calculated and applied to project future cash flows after the tenth year where appropriate. Impairment losses are recognized in the statement of profit or loss in expense categories consistent with the function of the impaired asset. For assets excluding goodwill, 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 is limited so that the recoverable amount since the last impairment loss was recognized. The reversal 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. Goodwill is 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 with indefinite useful appropriate, and when circumstances indicate that the carrying value may be impaired. lives are tested for impairment annually at the CGU level, as (p) Cash and cash equivalents For the purpose of the consolidated statement of cash flows, cash and cash equivalents in the statement of financial position comprise cash at banks and on hand, short-term highly liquid deposits with a maturity of three months or less, that are readily convertible to a known amount of cash and subject to an insignificant risk of changes in value. (q) Leases The Group assess at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. 58 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (q) Leases (cont’d) Group as a lessee The Group applies a single recognition and measurement approach for all leases, expect for short-term leases and leases of low-value assets. The Group recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. (i) Right-of-use assets the commencement date of The Group recognizes right-of-use assets at the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any re-measurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and estimated useful lives of the assets, as follows: the lease (i.e., • • • Leasehold land Building and office space 3 to 50 years 1 to 6 years Office furniture, fittings and equipment 5 years If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. The right-of-use assets are also subjected to impairment. Refer to the accounting policies in Section (o) Impairment of non-financial assets. (ii) Lease liabilities At the commencement date of the lease, the Group recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substances fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating the lease, if the lease term reflects the Group exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognized as expenses (unless they are incurred to produce inventories) in the period in which the event or condition that triggers the payment occurs. ANNUAL REPORT 2021 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (q) Leases (cont’d) Group as a lessee (cont’d) (ii) Lease liabilities (cont’d) In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is re-measured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying assets. (iii) Short-term leases The Group applies the short-term lease recognition exemption to its short-term leases of land and building (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). Lease payments on short-term leases are recognized as expense 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. Rental income arising is accounted for on straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature. 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. (r) 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. 60 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (s) 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 recognized as a finance cost. Product warranty The Group recognizes a liability at the time the product is sold, for the estimated future costs relating to the assurance-type warranties, 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 3 to 36 months) or mileage (generally 5,000 to 300,000 kilometers), whichever materializes first. For other applications engines, warranties extend for a duration of generally 3 to 36 months or running hours of 300 to 4,000 hours, whichever materializes first. 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. If the nature, frequency and average cost of warranty claims change, the accrued liability for product warranty will be adjusted accordingly. Onerous contract If the Group has a contract that is onerous, the present obligation under the contract is recognized and measured as a provision. However, before a separate provision for an onerous contract is established, the Group recognizes any impairment loss that has occurred on assets dedicated to that contract. An onerous contract is a contract under which the unavoidable costs (i.e., the costs that the Group cannot avoid because it has the contract) of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. The cost of fulfilling a contract comprises the costs that relate directly to the contract (i.e., both incremental costs and an allocation of costs directly related to contract activities). ANNUAL REPORT 2021 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (t) Pensions and other post-employment benefits Defined contribution plans 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 to defined contribution pension schemes are recognized as an expense in the period in which the related services are performed. Employee leave entitlement Employee entitlements to annual leave are recognized as a liability when they are accrued to the employees. The undiscounted liability for leave expected to be settled wholly before twelve months after the end of the reporting period is recognized for services rendered by employees up to the end of the reporting period. (u) 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”). 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, further details of which are given in Note 21. That cost is recognized in “Staff costs”, together with a corresponding increase in performance share reserve in equity, over the period in which the performance and/or service conditions are fulfilled (the vesting period). 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 expense or credit in the statement of profit or loss for a period represents the movement in cumulative expense recognized as of the beginning and end of that period. 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 vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. 62 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.3 Summary of significant accounting policies (cont’d) (u) Share-based payments (cont’d) Equity-settled transactions (cont’d) When the terms of an equity-settled award are modified, the minimum expense recognized is the expense had the terms not been modified, provided the original terms of the award are met. An additional expense, measured as of the date of modification, is recognized for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss. 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 9). (v) Development properties Development properties are properties acquired or being constructed for sale in the ordinary course of business, rather than to be held for the Group’s own use, rental or capital appreciation. Development properties are held as other asset and are measured at the lower of cost and net realizable value. Costs to complete development include cost of land and other direct and related development expenditure, including borrowing costs incurred in developing the properties. Net realizable value of development properties is the estimated selling price in the ordinary course of business, based on market prices at the reporting date and discounted for the time value of money if material, less the estimated costs of completion and the estimated costs necessary to make the sale. The costs of development properties recognized in profit or loss on disposal are determined with reference to the specific costs incurred on the property sold and an allocation of any non-specific costs based on the relative size of the property sold. (w) 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 through profit or loss. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. ANNUAL REPORT 2021 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.4 Changes in accounting policies and disclosures New and amended standards and interpretations The Group applied for the first-time certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2021. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. Interest Rate Benchmark Reform – Phase 2: Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 The amendments provide temporary reliefs which address the financial reporting effects when an interbank offered rate (IBOR) is replaced with an alternative nearly risk-free interest rate (RFR). The amendments include the following practical expedients: • • • A practical expedient to require contractual changes, or changes to cash flows that are directly required by the reform, to be treated as changes to a floating interest rate, equivalent to a movement in a market rate of interest Permit changes required by IBOR reform to be made to hedge designations and hedge documentation without the hedging relationship being discontinued Provide temporary relief to entities from having to meet the separately identifiable requirement when an RFR instrument is designated as a hedge of a risk component These amendments had no impact on the consolidated financial statements of the Group. Covid-19-Related Rent Concessions beyond June 30, 2021 Amendments to IFRS 16 On May 28, 2020, the IASB issued Covid-19-Related Rent Concessions—amendment to IFRS 16 Leases. The amendments provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the Covid-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a Covid-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the Covid-19 related rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. The amendment was intended to apply until June 30, 2021, but as the impact of the Covid-19 pandemic is continuing, on March 31, 2021, the IASB extended the period of application of the practical expedient to June 30, 2022. The amendment applies to annual reporting periods beginning on or after April 1, 2021. However, the Group has not received Covid-19-related rent concessions, but plans to apply the practical expedient if it becomes applicable within allowed period of application. 64 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.5 Standards issued but not yet effective The new and amended standards and interpretations that are issued, but not yet effective are disclosed below. The Group intends to adopt these new and amended standards and interpretations, if applicable, when they become effective. Amendments to IAS 1: Classification of Liabilities as Current or Non-current In January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 to specify the requirements for classifying liabilities as current or non-current. The amendments clarify: • • • • What is meant by a right to defer settlement That a right to defer must exist at the end of the reporting period That classification is unaffected by the likelihood that an entity will exercise its deferral right That only if an embedded derivative in a convertible liability is itself an equity instrument would the terms of a liability not impact its classification The amendments are effective for annual reporting periods beginning on or after January 1, 2023 and must be applied retrospectively. The Group is currently assessing the impact the amendments will have on current practice and whether existing loan agreements may require renegotiation. Reference to the Conceptual Framework – Amendments to IFRS 3 In May 2020, the IASB issued Amendments to IFRS 3 Business Combinations - Reference to the Conceptual Framework. The amendments are intended to replace a reference to the Framework for the Preparation and Presentation of Financial Statements, issued in 1989, with a reference to the Conceptual Framework for Financial Reporting issued in March 2018 without significantly changing its requirements. The Board also added an exception to the recognition principle of IFRS 3 to avoid the issue of potential “day 2” gains or losses arising for liabilities and contingent liabilities that would be within the scope of IAS 37 or IFRIC 21 Levies, if incurred separately. At the same time, the Board decided to clarify existing guidance in IFRS 3 for contingent assets that would not be affected by replacing the reference to the Framework for the Preparation and Presentation of Financial Statements. The amendments are effective for annual reporting periods beginning on or after January 1, 2022 and apply prospectively. The amendments are not expected to have a material impact on the Group. ANNUAL REPORT 2021 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.5 Standards issued but not yet effective (cont’d) Property, Plant and Equipment: Proceeds before Intended Use – Amendments to IAS 16 In May 2020, the IASB issued Property, Plant and Equipment — Proceeds before Intended Use, which prohibits entities deducting from the cost of an item of property, plant and equipment, any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity recognizes the proceeds from selling such items, and the costs of producing those items, in profit or loss. The amendment is effective for annual reporting periods beginning on or after January 1, 2022 and must be applied retrospectively to items of property, plant and equipment made available for use on or after the beginning of the earliest period presented when the entity first applies the amendment. The amendments are not expected to have a material impact on the Group. Onerous Contracts – Costs of Fulfilling a Contract – Amendments to IAS 37 In May 2020, the IASB issued amendments to IAS 37 to specify which costs an entity needs to include when assessing whether a contract is onerous or loss-making. The amendments apply a “directly related cost approach”. The costs that relate directly to a contract to provide goods or services include both incremental costs and an allocation of costs directly related to contract activities. General and administrative costs do not relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under the contract. The amendments are effective for annual reporting periods beginning on or after January 1, 2022. The Group will apply these amendments to contracts for which it has not yet fulfilled all its obligations at the beginning of the annual reporting period in which it first applies the amendments. The amendments are not expected to have a material impact on the Group. IFRS 1 First-time Adoption of International Financial Reporting Standards – Subsidiary as a first-time adopter As part of its 2018-2020 annual improvements to IFRS standards process, the IASB issued an amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards. The amendment permits a subsidiary that elects to apply paragraph D16(a) of IFRS 1 to measure cumulative translation differences using the amounts reported by the parent, based on the parent’s date of transition to IFRS. This amendment is also applied to an associate or joint venture that elects to apply paragraph D16(a) of IFRS 1. The amendment is effective for annual reporting periods beginning on or after January 1, 2022 with earlier adoption permitted. The amendments are not expected to have a material impact on the Group. 