NOTES ON THE ACCOUNTS

For the year ended 31 March 2004

Expressed in HK$ ' 000

1.

Status of the Land Registry Trading Fund

The Land Registry Trading Fund was established on 1 August 1993 under the Legislative Council Resolution passed on 30 June 1993 pursuant to sections 3, 4 and 6 of the Trading Funds Ordinance (Cap. 430). The Land Registry administers a land registration system by maintaining an up-to-date Land Register and provides its customers with services and facilities for searches of the Land Register and related land records. The Land Registry also processes applications for the incorporation of owners.

(a)

Basis of accounting

The accounts have been prepared in accordance with accounting principles generally accepted in Hong Kong.

(b)

Fixed assets

(i)

Fixed assets appropriated to the Land Registry Trading Fund on 1 August 1993 are stated at the value contained in the Legislative Council Resolution for the setting up of the Land Registry Trading Fund. Fixed assets acquired since 1  August 1993 and costing more than $100,000 on an individual basis are stated at their costs of acquisition.

(ii)

For capital projects under development, the costs include the actual direct expenditure and staff costs for planning, design and supervision during the development period.

(c)

Depreciation and amortisation

Depreciation

(i)

Depreciation is provided on a straight-line basis calculated to write off the cost of assets less residual value over their estimated useful lives. The annual rates of depreciation used are :

Buildings

3.3%

Computer systems

20%

Equipment, furniture and fittings

10% - 20%

Office car

20%

(ii)

Land is regarded as a non-depreciating asset.

Amortisation

Capital projects are amortised over a period of five years. Full year amortisation is charged if a project starts commissioning on or before 30 September of the year, while half-year amortisation is charged for a project commissioned after 30 September.

(d)

Income Tax

(i)

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Income tax is recognised in the profit and loss account except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

(ii)

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

(iii)

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

All deferred tax liabilities, and all deferred tax assets, to the extent that it is probable that future taxable profits will be available against which the assets can be utilised, are recognised.

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at the balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the related tax benefit to be utilised. Any such deduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.

(iv)

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities if, and only if, the Land Registry Trading Fund has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met :

- in the case of current tax assets and liabilities, the Land
Registry Trading Fund intends to settle them on a net basis; or

- in the case of deferred tax assets and liabilities, if they
relate to income taxes levied by the same taxation authority.

(e)

Revenue recognition

Revenue is recognised as services are provided. Interest income is recognised on an accrual basis.

(f)

Employee benefits

Salaries and annual leave are accrued and recognized as an expense in the year in which the associated services are rendered by the staff. Staff oncosts including pensions, housing and non-monetary benefits provided to the staff by the Government of the Hong Kong Special Administrative Region (the Government) are charged to the Land Registry Trading Fund and recognized as an expense in the year in which the associated services are rendered.

(g)

Related parties

The Land Registry Trading Fund is a separate accounting entity within the Government established under the Trading Funds Ordinance (Cap. 430). During the year, the Land Registry Trading Fund has entered into transactions with various related parties, including government bureaux and departments, trading funds and financially autonomous bodies controlled or significantly influenced by the Government, in the ordinary course of its business.

(h)

Cash equivalents

Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, with a maturity of three months or less from the date of acquisition.

2004

2003

Registration of documents

181,402

180,606

Search

72,005

66,719

Copying

53,173

52,306

Reports on title

45,013

56,978

Owners incorporation

6,296

7,490

Others

4,427

3,865

362,316

367,964

2004

2003

Staff costs

202,105

207,494

General operating expenses

19,332

23,211

Computer service charges

16,372

19,195

Rental and management charges

20,682

22,750

Central administrative overheads

1,546

1,578

Depreciation and amortisation

10,420

11,228

Audit fees

396

373

270,853

285,829

2004

2003

Rental income from the Government