66 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.5 Standards issued but not yet effective (cont’d) IFRS 9 Financial Instruments – Fees in the “10 per cent” test for de-recognition of financial liabilities As part of its 2018-2020 annual improvements to IFRS standards process the IASB issued amendment to IFRS 9. The amendment clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The amendment is effective for annual reporting periods beginning on or after January 1, 2022 with earlier adoption permitted. The Group will apply the amendments to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The amendments are not expected to have a material impact on the Group. Definition of Accounting Estimates – Amendments to IAS 8 In February 2021, the IASB issued amendments to IAS 8, in which it introduces a definition of ‘accounting estimates’. The amendments clarify the distinction between changes in accounting estimates and changes in accounting policies and the correction of errors. Also, they clarify how entities use measurement techniques and inputs to develop accounting estimates. The amendments are effective for annual reporting periods beginning on or after January 1, 2023 and apply to changes in accounting policies and changes in accounting estimates that occur on or after the start of that period. Earlier application is permitted as long as this fact is disclosed. The amendments are not expected to have a material impact on the Group. Disclosure of Accounting Policies – Amendments to IAS 1 and IFRS Practice Statement 2 In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements, in which it provides guidance and examples to help entities apply materiality judgements to accounting policy disclosures. The amendments aim to help entities provide accounting policy disclosures that are more useful by replacing the requirement for entities to disclose their ‘significant’ accounting policies with a requirement to disclose their ‘material’ accounting policies and adding guidance on how entities apply the concept of materiality in making decisions about accounting policy disclosures. The amendments to IAS 1 are applicable for annual periods beginning on or after January 1, 2023 with earlier application permitted. Since the amendments to the Practice Statement 2 provide non-mandatory guidance on the application of the definition of material to accounting policy information, an effective date for these amendments is not necessary. ANNUAL REPORT 2021 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (cont’d) 2.5 Standards issued but not yet effective (cont’d) Disclosure of Accounting Policies – Amendments to IAS 1 and IFRS Practice Statement 2 (cont’d) The Group is currently assessing the impact of the amendments to determine the impact they will have on the Group’s accounting policy disclosures. Deferred Tax related to Assets and Liabilities arising from a Single Transaction – Amendments to IAS 12 In May 2021, the IASB issued amendments to IAS 12, which narrow the scope of the initial recognition exception under IAS 12, so that it no longer applies to transactions that give rise to equal taxable and deductible temporary differences. The amendments clarify that where payments that settle a liability are deductible for tax purposes, it is a matter of judgement (having considered the applicable tax law) whether such deductions are attributable for tax purposes to the liability recognized in the financial statements (and interest expense) or to the related asset component (and interest expense). This judgement is important in determining whether any temporary differences exist on initial recognition of the asset and liability. Under the amendments, the initial recognition exception does not apply to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. It only applies if the recognition of a lease asset and lease liability (or decommissioning liability and decommissioning asset component) give rise to taxable and deductible temporary differences that are not equal. Nevertheless, it is possible that the resulting deferred tax assets and liabilities are not equal (e.g., if the entity is unable to benefit from the tax deductions or if different tax rates apply to the taxable and deductible temporary differences). In such cases, which the IASB expects to occur infrequently, an entity would need to account for the difference between the deferred tax asset and liability in profit or loss. The amendment is effective for annual reporting periods beginning on or after January 1, 2023. The amendments are not expected to have a material 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, 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. 68 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (cont’d) Other disclosures relating to the Group’s exposure to risks and uncertainties includes: • • • Capital management (Note 32) Financial risk management objectives and policies (Note 31) Sensitivity analyses disclosures (Note 12 and 31) 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: Revenue from Contracts with Customers The Group applied the following judgments that significantly affect the determination of the amount and timing of revenue from contracts with customers: • Identifying contract price and performance obligations in sales of engines The Group provides certain warranties for both general repairs and maintenance service as part of the sales of engines. For general repairs, such warranties will be assurance-type warranty that will continue to be accounted for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. For maintenance services, it will be accounted for as a service-type warranties that are capable of being distinct and customers can benefit from the service on its own. Hence, the Group identified two separate performance obligation, one is the promise to transfer the engine and the other one is to provide maintenance services after reaching certain on-road mileage or running hours. Consequently, the Group allocated a portion of the transaction price to the engines and the maintenance services based on a combination of expected cost plus a margin and residual approaches. Please refer to Note 6.3. Derecognition of bills receivable The Group sell certain 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 derecognition of bills receivable when discounted, the management believes that the contractual right to receive the cash flows from the asset have terminated with the Group, but transferred to the banks. Accordingly, bills receivable are derecognized, 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 15. ANNUAL REPORT 2021 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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, 2020 and 2021 are RMB 400.2 million and RMB 398.2 million (US$ 63.0 million) respectively, and primarily relate to unutilized capital allowances and investment allowances, as well as other unrecognized temporary differences relating to asset impairment and deferred grants. If the Group was able to recognize all unrecognized deferred tax assets, profit would increase by RMB 159.2 million (US$ 25.2 million) for year ended December 31, 2021 (2020: RMB 157.6 million). Development costs Development costs are capitalized in accordance with the accounting policy in Note 2.3 (l). Capitalization of development costs requires the application of management judgment to determine, what continues to constitute development activities and when a development project should cease further capitalization of development costs. Management judgment is also required to ascertain the nature of expenses that qualify for capitalization. 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 ten 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, development costs and trademarks recognized 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 12. 70 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 31.12.2020 31.12.2021 Guangxi Yuchai Machinery Company Limited Guangxi Yuchai Machinery Monopoly Development Co., People’s Republic of China Ltd Guangxi Yuchai Accessories Manufacturing Company Limited Guangxi Yulin Hotel Company Limited HL Global Enterprises Limited People’s Republic of China People’s Republic of China People’s Republic of China Singapore % 76.4 54.9 76.4 76.4 50.2 % 76.4 54.9 76.4 76.4 50.2 The Group has the following subsidiary that has non-controlling interests (“NCI”) that are material to the Group. Proportion of equity interest held by NCI Yuchai 31.12.2019 31.12.2020 31.12.2021 23.6% 23.6% 23.6% 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Accumulated balances of material NCI Yuchai Profit allocated to material NCI Yuchai Dividends paid to material NCI Yuchai 2,603,227 2,624,933 2,574,669 407,243 254,284 229,231 153,500 24,280 207,514 207,514 203,753 32,228 ANNUAL REPORT 2021 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4. INVESTMENTS IN SUBSIDIARIES (cont’d) Summarized financial intercompany eliminations of subsidiaries with material non-controlling interests are as follows: information including goodwill on acquisition and consolidation adjustments but before Summarized statement of comprehensive income Revenue Profit after tax Total comprehensive income for the year Attributable to NCI Summarized statement of cash flows Operating Investing Financing Net increase in cash and cash equivalents Summarized statement of financial position Current assets Non-current assets, excluding goodwill Goodwill Current liabilities Non-current liabilities Net assets Total equity Attributable to NCI Summarized statement of comprehensive income Revenue Profit after tax Total comprehensive income for the year Attributable to NCI Summarized statement of cash flows Operating Investing Financing Net increase in cash and cash equivalents 31.12.2019 Yuchai RMB’000 17,980,304 825,807 828,861 254,284 1,632,557 (858,904) (656,576) 117,077 31.12.2020 Yuchai RMB’000 18,395,754 6,722,233 212,636 (13,035,680) (1,293,007) 11,001,936 11,001,936 2,624,933 20,557,660 829,042 826,214 229,231 1,476,034 (794,291) (505,997) 175,746 72 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 Total equity Attributable to NCI Summarized statement of comprehensive income Revenue Profit after tax Total comprehensive income for the year Attributable to NCI Summarized statement of cash flows Operating Investing Financing Net increase in cash and cash equivalents Significant restrictions 31.12.2021 Yuchai RMB’000 US$’000 17,067,747 6,812,500 212,636 (12,620,344) (781,986) 2,699,653 1,077,552 33,633 (1,996,195) (123,689) 10,690,553 1,690,954 10,690,553 1,690,954 2,574,669 407,243 21,254,134 3,361,826 443,499 506,769 153,500 70,149 80,157 24,280 588,727 (674,686) (1,002,764) 93,121 (106,717) (158,610) (1,088,723) (172,206) The nature and extent of significant restrictions on the Group’s ability to use or access assets and settle liabilities of subsidiaries with material non-controlling interests are: the end of At the reporting period, cash and cash equivalents of RMB 4,200.5 million (US$ 664.4 million) (2020: RMB 5,289.2 million) held in the PRC are subject to local exchange control regulations. These regulations place restriction on the amount of currency being exported other than through dividends, trade and service related transactions. Acquisition of ownership in subsidiaries, without change in control in 2019 In February 2019, Yuchai acquired 7.5% of equity interest from non-controlling interest for a cash consideration of RMB 0.1 million. As a result, Yuchai’s shareholding in YC Europe increased from 67.5% to 75.0%. in YC Europe Co., Ltd. (“YC Europe”) ANNUAL REPORT 2021 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT IN JOINT VENTURES Share of profit/(loss) of joint ventures, net of tax: Y & C Engine Co., Ltd MTU Yuchai Power Co., Ltd. Eberspaecher Yuchai Exhaust Technology Co., Ltd Other joint ventures Carrying amount of investments: Y & C Engine Co., Ltd MTU Yuchai Power Co., Ltd Eberspaecher Yuchai Exhaust Technology Co., Ltd Other joint ventures The Group has interests in the following joint ventures: Name of company Principal activities 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 28,484 594 (9,366) (497) 19,215 (44,016) 3,238 (19,157) 513 (125,853) 28,037 1,377 454 (19,907) 4,435 218 72 (59,422) (95,985) (15,182) 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 145,599 62,217 12,638 6,666 227,120 22,821 89,481 31,655 7,138 151,095 3,610 14,153 5,007 1,129 23,899 Place of incorporation/ business Group’s effective equity interest 31.12.2020 31.12.2021 % % Held by subsidiaries HL Heritage Sdn. Bhd. Shanghai Hengshan Equatorial Hotel Management Co., Ltd. Y & C Engine Co., Ltd (“Y&C”) Property development and Malaysia property investment holdings Hotel and property management Manufacture and sale of heavy duty diesel engines, spare parts and after-sales services Guangxi Yineng IOT Science & Design, development, Technology Co., Ltd. management and marketing of an electronic operations management platform MTU Yuchai Power Co., Ltd (“MTU Yuchai Power”) Manufacture off-road diesel engines Eberspaecher Yuchai Exhaust Application development, Technology Co. Ltd (“Eberspaecher Yuchai”) production, sales and service on engine exhaust control systems 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 30.1 24.6 30.1 24.6 34.4 34.4 15.3 15.3 38.2 38.2 37.4 37.4 74 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT IN JOINT VENTURES (cont’d) The Group assess impairment of investments 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 performs evaluation of the value of its investment using a discounted cash flows projection or fair value less cost of disposal where appropriate. The projection will be performed using historical trends as a reference and certain assumptions to project the future streams of cash flows. In 2020 and 2021, the Group has performed an impairment evaluation of its investments in joint ventures and no impairment was required. Revenue Depreciation and amortization Interest expense Profit/(loss) for the year, representing total comprehensive income for the year Proportion of the Group’s ownership Group’s share of profit/(loss) Unrealized profit on transactions with joint venture Group’s share of profit/(loss) of significant joint ventures Group’s share of loss of other joint ventures, representing the Group’s share of total comprehensive loss of other joint ventures Group’s share of profit for the year, representing the Group’s share of total comprehensive income for the year 31.12.2019 MTU Yuchai Power RMB’000 Eberspaecher Yuchai RMB’000 178,796 (6,379) (5,017) 3,509 (25) – Y & C RMB’000 2,404,244 (26,099) (29,606) Total RMB’000 2,586,549 (32,503) (34,623) 44,484 45% 20,018 8,466 28,484 600 50% 300 294 594 (19,114) 25,970 49% (9,366) – (9,366) 19,712 (497) 19,215 ANNUAL REPORT 2021 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT IN JOINT VENTURES (cont’d) 31.12.2020 MTU Yuchai Power RMB’000 Eberspaecher Yuchai RMB’000 Non-current assets Current assets - Cash and bank balances - Others Total assets Non-current liabilities Current liabilities Total liabilities Equity Y & C RMB’000 740,423 160,844 1,287,935 2,189,202 (417,759) (1,340,704) (1,758,463) 430,739 71,635 43,056 266,123 380,814 – (244,963) (244,963) 135,851 Total RMB’000 857,641 206,173 1,597,953 2,661,767 45,583 2,273 43,895 91,751 – (65,960) (417,759) (1,651,627) (65,960) (2,069,386) 25,791 592,381 Proportion of the Group’s ownership 45% 50% 49% Group’s share of net assets Unrealized profit on transactions with joint venture Carrying amount of significant joint ventures Carrying amount of other joint ventures Carrying amount of the investment in joint ventures 193,833 (48,234) 145,599 67,926 (5,709) 62,217 12,638 – 12,638 220,454 6,666 227,120 Total RMB’000 3,375,542 (62,116) (42,692) 31.12.2020 MTU Yuchai Power RMB’000 Eberspaecher Yuchai RMB’000 307,699 (2,350) (1,983) 45,966 (360) – Y & C RMB’000 3,021,877 (59,406) (40,709) (88,785) 6,421 (39,095) (121,459) 45% (39,953) (4,063) 50% 3,211 27 49% (19,157) – Revenue Depreciation and amortization Interest expense Profit/(loss) for the year, representing total comprehensive income for the year Proportion of the Group’s ownership Group’s share of profit/(loss) Unrealized profit on transactions with joint venture Group’s share of profit/(loss) of significant joint ventures (44,016) 3,238 (19,157) (59,935) Group’s share of profit of other joint ventures, representing the Group’s share of total comprehensive loss of other joint ventures Group’s share of loss for the year, representing the Group’s share of total comprehensive loss for the year 513 (59,422) 76 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT IN JOINT VENTURES (cont’d) Non-current assets Current assets - Cash and bank balances - Others Total assets Non-current liabilities Current liabilities Total liabilities Equity MTU Yuchai Power RMB’000 31.12.2021 Eberspaecher Yuchai RMB’000 Total Total RMB’000 US$’000 89,749 71,858 822,463 130,091 63,609 310,394 463,752 – (271,521) 2,105 99,352 245,493 38,830 1,227,718 194,192 173,315 2,295,674 363,113 (14,109) (94,604) (376,888) (59,613) (1,513,541) (239,401) Y & C RMB’000 660,856 179,779 817,972 1,658,607 (362,779) (1,147,416) (1,510,195) (271,521) (108,713) (1,890,429) (299,014) 148,412 192,231 64,602 405,245 64,099 Proportion of the Group’s ownership 45% 50% 49% Group’s share of net assets Unrealized profit on transactions with joint venture Carrying amount of significant joint ventures Carrying amount of other joint ventures Carrying amount of the investment in joint ventures 66,785 96,116 31,655 (43,964) 22,821 (6,635) 89,481 – 31,655 143,957 22,770 7,138 1,129 151,095 23,899 Revenue Depreciation and amortization Interest expense, net Profit/(loss) for the year, representing total comprehensive income for the year MTU Yuchai Power RMB’000 31.12.2021 Eberspaecher Yuchai RMB’000 Total Total RMB’000 US$’000 467,800 (2,377) (1,850) 157,316 (709) (41) 2,697,837 426,724 (8,852) (8,498) (55,967) (53,727) Y & C RMB’000 2,072,721 (52,881) (51,836) (282,205) 54,526 2,811 (224,868) (35,568) Proportion of the Group’s ownership 45% 50% (126,992) 27,263 49% 1,377 Group’s share of profit/(loss) Unrealized profit on transactions with joint venture Group’s share of profit/(loss) of significant joint 1,139 774 – ventures (125,853) 28,037 1,377 (96,439) (15,254) Group’s share of loss of other joint ventures, representing the Group’s share of total comprehensive loss of other joint ventures Group’s share of loss for the year, representing the Group’s share of total comprehensive loss for the year 454 72 (95,985) (15,182) ANNUAL REPORT 2021 77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT IN JOINT VENTURES (cont’d) Note: As of December 31, 2021, the Group’s share of joint ventures’ capital commitment that are contracted but not paid was RMB 7.0 million (US$ 1.1 million) (2020: RMB 2.1 million). As of December 31, 2021, the Group’s share of outstanding bills receivables discounted with banks for which Y & C retained a recourse obligation totaled RMB 213.9 million (US$ 33.8 million) (2020: RMB 40.1 million). As of December 31, 2021, the Group’s share of outstanding bills receivables endorsed to suppliers for which Y & C retained a recourse obligation were RMB 33.1 million (US$ 5.2 million) (2020: RMB 58.4 million). Significant restrictions The nature and extent of significant restrictions on the Group’s ability to use or access assets and settle liabilities of joint ventures are: The Group’s share of cash and cash equivalents of RMB 39.6 million (US$ 6.3 million) (2020: RMB 30.4 million) held in the PRC are subject to local exchange control regulations. These regulations places restriction on the amount of currency being exported other than through dividends, trade and service related transactions. As of December 31, 2021, the Group’s share of restricted cash of RMB 74.5 million (US$ 11.8 million) (2020: RMB 65.2 million) which was used as collateral by the banks for the issuance of bills to suppliers. As of December 31, 2021, the Group’s share of bills receivables of RMB 22.0 million (US$ 3.5 million) (2020: RMB 28.6 million) which was used as collateral by banks for the issuance of bills to suppliers. 78 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. REVENUE FROM CONTRACTS WITH CUSTOMERS 6.1 Disaggregated revenue information Set out below is the disaggregation of the Group’s revenue from contracts with customers: Segments Type of goods or services Heavy-duty engines Medium-duty engines Light-duty engines Other products and services (i) Revenue from hospitality operations 31.12.2019 HLGE RMB’000 RMB’000 Yuchai 6,189,934 5,583,982 2,429,248 3,732,436 44,704 – – – – 35,781 Total RMB’000 6,189,934 5,583,982 2,429,248 3,732,436 80,485 Total revenue from contracts with customers 17,980,304 35,781 18,016,085 Geographical markets People’s Republic of China Other countries Total revenue from contracts with customers Timing of revenue recognition At a point in time Over time Total revenue from contracts with customers Segments Type of goods or services Heavy-duty engines Medium-duty engines Light-duty engines Other products and services (i) Revenue from hospitality operations 17,913,615 66,689 – 17,913,615 102,470 35,781 17,980,304 35,781 18,016,085 17,935,600 44,704 – 17,935,600 80,485 35,781 17,980,304 35,781 18,016,085 31.12.2020 HLGE RMB’000 RMB’000 Yuchai 6,725,312 6,626,629 2,356,168 4,809,921 39,630 – – – – 23,510 Total RMB’000 6,725,312 6,626,629 2,356,168 4,809,921 63,140 Total revenue from contracts with customers 20,557,660 23,510 20,581,170 Geographical markets People’s Republic of China Other countries Total revenue from contracts with customers Timing of revenue recognition At a point in time Over time Total revenue from contracts with customers 20,504,288 53,372 – 20,504,288 76,882 23,510 20,557,660 23,510 20,581,170 20,518,030 39,630 – 20,518,030 63,140 23,510 20,557,660 23,510 20,581,170 ANNUAL REPORT 2021 79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. REVENUE FROM CONTRACTS WITH CUSTOMERS (cont’d) 6.1 Disaggregated revenue information (cont’d) Segments Type of goods or services Heavy-duty engines Medium-duty engines Light-duty engines Other products and services (i) Revenue from hospitality operations 31.12.2021 Yuchai HLGE RMB’000 RMB’000 Total RMB’000 Total US$’000 7,410,771 7,065,283 2,429,745 4,304,918 43,417 – – – 77 11,719 7,410,771 1,172,182 7,065,283 1,117,535 384,320 2,429,745 680,933 4,304,995 8,721 55,136 Total revenue from contracts with customers 21,254,134 11,796 21,265,930 3,363,691 Geographical markets People’s Republic of China Other countries 21,206,280 47,854 – 21,206,280 3,354,256 9,435 59,650 11,796 Total revenue from contracts with customers 21,254,134 11,796 21,265,930 3,363,691 Timing of revenue recognition At a point in time Over time 21,210,718 43,416 8,067 21,218,785 3,356,234 7,457 47,145 3,729 Total revenue from contracts with customers 21,254,134 11,796 21,265,930 3,363,691 Note: (i) included sales of power generator sets, engine components, service-type maintenance services and others. 6.2 Contract balances Trade receivables (Note 15) Capitalized contract cost Contract liabilities (Note 24) 31.12.2020 RMB’000 31.12.2021 RMB’000 31.12.2021 US$’000 289,048 127,704 935,462 524,557 147,499 642,432 82,971 23,330 101,615 Trade receivables are non-interest bearing and are generally on terms of 60 - 90 days. The contract liabilities comprise short-term advance received from customers and unfulfilled service-type maintenance service. The advance received from customers is recognized as revenue upon the delivery of goods, and the contract liability arising from unfulfilled service-type warranty is recognized upon the completion of the maintenance services. According to the business customary practice, the remaining performance obligations (unfulfilled service-type maintenance service) at the year-end is expected to be satisfied within 2 years. The significant decrease in contract liabilities as at December 31, 2021 was mainly due to lower advance payment from customers as of the year-end for future product deliveries. 80 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. REVENUE FROM CONTRACTS WITH CUSTOMERS (cont’d) 6.2 Contract balances (cont’d) (a) Set out below is the amount of revenue recognized from: Amounts include in contract liabilities (b) Capitalized contract costs Capitalized contract costs relating to service fee charge on development of technology know-how At January 1 Addition Reclassified to development costs Released to consolidated statement of profit or loss At December 31 6.3 Performance obligations 31.12.2020 RMB’000 31.12.2021 RMB’000 31.12.2021 US$’000 363,464 874,391 138,305 31.12.2020 RMB’000 31.12.2021 RMB’000 31.12.2021 US$’000 136,457 24,147 (21,519) (11,381) 127,704 127,704 19,795 – – 147,499 20,199 3,131 – – 23,330 The transaction price allocated to the remaining unsatisfied performance obligations as of 31 December are, as follows: Within one year More than one year Total unfulfilled service-type maintenance service (Note 24) 31.12.2020 RMB’000 31.12.2021 RMB’000 31.12.2021 US$’000 112,454 67,269 179,723 140,601 69,172 209,773 22,239 10,941 33,180 As of December 31, 2020, the remaining performance obligations (unfulfilled maintenance service) were expected to be satisfied within three years. In 2021, the Group has reassessed the future satisfaction period relating to the remaining performance obligations related to the unfulfilled service-type maintenance service. Based on the business development and latest data, the Group expects that the remaining performance obligation as of December 31, 2021, to be recognized within 2 years, and accordingly has applied the change of management estimation prospectively. As a result, RMB 36.7 million (US$ 5.8 million) was credited to consolidated statement of profit or loss under “revenue” and lower the contract liability (current) by RMB 36.7 million (US$ 5.8 million). ANNUAL REPORT 2021 81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7.1 Depreciation, amortization, shipping and handling expenses (a) Depreciation and amortization expenses 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Amortization of intangible assets (i) Depreciation of investment property Depreciation of property, plant and equipment Depreciation of right-of-use assets (ii) 1,012 380 422,859 40,958 465,209 1,012 376 450,092 43,127 494,607 38,957 355 492,826 41,458 573,596 6,162 56 77,952 6,558 90,728 Note: (i) (ii) The higher amortization charges in 2021 is mainly due to the amortization charged on additional Technology Know-how recognized during the year which are transferred from Group capitalized development cost upon completion and ready for use. In 2020, COVID-19 related rent rebate received from lessors of RMB 0.2 million has been offset against the depreciation of right-of-use assets. Depreciation and amortization expenses are included in the following captions: 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Cost of sales Research and development expenses Selling, general and administrative expenses (b) Shipping and handling expenses 315,445 16,470 133,294 465,209 327,866 26,815 139,926 494,607 381,248 41,835 150,513 573,596 60,303 6,618 23,807 90,728 Sales related shipping and handling expenses not separately billed to customers are included in the following caption: Selling, general and administrative expenses 221,255 237,683 224,292 35,477 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 82 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7.2 (a) Other operating income 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Interest income Dividend income from quoted equity securities Gain on disposal of: - property, plant and equipment - quoted equity securities - right-of-use assets Government grants Fair value gain on quoted equity securities Fair value gain on foreign exchange forward contract Realised foreign exchange gain, net Unrealised foreign exchange gain, net Others 177,261 959 – 11,528 9,237 122,371 1,118 – 3,604 4,679 16,404 347,161 166,970 166 – 874 2,574 209,793 – 999 1,390 1,827 15,676 400,269 132,083 168 1,224 5,416 14,714 152,932 138 – – – 19,496 326,171 20,892 26 194 857 2,327 24,190 22 – – – 3,083 51,591 7.2 (b) Other operating expenses 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Fair value loss on quoted equity securities Fair value loss on foreign exchange forward contract Loss on disposal of property, plant and equipment Provision/(reversal) for onerous contract, net Realised foreign exchange loss, net Unrealised foreign exchange loss, net Unrecoverable value added tax Others – 5,529 645 – – – – 2,501 8,675 1,196 – 4,183 13,639 – – – 2,304 21,322 – – – (8,810) (1,532) 3,271 11,164 5,889 9,982 – – – (1,394) (242) 518 1,766 931 1,579 7.3 Finance costs Bank term loans Bills discounting Bank charges Interest on lease liabilities (Note 17) 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 76,721 47,212 4,945 2,918 95,357 49,738 3,877 2,198 82,109 27,864 4,136 1,819 131,796 151,170 115,928 12,987 4,408 654 288 18,337 ANNUAL REPORT 2021 83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7.4 Staff costs 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Wages and salaries Contribution to defined contribution plans Executive bonuses Staff welfare Staff severance cost Others Staff costs are included in the following captions: 1,122,712 324,623 59,791 82,692 15,454 6,012 1,364,751 287,830 59,908 94,982 19,712 3,439 1,338,777 386,551 19,355 93,992 11,771 4,887 1,611,284 1,830,622 1,855,333 211,758 61,142 3,061 14,867 1,862 773 293,463 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Cost of sales Research and development expenses Selling, general and administrative expenses 808,763 243,049 559,472 912,304 258,118 660,200 985,676 283,543 586,114 1,611,284 1,830,622 1,855,333 155,907 44,849 92,707 293,463 8. INCOME TAX EXPENSE The major components of income tax expense for the years ended December 31, 2019, 2020 and 2021 are as follows: 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Current income tax - Current year - Over provision in respect of prior years Deferred tax - Movement in temporary differences - Over provision in respect of prior years 193,878 (6,985) 180,254 (124) 48,856 (21,523) (14,274) – 12,543 (135) 16,483 – 7,727 (3,404) 2,607 – Consolidated income tax expense reported in the statement of profit or loss 172,619 192,538 43,816 6,930 84 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAX EXPENSE (cont’d) Income tax expense reported in the consolidated statement of profit or loss differs from the amount computed by applying the PRC income tax rate of 15% (being tax rate of Yuchai) for the years ended December 31, 2019, 2020 and 2021 for the following reasons: 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Accounting profit before tax Computed tax expense at 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 Over provision in respect of previous years Withholding tax expense Others Total 1,033,319 154,998 971,864 145,780 451,710 67,757 71,447 10,717 3,982 (6,171) (5,076) 6,613 (31,863) 26,223 (6,985) 30,898 – 9,188 (601) (1,996) 6,097 (26,329) 24,251 (259) 36,332 75 17,795 (2,181) (29) 10,356 (59,633) 16,517 (21,523) 14,639 118 172,619 192,538 43,816 2,815 (345) (5) 1,638 (9,432) 2,612 (3,404) 2,315 19 6,930 ANNUAL REPORT 2021 85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAX EXPENSE (cont’d) Deferred tax Deferred tax relates to the following: Consolidated statement of financial position 31.12.2021 US$’000 31.12.2020 RMB’000 31.12.2021 RMB’000 Consolidated statement of profit or loss 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Accelerated tax depreciation Interest receivable PRC withholding tax on dividend income (i) Impairment of property, plant and equipment Effect of change in residual value of property, plant and equipment Write-down of inventories Allowance for doubtful account receivables Accruals Deferred income Losses available for offsetting against future taxable income Others Deferred tax benefits/(expenses) (100,802) (1,937) (138,770) (3,396) (21,950) (537) (17,366) 608 (55,882) (293) (37,968) (1,459) (6,006) (231) (112,456) (65,544) (10,367) (30,721) (36,255) (14,529) (2,298) 6,210 5,138 812 (9,295) (438) (1,072) (170) 33,894 22,628 8,056 298,766 108,942 – 24,441 60,230 20,250 6,789 283,427 97,828 23,072 43,606 9,527 3,203 1,074 44,830 15,474 3,650 6,897 – 2,343 33,894 4,225 26,336 (2,378) 4,900 46,108 12,232 – 5,465 (2,021) 48,149 1,211 (1,267) (15,339) (11,114) – (4,998) 23,072 19,235 4,166 (376) (200) (2,426) (1,758) 3,650 3,042 14,274 (12,408) (16,483) (2,607) Net deferred tax assets 287,742 332,630 52,613 Reflected in the consolidated statement of financial position as follows: Deferred tax assets Deferred tax liabilities 400,198 (112,456) 287,742 398,174 (65,544) 332,630 62,980 (10,367) 52,613 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 December 31 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 (106,922) (36,255) 30,721 (112,456) (14,529) 61,441 (17,787) (2,298) 9,718 (112,456) (65,544) (10,367) 86 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAX EXPENSE (cont’d) Deferred tax (cont’d) The Corporate Income Tax (“CIT”) law provides for a tax of 10% to be withheld from dividends paid to foreign investors of PRC enterprises. This withholding tax provision does not apply to dividends paid out of profit earned prior to January 1, 2008. Beginning on January 1, 2008, a 10% withholding tax is imposed on dividends paid to the Company, as a non-resident enterprise, unless an applicable tax treaty provides for a lower tax rate. The Company recognizes a deferred tax liability for withholding tax payable for profits accumulated after December 31, 2007 for the earnings that the Company does not plan to indefinitely reinvest in the PRC enterprises. As of December 31, the deferred tax liability for withholding tax payable was RMB 65.5 million (US$ 10.4 million) (2020: 2021, RMB 112.5 million). The amount of unrecognized deferred tax liability relating to undistributed earnings of the PRC enterprises is estimated to be RMB 195.5 million (US$ 30.9 million) (2020: RMB 236.4 million). Deferred tax assets have not been recognized in respect of the following items: Unutilized tax losses Unutilized capital allowances and investment allowances Other unrecognized temporary differences relating to asset impairment and deferred grants 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 404,215 105,622 204,423 714,260 414,212 103,810 199,203 717,225 65,517 16,420 31,508 113,445 Unrecognized tax losses for the Group are subject to agreement with the tax authorities and compliance with tax regulations in the respective countries in which the Group operates. The unutilized tax losses for PRC subsidiaries and Malaysia subsidiaries expire within the next 5 to 10 years and 10 years, respectively. These losses may not be used to offset taxable income elsewhere in the Group. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profits will be available against which the Group can utilize the benefits. 9. EARNINGS PER SHARE Basic earnings per share is calculated by dividing the profit for the year attributable to ordinary equity holders of the company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is calculated by dividing the profit attributable to ordinary equity holders of the company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares. ANNUAL REPORT 2021 87 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9. EARNINGS PER SHARE (cont’d) Basic earnings per share The calculation of basic earnings per share is based on: 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Profit attributable to ordinary equity holders of the company 604,914 548,903 272,673 43,129 Weighted average number of ordinary shares 40,858,290 40,858,290 40,858,290 40,858,290 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: 31.12.2019 31.12.2020 31.12.2021 Weighted average number of shares issued, used in the calculation of basic earnings per share Diluted effect of share options 40,858,290 40,858,290 40,858,290 – – – Weighted average number of ordinary shares adjusted for effect of dilution 40,858,290 40,858,290 40,858,290 In 2021, 270,000 (2020: 470,000; 2019: 470,000) 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. There have been no other transactions involving ordinary shares or potential ordinary share since the reporting date and before the completion of these financial statements. 88 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. PROPERTY, PLANT AND EQUIPMENT Freehold land RMB’000 Leasehold buildings and improvements RMB’000 Construction in progress Plant and machinery RMB’000 RMB’000 Office furniture, fittings and equipment Motor and transport Total vehicles RMB’000 RMB’000 RMB’000 14,836 – – – – (744) 14,092 – – – – (628) 13,464 513 – – – – (26) 487 – – – – (30) 457 2,376,090 16,273 (4,664) 75,264 (9,759) (3,825) 2,449,379 2,214 (5,435) 105,117 (1,551) (3,439) 1,037,035 5,285,022 20,617 (260,996) 741,218 (53,917) (459) 487,725 – (823,981) – (63) 195,154 112,501 9,020,638 554,847 16,166 (274,006) (4,742) – 176 (73,571) (912) (6,088) (131) 14,066 (3,604) 7,323 (8,983) (866) 700,716 5,731,485 20,655 426,621 (81,321) – 603,595 (721,753) (48,990) – (522) (154) 203,090 123,058 9,221,820 478,891 12,598 (102,512) (13,860) – – (60,548) (2,591) (6,021) (36) 16,803 (1,896) 13,041 (7,416) (1,242) 2,546,285 405,430 6,224,902 222,380 119,169 9,531,630 848,803 92,034 (1,102) (4,660) – (685) 934,390 93,397 (2,119) (1,432) – (780) – 3,739,750 357,434 – (253,121) – (51,910) – 3,920 – (269) – – 3,795,804 394,171 – (78,917) – (48,366) – 7,227 – (277) – 151,710 19,913 (3,218) (8,719) – (651) 69,418 4,810,194 478,320* (261,499) (66,154) 3,920 (1,721) 8,939 (4,058) (865) – (90) 159,035 19,579 (1,688) (7,280) – (716) 73,344 4,963,060 519,518* 12,371 (94,833) (12,109) (59,414) (2,336) 7,227 – (1,837) (34) 1,023,456 – 4,069,642 168,930 71,236 5,333,721 13,605 13,007 2,057 1,514,989 1,522,829 700,716 1,935,681 44,055 49,714 4,258,760 405,430 2,155,260 53,450 47,933 4,197,909 240,870 64,128 340,904 8,454 7,582 663,995 Cost At January 1, 2020 Additions Disposals Transfers Write-off Translation difference At December 31, 2020 and January 1, 2021 Additions Disposals Transfers Write-off Translation difference At December 31, 2021 Accumulated depreciation and impairment At January 1, 2020 Charge for the year Disposals Write-off Impairment loss Translation difference At December 31, 2020 and January 1, 2021 Charge for the year Disposals Write-off Impairment loss Translation difference At December 31, 2021 Net book value At December 31, 2020 At December 31, 2021 US$’000 * In 2021, RMB 26.1 million (US$ 4.1 million) (2020: RMB 28.2 million) were capitalized as development costs. In 2021, RMB 0.6 million (US$ 0.1 million) (2020: RMB Nil) were capitalized as capitalized contract cost. An impairment loss of RMB 7.2 million (US$ 1.1 million) (2020: RMB 3.9 million; 2019: RMB 4.0 million) was charged to the consolidated statement of profit or loss under “Cost of sales” for the Group’s plant and equipment within the Yuchai segment. The impairment loss was due to assets that were not in use. ANNUAL REPORT 2021 89 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11. INVESTMENT PROPERTY Cost At January 1 Translation difference At December 31 Accumulated depreciation At January 1 Charge for the year Translation difference At December 31 Net carrying amount Fair value Consolidated statements of profit or loss: Rental income from an investment property Direct operating expenses (including repairs, maintenance and depreciation expense) arising from the rental generating property 31.12.2020 RMB’000 31.12.2021 RMB’000 31.12.2021 US$’000 34,940 (1,753) 33,187 28,388 376 (1,406) 27,358 5,829 11,954 230 (180) 33,187 (1,377) 31,810 27,358 355 (989) 26,724 5,086 11,308 77 (82) 5,249 (218) 5,031 4,327 56 (156) 4,227 804 1,789 12 (13) The Group has no restrictions on the realizable of its investment property and no contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancement. The fair value is determined by independent professional qualified assessor. The fair value of investment property is determined by the market comparison and cost methods. In valuing the investment property, due consideration is given to factors such as location and size of building, building infrastructure, market knowledge and historical comparable transactions to arrive at their opinion of value. The following table shows information about fair value measurement of the investment property using significant unobservable inputs (Level 3): Valuation techniques Unobservable input 2021 Market comparison and cost method 2020 Market comparison and cost method Comparable price: - RMB 165 to RMB 401 (US$ 26 to US$ 63) per square foot Comparable price: - RMB 172 to RMB 418 (US$ 27 to US$ 65) per square foot Inter-relationship between key unobservable inputs and fair value measurement The estimated fair value increases with higher comparable price The estimated fair value increases with higher comparable price 90 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. INTANGIBLE ASSETS Goodwill RMB’000 Technology Know-how RMB’000 Cost At January 1, 2020 Addition At December 31, 2020 and January 1, 2021 Addition Transfer At December 31, 2021 Accumulated amortization and impairment At January 1, 2020 Amortization At December 31, 2020 and January 1, 2021 Amortization At December 31, 2021 Net carrying amount At December 31, 2020 At December 31, 2021 US$’000 Goodwill 218,311 – 218,311 – – 218,311 5,675 – 5,675 – 5,675 212,636 212,636 33,633 Development costs Trademarks Total RMB’000 RMB’000 RMB’000 562,587 530,836 1,093,423 313,571 (414,704) 169,811 1,087,531 530,836 – 169,811 1,618,367 313,571 – – – 992,290 169,811 1,931,938 – – – – – – – – – – 133,387 1,012 134,399 38,957 173,356 136,822 – 136,822 – 414,704 551,526 127,712 1,012 128,724 38,957 167,681 8,098 1,093,423 169,811 1,483,968 383,845 60,714 992,290 156,953 169,811 1,758,582 26,860 278,160 Goodwill represents the excess of purchase consideration over fair value of net assets of businesses acquired. Goodwill acquired through business combinations have been allocated to two cash-generating units for impairment testing as follows: • • Yuchai Yulin Hotel. Goodwill allocated to Yulin Hotel was fully impaired in 2008. Carrying amount of goodwill allocated to the cash-generating unit: Yuchai 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 212,636 212,636 33,633 ANNUAL REPORT 2021 91 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. INTANGIBLE ASSETS (cont’d) Goodwill (cont’d) Yuchai unit 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 a ten-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 12.54% (2020: 12.37%) and cash flows beyond the ten-year period are extrapolated using a 5% growth rate (2020: 6%) that is the same as the long-term average growth rate for PRC. No impairment was identified for this unit. Key assumptions used for value in use calculations Key assumptions used in estimation of value in use were as follows: • • • 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 and future business outlook 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 5% and 6.0% for 2021 and 2020 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 demand by 15.21% (2020: 13.99%) would result in impairment. Discount rate – A rise in pre-tax discount rate to 14.03% (2020: 13.58%) in the Yuchai unit would result in impairment. 92 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. INTANGIBLE ASSETS (cont’d) Goodwill (cont’d) Sensitivity to changes in assumptions (cont’d) 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 1.53% (2020: 3.60%) 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. Technology know-how At December 31, 2020, The Group has an intangible asset representing technology development costs with carrying amount of RMB 8.1 million, which is the technology know-how that relates to production of 4Y20 engines. As of December 31, 2020, loss charged on this Technology Know-how was RMB 126.7 million. the accumulated impairment In late 2018, the Group had commenced the production of 4Y20 engines. In 2019, 2020 and 2021, management believed that there was no indicator for further impairment, and also considered there was no significant changes to the market and economic environment which will have a favourable effect to the recoverable amount of the intangible asset. Management concluded that no reversal of impairment was necessary in 2019, 2020 and 2021. In 2021, the development of certain engine platform relating to National VI engines were completed, and the related development costs amounting to RMB 414.7 million (US$ 65.6 million) were transferred from development costs to Technology Know-how, and amortization were charged accordingly based on the Group’s policy. Development costs During 2020 and 2021, the Group has capitalized development costs of RMB 530.8 million and RMB 313.6 million (US$ 49.6 million), respectively, for new engines that comply with National VI and Tier 4 emission standards. As of December 31, 2021, the total capitalized development costs are RMB 992.3 million (US$ 157.0 million). These development costs relate to on-going development efforts and, accordingly, have not yet been available for use, and therefore no amortization charges were recorded. In 2020 and 2021, the Group performs an impairment test on the development costs that are not available for use. No impairment has been identified. The recoverable amount was determined based on its value in use using the discounted cash flow approach. Cash flows were projected based on historical growth, past experience and management best estimation of future business outlook. Both the 2020 and 2021, the Group used 8 years forecast and were based on the updated financial budgets approved by the senior management with no terminal value. ANNUAL REPORT 2021 93 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. INTANGIBLE ASSETS (cont’d) Development costs (cont’d) Key assumptions used in estimation of value in use were as follows: • • Profit from operation – Profit from operation is based on management’s estimate with reference to historical revenue generated, growth rate and estimation of future business outlook. In 2021, the Group used a 8 years business plan, the revenue growth rate is estimated at an average around 12% year-on-year from 2022 to 2025 due to the implementation of new emission standard and government encouragement of consumption of new energy products, decrease to 5% in 2026 and thereafter management assumed no revenue growth from 2026 to 2029. In 2020, the business plan projected 8 years, the revenue growth rate is estimated at around 10% year-on-year from 2021 to 2023 and decrease to 5% in 2024 and 2025. Management assumed no revenue growth from 2026 to 2028 after reaching the commercial deployment of technology. 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. The Group has applied a pre-tax discount rate of 12.54% (2020: 12.37%). 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 demand by 13.86% (2020: 25.94%) would result in impairment. Discount rate – A rise in pre-tax discount rate to 15.69% (2020: 20.05%) would result in impairment. With regard to the assessment of value in use, 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. Trademarks In 2019, Yuchai entered into a trademark license agreement with GY Group under which Yuchai was granted the exclusive and perpetual use of the trademarks listed in the trademark license agreement for a one-time usage fee of RMB 169.8 million. Management has assessed and concluded that the right granted by the trademark license, according to the terms and conditions of the trademark license agreement, is indefinite. In 2020 and 2021, the Group performed an annual impairment review by taking Yuchai as a cash–generating unit. Using the same cash flow projection and assumptions for goodwill impairment test disclosed above, management concluded that no impairment charge is to be recognized in 2020 and 2021. 94 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. INVENTORIES Raw materials Work in progress Finished goods 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 1,940,119 33,211 2,497,865 2,111,881 25,169 3,071,586 334,042 3,981 485,841 823,864 Total inventories at the lower of cost and net realizable value 4,471,195 5,208,636 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Inventories recognized as an expense in cost of sales Inclusive of the following charge/(credit): - Inventories written down - Reversal of write-down of inventories - Inventories written off 13,167,181 15,501,807 16,457,476 2,603,125 31,810 (14,788) – 82,386 (54,408) – 32,813 (41,823) 10,085 5,190 (6,615) 1,595 The reversal of write-down of inventory was made when the related inventories were sold above their carrying value. 14. OTHER CURRENT ASSETS Current Development properties Quoted equity securities (i) 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 16,906 6,258 23,164 16,167 606 16,773 2,557 96 2,653 Note: (i) The quoted equity securities are listed on the Singapore Exchange. In 2021, the Group has disposed some of the quoted equity securities for consideration of RMB 6.5 million (US$ 1.0 million) (2020: RMB 1.4 million) and recognized a gain on disposal of RMB 5.4 million (US$ 0.9 million) (2020: RMB 0.9 million) in consolidated statement of profit or loss under “Other operating income”. ANNUAL REPORT 2021 95 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. TRADE AND OTHER RECEIVABLES Trade receivables, gross Less: Allowance for expected credit losses Net trade receivables (Note 6.2) Bills receivable (i) Total (Note 34) Amounts receivable: - associates and joint ventures (trade) - associates and joint ventures (non-trade) - related parties (trade) - related parties (non-trade) Bills receivable in transit Interest receivables Staff advances Others Less: Impairment losses – other receivables (ii) Other receivables carried at amortized cost (Note 34) Tax recoverable Prepayments Right of return assets Net other receivables Total trade and other receivables 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 332,567 (43,519) 557,767 (33,210) 88,224 (5,253) 289,048 7,793,343 524,557 6,437,100 82,971 1,018,174 8,082,391 6,961,657 1,101,145 1,266 11,119 9,663 2,992 12,620 4,999 3,326 36,951 (6,741) 76,195 236,400 64,102 – 376,697 243 11,959 70,594 459 22,360 11,788 5,578 24,085 (6,231) 140,835 328,369 66,474 40,761 576,439 38 1,892 11,166 73 3,537 1,865 882 3,810 (986) 22,277 51,939 10,514 6,447 91,177 8,459,088 7,538,096 1,192,322 Note: (i) (ii) As of December 31, 2021, bills receivable includes bills received from joint ventures and related parties amounted to RMB 0.7 million (US$ 0.1 million) (2020: RMB Nil) and RMB 523.5 million (US$ 82.8 million) (2020: RMB 1,014.1 million) respectively. As of December 31, 2020 and 2021, bills receivable amounted to RMB 13.4 million (US$ 2.1 million) (2020: RMB Nil) was pledged to secure bank facilities. This comprised impairment loss on bills receivable in transit of RMB 6.0 million (US$ 0.9 million) as of December 31, 2021 (2020: RMB 6.5 million). This impairment loss was charged to the consolidated statement of profit or loss under “Selling, general and administrative expenses”. Trade receivables are non-interest bearing and are generally on 60-90 days’ term. They are recognized at their original invoice amounts which represent their fair values on initial recognition. Non-trade balance from associates, joint ventures and other related parties are unsecured, interest-free, and repayable on demand. 96 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. TRADE AND OTHER RECEIVABLES (cont’d) Movement in the allowance for expected credit losses of trade and other receivables is as follows: At January 1 Credit to consolidated statement of profit or loss (under “Selling, general and administrative expenses”) Written off Translation difference At December 31 31.12.2020 RMB’000 31.12.2021 RMB’000 31.12.2021 US$’000 62,854 50,260 7,950 (12,349) (242) (3) (8,525) (2,278) (16) 50,260 39,441 (1,348) (360) (3) 6,239 As of December 31, 2020 and 2021, outstanding bills receivable discounted with banks for which the Group retained a recourse obligation totaled RMB 2,225.1 million and RMB 79.1 million (US$ 12.5 million) respectively. All bills receivable discounted have contractual maturities within 12 months at time of discounting. As of December 31, 2020 and 2021, outstanding bills receivable endorsed to suppliers with recourse obligation were RMB 1,834.5 million and RMB 2,550.0 million (US$ 403.3 million) respectively. As of December 31, 2020 and 2021, trade receivables due from a major customer group, Dongfeng Automobile Co., Ltd. and its affiliates (the “Dongfeng companies”) were RMB 17.6 million and RMB 65.7 million (US$ 10.4 million), respectively. See Note 31 for further discussion of customer concentration risk. For terms and conditions relating to related parties, refer to Note 28. 16. CASH AND CASH EQUIVALENTS LONG-TERM BANK DEPOSITS SHORT-TERM BANK DEPOSITS RESTRICTED CASH Non-current Long-term bank deposits (i) Current Cash and cash equivalents Short-term bank deposits (ii) Restricted cash Cash and bank balances 31.12.2020 RMB’000 31.12.2021 RMB’000 31.12.2021 US$’000 140,000 110,000 17,399 5,877,647 258,756 171,135 4,788,219 357,335 76,001 6,307,538 5,221,555 6,447,538 5,331,555 757,366 56,521 12,021 825,908 843,307 ANNUAL REPORT 2021 97 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. CASH AND CASH EQUIVALENTS (cont’d) LONG-TERM BANK DEPOSITS (cont’d) SHORT-TERM BANK DEPOSITS (cont’d) RESTRICTED CASH (cont’d) Note: (i) (ii) In 2021, YMMC has placed new three-year time deposits of RMB 20.0 million (US$ 3.2 million) (2020: RMB 90.0 million) at annual interest rate of 3.85% (2020: range from 3.85% to 3.99%) with certain banks. These long-term deposits are not considered to be cash equivalents. As at December 31, 2021, the three-year time deposits placed in 2019 has remaining maturity period of less than 12 months. Accordingly, this has been classified as short-term bank deposits in 2021. 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, 2021 for the Group ranged from 0.30% to 1.65% (2020: 0.23% to 2.25%). 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 and short-term bank deposits) as of December 31, 2021 for the Group ranged from 0.13% to 1.55% (2020: 0.10% to 1.55%). As at December 31, 2021, there is fixed deposits of RMB 140.3 million (US$ 22.2 million) held with a related party (2020: RMB 130.8 million). As of December 31, 2021, the Group’s restricted cash of RMB 76.0 million (US$ 12.0 million) (2020: RMB 171.1 million) was used as collateral by the banks for the issuance of bills to suppliers. As of December 31, 2020 and 2021, the Group had RMB 491.9 million and RMB 474.2 million (US$ 75.0 million) respectively, of undrawn borrowing facilities in respect of which all conditions precedent had been met. The commitment fees incurred for 2019, 2020 and 2021 were RMB 0.2 million, less than RMB 0.1 million and RMB Nil (US$ Nil) respectively. For the purpose of the statement of cash flows, cash and cash equivalents comprise the following at December 31: Cash at banks and on hand Short-term bank deposits (i) Cash and cash equivalents 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 667,194 4,218,131 90,172 570,088 RMB’000 5,466,288 411,359 5,877,647 4,788,219 757,366 Note: (i) This relates to other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. 98 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17. LEASES Group as a lessee The Group has lease contracts for land, motor vehicles, office space and staff accommodations used in its operations. These leases are generally with lease term of between 1 and 6 years. The Group’s obligations under its leases are secured by the lessor’s title to the leased assets. The Group also has certain leases of office space and staff accommodations with lease terms of 12 months or less. The Group has applied the “short-term leases” recognition exemptions for these leases. Set out below are the carrying amounts of right-of-use assets recognized and the movements during the year. At January 1, 2020 Addition Depreciation expenses Disposal Translation difference At December 31, 2020 and January 1, 2021 Addition Depreciation expenses Disposal Translation difference At December 31, 2021 Leasehold land RMB’000 Building and office space RMB’000 Office furniture, fittings and equipment RMB’000 Total RMB’000 Total US$’000 353,807 2,058 (14,102) (3,198) – 338,565 1,355 (13,655) (21,620) – 304,645 61,556 13,198 (29,182) – (142) 45,430 22,558 (27,790) – (80) 40,118 21 – (14) – (1) 6 58 (13) – – 415,384 15,256 (43,298) (3,198) (143) 384,001 23,971 (41,458) (21,620) (80) 65,702 2,413 (6,848) (506) (22) 60,739 3,792 (6,558) (3,420) (13) 51 344,814 54,540 Set out below are the carrying amounts of lease liabilities and the movements during the year: 2020 2021 RMB’000 RMB’000 US$’000 2021 At January 1 Additions Accretion of interest (Note 7.3) Payments Translation difference At December 31 Current (Note 25) Non-current (Note 25) Total The maturity analysis of lease liabilities is disclosed in Note 25. 60,007 15,256 2,198 (37,561) (122) 39,778 22,755 17,023 39,778 39,778 23,971 1,819 (24,940) (97) 40,531 27,125 13,406 40,531 6,291 3,792 288 (3,945) (16) 6,410 4,290 2,120 6,410 ANNUAL REPORT 2021 99 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17. LEASES (cont’d) Group as a lessee (cont’d) The following are the amounts recognized in profit of loss: Depreciation charge for right-of-use assets Interest expenses on lease liabilities (Note 7.3) Expenses relating to short-term leases (included in selling, general and administrative expenses and research and development expenses) Total amount recognized in profit or loss 2020 RMB’000 2021 RMB’000 2021 US$’000 43,127 2,198 14,313 59,638 41,458 1,819 6,558 288 27,686 4,379 70,963 11,225 In 2021, the Group had total cash outflows for leases of RMB 52.6 million (US$ 8.3 million) (2020: RMB 51.9 million). The Group also had non-cash additions to right-of-use assets and lease liabilities of RMB 24.0 million (US$ 3.8 million) in 2021 (2020: RMB 15.3 million). The future cash outflows relating to leases that have not yet commenced are disclosed in Note 29. Group as a lessor The Group has entered into operating leases on some of its assets, including surplus offices and warehouses. Theses leases have terms between 1 to 15 years. Rental income recognized by the Group during the year is RMB 15.2 million (US$ 2.4 million) (2020: RMB 13.3 million). Future minimum rental receivables under non-cancellable operating leases as of 31 December are as follows: Within 1 year - related parties - joint venture - third parties After 1 year but within 5 years - related parties - joint venture - third parties More than 5 years - joint venture - third parties 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 902 2,590 5,058 – 10,720 13,305 14,141 4,392 51,108 598 1,425 5,573 2,358 5,698 7,240 10,566 4,272 37,730 95 225 882 373 901 1,145 1,671 676 5,968 100 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 18. ISSUED CAPITAL Issued capital Authorized shares Ordinary share of par value US$ 0.10 each Ordinary shares issued and fully paid At January 1, 2020, December 31, 2020 and December 31, 2021 US$’000 Special share issued and fully paid One special share issued and fully paid at US$ 0.10 per share * Less than RMB 1 (US$ 1) 31.12.2020 31.12.2021 thousands thousands 100,000 100,000 Number of shares RMB’000 40,858,290 2,081,138 329,179 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 * * * The holders of ordinary shares are entitled to such dividends as the Board of Directors of the Company may declare from time to time. All ordinary shares are entitled to one vote on a show of hands and carry one vote per share on a poll. The holder of special share is entitled to elect a majority of directors of the Company. In addition, no shareholders’ resolution may be passed without the affirmative vote of the special share, including any resolution to amend the Memorandum of Association or Bye-laws of the Company. The special share is not transferable except to Hong Leong Asia Ltd. (“HLA”), Hong Leong (China) Limited (“HLC”) or any of its affiliates. The Bye-Laws of the Company provides that the special share shall cease to carry any rights in the event that HLA and its affiliates cease to own, directly or indirectly, at least 7,290,000 ordinary shares in the capital of the Company. 19. DIVIDENDS DECLARED AND PAID Declared and paid during the year Dividends on ordinary shares: Final dividend paid in 2021: US$ 1.70 per share (2020: US$ 0.85 per share) Dividend paid in cash 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 245,871 245,871 448,712 448,712 70,974 70,974 ANNUAL REPORT 2021 101 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 20. RESERVES Statutory reserve Statutory general reserve (i) At January 1 Transfer from retained earnings At December 31 General surplus reserve (ii) At January 1 and December 31 Total Capital reserves (iii) At January 1 and December 31 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 278,601 2,858 281,459 281,459 2,072 283,531 25,706 25,706 307,165 309,237 44,519 328 44,847 4,066 48,913 30,704 30,704 4,857 Note: (i) (ii) (iii) 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 shareholders 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. 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. Capital reserves pertain to a capital transaction in 2015. 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 (89,925) 19,758 (11,472) (79,720) (118,176) 19,758 (11,472) (30,902) (18,692) 3,125 (1,814) (4,888) (161,359) (140,792) (22,269) Other components of equity Foreign currency translation reserve (i) Performance shares reserve (ii) Premium paid for acquisition of non-controlling interests Fair value reserve of financial assets at FVOCI (iii) Total Note: (i) (ii) (iii) 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. Performance shares reserve comprises the cumulative value of employee services received in return for share-based compensation. The amount in the reserve is retained when the option is expired. Fair value reserve of financial assets at FVOCI relates to the subsequent measurement of the Group’s bills receivable at fair value through OCI. 102 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21. 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 years after the date of grant for up to 100% (including (1) and (2) above) of the shares over which the options are exercisable. In 2021, there was no expense arising from equity-settled share-based payment transactions. (2019: Nil; 2020: Nil). 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: Outstanding at January 1 Cancelled during the year Outstanding at December 31 Exercisable at December 31 Number of share options WAEP 31.12.2020 31.12.2020 Number of share options 31.12.2021 WAEP 31.12.2021 470,000 US$ 21.11 – – 470,000 US$ 21.11 (200,000) US$ 21.11 470,000 US$ 21.11 270,000 US$ 21.11 470,000 US$ 21.11 270,000 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 behavioral considerations. Fair value of share options and assumptions Date of grant of options Fair value at measurement date (US$) Share price (US$) Exercise price (US$) Expected volatility (%) Expected option life (years) Expected dividends (%) Risk-free interest rate (%) On July 29, 2014 5.70 – 6.74 21.11 21.11 47.4 3.5 – 5.5 5.81 1.4 – 2.0 ANNUAL REPORT 2021 103 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21. SHARE-BASED PAYMENT (cont’d) Fair value of share options and assumptions (cont’d) The exercise price for options outstanding as of December 31, 2021 was US$ 21.11 dollar (2020: US$ 21.11 dollar). The weighted average remaining contractual life for the share options outstanding as of December 31, 2021 was 2.6 (2020: 3.6) 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 granted. 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. 22. TRADE AND OTHER PAYABLES Current Trade payables Bills payables (i) Other payables Accrued expenses Accrued staff costs Refund liabilities Dividend payable Amount due to: - associates and joint ventures (trade) - associates and joint ventures (non-trade) - related parties (trade) - related parties (non-trade) Financial liabilities carried at amortized cost (Note 31, Note 34) Deferred grants (Note 27) Advance from customers Other tax payable 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 3,406,398 3,348,163 533,705 233,053 714,701 1,031,562 49,468 467,351 205 238,622 1,841 10,025,069 23,468 320 62,111 3,884,812 3,085,206 423,787 167,575 689,327 913,756 29,304 176,819 27 214,980 1,308 9,586,901 12,482 316 39,416 614,472 487,996 67,032 26,506 109,033 144,531 4,635 27,968 4 34,004 207 1,516,388 1,974 50 6,234 Total trade and other payables (current) 10,110,968 9,639,115 1,524,646 (i) As of December 31, 2021, the bills payables include bills payable to joint ventures, associates and other related parties amounted to RMB 28.4 million (US$ 4.5 million) (2020: RMB 105.6 million), RMB 5.4 million (US$ 0.9 million) (2020: RMB 12.9 million) and RMB 237.6 million (US$ 37.6 million) (2020: RMB 249.0 million) respectively. 104 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 22. TRADE AND OTHER PAYABLES (cont’d) Non-current Other payables (i) (Note 31, Note 34) 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 191,563 188,725 29,851 (i) This relates to accrual for bonus that is not expected to be settled within next 12 months. Terms and conditions of the above financial liabilities: • • • Trade payables are non-interest bearing and are normally settled on 60 - 90 day terms. Other payables (current) are non-interest bearing and have an average term of three months. For terms and conditions relating to related parties, refer to Note 28. 23. PROVISION At January 1, 2020 Provision made Provision utilized Provision reversed At December 31, 2020 and January 1, 2021 Provision made Provision utilized Provision reversed At December 31, 2021 24. CONTRACT LIABILITIES Unfulfilled service-type maintenance services Advance from customer Total Current Non-current Total contract liabilities (Note 6.2) Provision for warranty RMB’000 Provision for onerous Total contract RMB’000 RMB’000 US$’000 Total 215,715 335,664 (295,940) – 255,439 292,157 (299,397) – 248,199 2,316 13,639 – (2,316) 13,639 4,829 – (13,639) 218,031 349,303 (295,940) (2,316) 269,078 296,986 (299,397) (13,639) 34,487 55,250 (46,810) (366) 42,561 46,975 (47,357) (2,157) 4,829 253,028 40,022 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 179,723 755,739 935,462 868,193 67,269 935,462 209,773 432,659 642,432 573,259 69,173 642,432 33,180 68,435 101,615 90,674 10,941 101,615 ANNUAL REPORT 2021 105 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 25. LEASE LIABILITIES Effective interest rate % Maturity 31.12.2020 RMB’000 31.12.2021 31.12.2021 US$’000 RMB’000 Current (Note 17) Non- current (Note 17) 1.25% - 6.20% 2021 1.25% - 6.20% 2022-2026 22,755 17,023 27,125 13,406 4,290 2,120 26. LOANS AND BORROWINGS Current Renminbi denominated loans Non-current Renminbi denominated loans Current Renminbi denominated loans Non-current Renminbi denominated loans Effective interest rate % Maturity 31.12.2020 RMB’000 1.80 – 4.05 2021 1,730,000 3.30 2022 500,000 Effective interest rate % Maturity 31.12.2021 RMB’000 31.12.2021 US$’000 1.10 – 3.85 2022 2,103,000 332,637 3.45 2023 100,000 15,817 Note: (i) All loan balances as stated above do not have a callable feature. S$ 30.0 million credit facility with DBS Bank Ltd (“DBS”) On June 25, 2021, the Company entered into an uncommitted revolving credit facility agreement with DBS with an aggregate value of S$ 30.0 million to refinance the S$ 30.0 million facility that matured on June 1, 2021. Among other things, the terms of the facility required that (i) HLA retains ownership of the special share, at all-time retains at least 35% ownership of the Company and that the Company remain a consolidated subsidiary of HLA, (ii) the Company at all-time retains at least 76.4% ownership in Yuchai and (iii) HLGE remains listed on the Main Board of Singapore Exchange. The terms of the facility also included certain financial covenants with respect to the Company’s consolidated tangible net worth (as defined in the agreement) not being less than US$ 400 million, and the ratio of the consolidated total debt (as defined in the agreement) to consolidated tangible net worth not exceeding 1.0 times. This arrangement was used to finance the Group general working capital requirements. 106 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 26. LOANS AND BORROWINGS (cont’d) S$ 30.0 million credit facility with MUFG Bank Ltd, Singapore Branch (formally known as Bank of Tokyo Mitsubishi UFJ, Ltd., Singapore Branch) (“MUFG”) On June 10, 2020, the Company entered into an uncommitted and unsecured multi-currency revolving credit facility agreement with MUFG for an aggregate value of S$ 30.0 million to refinance the S$ 30.0 million facility that matured on March 17, 2020. The facility is available for three years from the date of the facility agreement and will be used to finance the Company’s 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 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) not being less than US$ 120 million at all times and the ratio of the Company’s total net debt (as defined in the agreement) to tangible net worth not exceeding 2.0 times at all times, as well as negative pledge provisions and customary drawdown requirements. US$ 30.0 million credit facility with Sumitomo Mitsui Banking Corporation, Singapore Branch (“SMBC”) On June 24, 2020, the Company entered into an uncommitted and unsecured multi-currency short-term revolving credit facility agreement with SMBC for an aggregate value of US$ 30.0 million to refinance the US$ 30.0 million facility that matured on March 18, 2020. The maximum tenor of each drawdown under the facility is 6 months and will be utilized by the Company to finance its 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 subsidiary 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 of June 30 and December 31 of each year not less than US$ 200 million and the ratio of the Company’s consolidated total net debt (as defined in the agreement) to consolidated tangible net worth as of June 30 and December 31 of each year not exceeding 2.0 times, as well as negative pledge provisions and customary drawdown requirements. 27. DEFERRED GRANTS At January 1 Received during the year Grant receivable Grant disbursed to partner of joint project Released to consolidated statement of profit or loss At December 31 Current (Note 22) Non-current 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 676,728 52,241 129 (48,632) (138,856) 541,610 23,468 518,142 541,610 541,610 50,582 – (16,270) (151,782) 424,140 12,482 411,658 424,140 85,668 8,000 – (2,573) (24,008) 67,087 1,974 65,113 67,087 The government grant that have been received in PRC was to support and fund Yuchai’s production facilities, research and development activities for product innovations and developments. As at December 31, 2021, RMB 247.9 million (US$ 32.9 million) (2020: RMB 271.6 million) of the deferred grants are related to assets. ANNUAL REPORT 2021 107 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 27. DEFERRED GRANTS (cont’d) The grant receivable is related to the Job Support Scheme (the “JSS”) that was introduced in Singapore in response to COVID-19 coronavirus pandemic. The JSS is temporary scheme introduced to help the enterprises retain local employees during the period of economic uncertainty. Under the JSS, employers will receive cash grants in relation to the gross monthly wages of eligible employees. In 2020 and 2021, JSS grant income amounted to RMB 1.1 million and RMB 0.3 million (less than US$ 0.1 million) were credited to the consolidated statement of profit or loss under “Other income”. 28. RELATED PARTY DISCLOSURES The ultimate parent As of December 31, 2021, the controlling shareholder of the Company, HLA, indirectly owned 18,270,965, or 44.7% (2020: 18,270,965, or 44.7%), 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 23.3% (2020: 23.3%) 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 21.4% (2020: 21.4%) 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 0.5 million (less than US$ 0.1 million) (2020: RMB 0.03 million; 2019: RMB 0.03 million) during the financial years ended December 31, 2019, 2020 and 2021 respectively. The transaction relates to consultancy fees charged by HLA. Entity with significant influence over the Group As of December 31, 2021, the Yulin City Government through Coomber Investment Ltd. owned 17.2% (2020: 17.2%) of the ordinary shares in the capital of the Company. 108 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 28. RELATED PARTY DISCLOSURES (cont’d) The following provides the significant transactions that have been entered into with related parties for the relevant financial year. 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Sales of engines and materials - associates and joint ventures - GY Group (including its subsidiaries and affiliates) Purchase of material, supplies and engines - associates and joint ventures - GY Group (including its subsidiaries and affiliates) Hospitality, restaurant, consultancy and other service income charged to - a joint venture - GY Group (including its subsidiaries and affiliates) Service charge charged by - joint ventures Rental income - joint ventures - GY Group (including its subsidiaries and affiliates) Property management service expenses - GY Group (including its subsidiaries and affiliates) Selling, general and administrative expenses - a joint venture - GY Group (including its subsidiaries and affiliates) - HLA (including its affiliates) Delivery, storage, distribution and handling expenses - GY Group (including its subsidiaries and affiliates) Payment for trademarks usage fee - GY Group Payment for lease liabilities - GY Group (including its subsidiaries and affiliates) Purchases of vehicles and machineries - GY Group (including its subsidiaries and affiliates) 912,877 1,792,280 1,256,268 2,637,845 393,440 3,223,785 1,999,831 1,895,239 2,792,707 1,245,030 2,036,675 1,307,137 3,984 15,350 3,918 6,765 2,152 6,609 – – 5,023 3,206 2,133 4,565 3,970 4,415 275 62,232 509,915 322,146 206,754 340 1,045 795 698 43 22,595 24,968 21,978 3,476 – 19,953 6,788 7,287 4,728 6,687 2,530 9,315 7,188 400 1,473 1,137 304,532 312,891 300,699 47,562 169,811 – – – 33,594 18,086 17,215 2,723 2,817 2,838 3,460 547 Note: (i) The Group has adopted IFRS 16 on January 1, 2019. These leasing expenses have been recognized as right-of-use assets and lease liabilities on the consolidated statement of financial position as of December 31, 2020 and 2021. 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. The transactions with related parties are made at terms agreed between the parties. ANNUAL REPORT 2021 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 28. RELATED PARTY DISCLOSURES (cont’d) Compensation of key management personnel of the Group 31.12.2019 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 RMB’000 Short-term employee benefits Contribution to defined contribution plans 41,606 362 41,968 43,178 292 43,470 25,289 273 25,562 4,000 43 4,043 The non-executive directors do not receive pension entitlements from the Group. 29. COMMITMENTS AND CONTINGENCIES Operating lease commitments – Group as lessee The Group has various lease contracts that have not yet commenced as of December 31, 2021. The future lease payments for these non-cancellable lease contracts are as follows: Within 1 year After 1 year but within 5 years After 5 years 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 321 1,628 71 2,020 2,769 2,178 – 4,947 438 345 – 783 The Group has entered into certain lease contracts in which the lease of these assets will be commencing in 2022. The Group has disclosed these as operating lease commitments as at year end. Capital commitments As of December 31, 2020 and 2021, the Group had capital expenditure (mainly in respect of property, plant and equipment) contracted for but not paid and not recognized amounting to RMB 450.0 million and RMB 425.2 million (US$ 67.3 million) respectively. The Group’s share of joint venture’s capital commitment is disclosed in Note 5. Investment commitments As of December 31, 2020 and 2021, the Group has commitment of RMB 17.6 million and RMB Nil (US$ Nil) relating to the Group’s interest in joint venture, respectively. Letter of credits As of December 31, 2020 and 2021, Yuchai had issued irrevocable letter of credits of RMB 54.4 million and RMB 31.7 million (US$ 5.0 million), respectively. 110 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 29. COMMITMENTS AND CONTINGENCIES (cont’d) Product liability The General Principles of the Civil Law of the People’s Republic of China 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 Ecology and Environment (formerly known as 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. 30. 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. 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. ANNUAL REPORT 2021 111 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30. SEGMENT INFORMATION (cont’d) Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Year ended December 31, 2019 Yuchai RMB’000 RMB’000 HLGE Corporate RMB’000 Eliminations/ adjustment RMB’000 Revenue Total external revenue (Note 6.1) Results Interest income Interest expense Impairment of property, plant and equipment Staff severance cost Depreciation and amortization Share of profit of associates and joint venture Income tax expense Segment profit after tax Total assets Total liabilities Other disclosures Investment in joint ventures Capital expenditure Revenue Total external revenue (Note 6.1) Results Interest income Interest expense Impairment of property, plant and equipment Staff severance cost Depreciation and amortization Share of profit of associates and joint venture Income tax expense Segment profit after tax Total assets Total liabilities Other disclosures Investment in joint ventures Capital expenditure Consolidated financial statements RMB’000 18,016,085 177,261 (126,851) (3,950) (15,454) (465,209) 19,034 (172,619) 860,700 23,854,191 (12,280,806) Consolidated financial statements RMB’000 20,581,170 166,970 (147,293) (3,920) (19,712) (494,607) (58,970) (192,538) 779,326 26,290,958 (14,458,248) 17,980,304 35,781 – 158,855 (126,379) (3,950) (15,454) (458,665) 5,167 (51) – – (5,551) 13,239 (421) – – (993) 18,137 (141,330) 884,562 22,817,479 (12,127,021) 897 (527) 4,457 416,397 (15,575) – (41) 1,939 2,120,767 (31,278) – – – – – – – (30,721)(1) (30,258)(1) (1,500,452) (106,932)(2) 271,274 917,192 2,717 1,033 – 55 – – 273,991 918,280 20,557,660 23,510 – 158,569 (147,161) (3,920) (19,712) (488,536) 3,538 (35) – – (5,181) 4,863 (97) – – (890) (59,476) (156,007) 829,042 25,330,625 (14,328,688) 506 (200) 1,052 392,096 (10,346) – (69) (17,127) 2,075,262 (15,797) – – – – – – – (36,262)(1) (33,641)(1) (1,507,025) (103,417)(2) 223,918 550,424 3,202 4,409 – 14 – – 227,120 554,847 Year ended December 31, 2020 Yuchai RMB’000 RMB’000 HLGE Corporate RMB’000 Eliminations/ adjustment RMB’000 112 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30. SEGMENT INFORMATION (cont’d) Year ended December 31, 2021 Revenue Total external revenue (Note 6.1) Results Interest income Interest expense Impairment of property, plant and equipment Staff severance cost Depreciation and amortization Share of profit of associates and joint venture Income tax expense Segment profit after tax Total assets Total liabilities Other disclosures Investment in joint ventures Capital expenditure Yuchai HLGE Corporate RMB’000 RMB’000 RMB’000 Eliminations/ adjustment RMB’000 Consolidated financial statements RMB’000 Consolidated financial statements US$’000 21,254,134 11,796 – 129,520 (111,747) 1,363 (19) 1,200 (26) (7,227) (11,771) – – – – (567,465) (5,221) (910) (96,658) (29,043) 443,499 24,092,883 (13,402,330) 763 (245) (6,728) 368,415 (10,322) – – (20,321) 2,146,060 (13,550) – – – – – – – (14,528)(1) (8,556)(1) (1,506,672) (59,140)(2) 21,265,930 3,363,691 132,083 (111,792) (7,227) (11,771) 20,892 (17,683) (1,143) (1,862) (573,596) (90,728) (95,895) (43,816) 407,894 25,100,686 (13,485,342) (15,168) (6,930) 64,517 3,970,244 (2,133,012) 147,106 474,562 3,989 4,310 – 19 – – 151,095 478,891 23,899 75,748 Note: (1) (2) This relates mainly to the deferred tax expense relating to withholding tax on dividends from Yuchai. This relates mainly to the deferred tax liabilities relating to cumulative withholding tax on dividends that are expected to be declared from income earned after December 31, 2007 by Yuchai. Geographic information The geographic information for revenue from external customers is disclosed in Note 6.1. Revenue from one customer group amounted to RMB 5,328.0 million (US$ 842.7 million) RMB 6,018.2 million; 2019: RMB 5,205.5 million), arising from sales by Yuchai segment. (2020: ANNUAL REPORT 2021 113 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30. SEGMENT INFORMATION (cont’d) Non-current assets People’s Republic of China Other countries 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 6,268,004 94,067 6,370,404 89,549 1,007,624 14,164 6,362,071 6,459,953 1,021,788 Non-current assets for this purpose consist of property, plant and equipment, right-of-use assets, investment in joint ventures and associates, investment property, intangible assets and goodwill. 31. 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 quoted equity securities. 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 or 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, quoted equity securities and derivative financial instrument. The sensitivity analyses in the following sections relate to the position as of December 31, 2020 and 2021. 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, 2021. The analyses exclude the impact of movements in market variables on provisions and on the non-financial assets and liabilities of foreign operations. 114 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31. 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 26. As certain interest 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 points increase or decrease is used and represents management’s assessment of the possible change in interest rates. If interest rate had been 50 (2020: 50) basis points higher or lower and all other variables were held constant, the profit before tax for the year ended December 31, 2021 of the Group would increase/decrease by RMB 15.4 million (US$ 2.4 million) (2020: increase/decrease by RMB 20.9 million). 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. ANNUAL REPORT 2021 115 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont’d) Foreign currency risk (cont’d) The Group’s exposures to foreign currency are as follows: 31.12.2020 Quoted equity securities Trade and other receivables Cash and bank balances Financial liabilities Trade and other payables Net assets/(liabilities) Quoted equity securities Trade and other receivables Cash and bank balances Financial liabilities Trade and other payables Net assets/(liabilities) US$’000 Foreign currency risk sensitivity Singapore Dollar Others RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 Euro US Dollar Renminbi 6,258 620 181,575 (1,462) (6,184) – 8,624 3,829 – (9,356) – 913 45,203 – (10,858) – 305 – – (2,464) – 372 15,086 – – 180,807 3,097 35,258 (2,159) 15,458 31.12.2021 Singapore Dollar Others RMB’000 RMB’000 RMB’000 RMB’000 Euro US Dollar 606 676 164,544 (1,428) (4,551) 159,847 25,283 – 8,806 2,535 – (8,997) 2,344 371 – 297 4,345 – (3,651) 991 157 – – 14,342 – (510) 13,832 2,188 A 10% strengthening of the following major currencies against the functional currency of each of the Group’s entities at the reporting date would increase/(decrease) profit before tax by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. Singapore Dollar Euro US Dollar Renminbi Profit before tax 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 18,081 310 3,526 (216) 15,985 234 99 – 2,528 37 16 – 116 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont’d) Equity price risk The Group has investment in Thakral Corporation Ltd “TCL” which is quoted equity securities. Equity price risk sensitivity A 10% increase/(decrease) in the underlying prices at the reporting date would increase/(decrease) Group’s profit before tax by the following amount: Statement of profit or loss Credit risk 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 626 61 10 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. An impairment analysis is performed at each reporting date using a provision matrix. The provision rates are determined based on days past due for groupings of various customer segments with similar loss patterns (i.e. by profiles of the customers). The calculation reflects the reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Generally, trade receivables are written-off at management’s discretion after assessment and are not subject to enforcement activity. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in Note 15. The Group’s share of bills receivables of a joint venture which was used as collateral as security is disclosed in Note 5. ANNUAL REPORT 2021 117 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont’d) Credit risk (cont’d) Trade receivables (cont’d) Set out below is the information about the credit risk exposure on the Group’s trade receivables using a provision matrix: Trade receivables Days past due As of December 31, 2020 Total Current 0 – 90 days 91-180 days 181-365 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 days >365 days RMB’000 Expected credit loss rate Estimated total gross carrying amount at default Expected credit loss 13.1% – 4.2% 4.9% 7.8% 72.8% 332,567 43,519 126,706 – 91,233 3,860 29,675 1,451 36,413 2,852 48,540 35,356 Trade receivables Days past due As of December 31, 2021 Total Current 0 – 90 days 91-180 days 181-365 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 days >365 days RMB’000 Expected credit loss rate Estimated total gross carrying amount at default Expected credit loss 6.0% – 0.6% 5.9% 13.2% 56.6% 557,767 33,210 279,402 – 154,494 916 37,756 2,234 43,084 5,707 43,031 24,355 At December 31, 2021, the Group had top 20 customers (2020: top 20 customers) that owed the Group more than RMB 398.5 million (US$ 63.0 million) (2020: RMB 125.5 million) and accounted for approximately 63.4% (2020: 37.7%) of trade receivables (excluding bills receivables) respectively. These customers are located in the PRC. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets mentioned in Note 15. The Group’s share of bills receivables of a joint venture which was used as collateral as security is disclosed in Note 5. Cash and fixed deposits are placed with banks and financial institutions which are regulated. 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. 118 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (cont’d) Liquidity risk (cont’d) The table below summarizes the maturity profile of the Group’s financial assets and liabilities based on contractual undiscounted payments. As of December 31, 2020 Financial assets Trade and bills receivables Other receivables, excluding tax recoverable Cash and bank balances Quoted equity securities Financial liabilities Loans and borrowings Trade and other payables (Note 22) Lease liabilities As of December 31, 2021 Financial assets Trade and bills receivables Other receivables, excluding tax recoverable Cash and bank balances Quoted equity securities Financial liabilities Loans and borrowings Trade and other payables (Note 22) Lease liabilities 1 year or less 2 to 5 years RMB’000 RMB’000 More than 5 years RMB’000 Total RMB’000 8,082,391 76,195 6,307,538 6,258 – – 140,000 – – – – – 8,082,391 76,195 6,447,538 6,258 14,472,382 140,000 – 14,612,382 1,753,142 10,025,069 24,313 524,275 191,563 22,761 – 2,277,417 – 10,216,632 47,399 325 11,802,524 738,599 325 12,541,448 1 year or less 2 to 5 years RMB’000 RMB’000 Total RMB’000 Total US$’000 6,961,657 140,835 5,221,555 606 – – 110,000 – 6,961,657 140,835 5,331,555 606 1,101,145 22,277 843,307 96 12,324,653 110,000 12,434,653 1,966,825 2,130,356 9,586,901 28,121 101,524 188,725 13,650 2,231,880 9,775,626 41,771 353,023 1,546,238 6,607 11,745,378 303,899 12,049,277 1,905,868 32. CAPITAL MANAGEMENT The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximizing the return to shareholders through the optimization of the debt and equity balance except where decisions are made to exit businesses or close companies. ANNUAL REPORT 2021 119 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 32. CAPITAL MANAGEMENT (cont’d) The capital structure of the Group consists of debts (which includes the borrowings, lease liabilities and trade and other payables, less cash and bank balances) and equity attributable to equity holders of the company (comprising issued capital and reserves). Loans and borrowings (current and non-current) (Note 26) Lease liabilities (current and non-current) (Note 25) Trade and other payables (current and non-current) (Note 22) Less: Cash and bank balances (Note 16) Net debts Equity attributable to equity holders of the company Total capital and net debts 31.12.2020 31.12.2021 31.12.2021 US$’000 RMB’000 RMB’000 2,230,000 39,778 10,302,531 (6,447,538) 2,203,000 40,531 9,827,840 (5,331,555) 348,454 6,410 1,554,497 (843,307) 6,124,771 9,014,624 6,739,816 8,859,152 1,066,054 1,401,277 15,139,395 15,598,968 2,467,331 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, 2020 and 2021. As disclosed in Note 20, 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, 2020 and 2021. 33. FAIR VALUE MEASUREMENT Quantitative disclosures fair value measurement hierarchy for assets and liabilities as of December 31, 2020: Date of valuation Fair value measurement using Quoted prices in active markets (Level 1) RMB’000 Significant observable inputs (Level 2) RMB’000 Total RMB’000 Assets measured at fair value Quoted equity securities: Quoted equity shares – TCL (Note 14) Debt instruments (ii): Bills receivable December 31, 2020 6,258 6,258 – December 31, 2020 7,793,343 – 7,793,343 120 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 33. FAIR VALUE MEASUREMENT (cont’d) Quantitative disclosures fair value measurement hierarchy for assets and liabilities as of December 31, 2021: Fair value measurement using Date of valuation Total Total US$’000 RMB’000 Quoted prices in active markets (Level 1) RMB’000 Significant observable inputs (Level 2) RMB’000 Assets measured at fair value Quoted equity securities: Quoted equity shares – TCL (Note 14) December 31, 2021 Debt financial assets (ii): Bills receivable December 31, 2021 96 606 606 – 528,110 3,338,816 – 3,338,816 Note: (i) (ii) 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. The fair values of the Group’s debt financial assets at fair value through OCI were measured using the discounted cash flows model. The model incorporates market observable input including the interest rate of similar instruments. There have been no transfers between Level 1 and Level 2 during 2021 and 2020. 34. FINANCIAL ASSETS AND FINANCIAL LIABILITIES As of December 31, 2020 Financial assets Quoted equity securities Trade and bills receivable Other receivables Cash and bank balances Financial liabilities Trade and other payables Lease liabilities Loans and borrowings Note 14 15 15 16 22 25 26 Financial assets at fair value through profit or loss Financial assets at amortized costs Fair Value through OCI RMB’000 RMB’000 RMB’000 Other financial liabilities at amortized cost RMB’000 Total RMB’000 6,258 – – – – 289,048 76,195 6,447,538 – 7,793,343 – – – – – – 6,258 8,082,391 76,195 6,447,538 6,258 6,812,781 7,793,343 – 14,612,382 – – – – – – – – – – – – 10,216,632 10,216,632 39,778 2,230,000 39,778 2,230,000 12,486,410 12,486,410 ANNUAL REPORT 2021 121 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 34. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (cont’d) As of December 31, 2021 Financial assets Quoted equity securities Trade and bills receivable Other receivables Cash and bank balances Financial liabilities Trade and other payables Lease liabilities Loans and borrowings Note 14 15 15 16 22 25 26 Financial assets at fair value through profit or loss Financial assets at amortized costs Fair Value through OCI RMB’000 RMB’000 RMB’000 Other financial liabilities at amortized cost RMB’000 Total Total RMB’000 US$’000 606 – – – 3,622,841 3,338,816 – – 140,835 – – 5,331,555 – – – – 606 96 6,961,657 1,101,145 22,277 843,307 140,835 5,331,555 606 9,095,231 3,338,816 – 12,434,653 1,966,825 – – – – – – – – – – – – 9,775,626 40,531 2,203,000 9,775,626 1,546,239 6,410 348,454 40,531 2,203,000 12,019,157 12,019,157 1,901,103 Quoted equity securities 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 investment in real estate and marketing and distributing brands in beauty, wellness and lifestyle categories. 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. Changes in liabilities arising from financing activities January 1, 2020 Cash flows Addition RMB’000 RMB’000 RMB’000 Accretion of interest Foreign exchange movement RMB’000 RMB’000 Translation reserve Others RMB’000 RMB’000 December 31, 2020 RMB’000 As of December 31, 2020 Loans and borrowings - current - non-current Lease liabilities - current - non-current Total liabilities from 2,055,046 – (326,280) 500,000 – – – – 1,228 – 6 – – – 1,730,000 500,000 28,633 31,374 (37,561) – 4,039 11,217 2,198 – – – 409 25,037 (531) (25,037) 22,755 17,023 financing activities 2,115,053 136,159 15,256 2,198 1,228 (116) – 2,269,778 122 CHINA YUCHAI INTERNATIONAL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 34. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (cont’d) Changes in liabilities arising from financing activities (cont’d) January 1, 2021 Cash flows Addition RMB’000 RMB’000 RMB’000 Accretion of interest RMB’000 Translation reserve Others RMB’000 RMB’000 December 31, 2021 RMB’000 December 31, 2021 US$’000 As of December 31, 2021 Loans and borrowings - current - non-current Lease liabilities - current - non-current Total liabilities from financing activities 1,730,000 500,000 (127,000) 100,000 – – – – – 500,000 – (500,000) 2,103,000 100,000 332,637 15,817 22,755 17,023 (24,940) – 1,270 22,701 1,819 – (54) 26,275 (26,275) (43) 27,125 13,406 4,290 2,120 2,269,778 (51,940) 23,971 1,819 (97) – 2,243,531 354,864 The ‘Others’ column includes the effect of reclassification of non-current portion of loans and borrowings, including obligations under finance leases and lease liabilities due to the passage of time. 35. SUBSEQUENT EVENT Incorporation of Beijing Yuchai Xingshunda New Energy Technology Co., Ltd. On March 15, 2022, the Group announced that a 65-35 partnership company, Beijing Yuchai Xingshunda New Energy Technology Co., Ltd. was incorporated with registered capital of RMB 10.0 million (US$ 1.6 million). This was further to the Company’s announcement made on October 20, 2021 that the Group had entered into a cooperation agreement with Beijing Xing Shun Da Bus Co., Ltd., to combine the resources of both partners to accelerate the development, manufacturing and sale of fuel cell powertrain systems as well as core fuel cell power system components for the Beijing, Tianjin and Hebei markets. REFERENCE INFORMATION US TRANSFER AGENT AND REGISTRAR Computershare PO BOX 505000 Louisville, KY 40233-5000 1-800 522 6645 in US 201-680-6578 outside US SHAREHOLDER WEBSITE www.computershare.com/investor INVESTOR RELATIONS BlueFocus Communication Group of America c/o Awaken Advisors 110 East 59th Street Suite 3200 New York, NY 10022 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 Designed and typeset by Donnelley Financial Solutions Website: www.cyilimited.com 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 

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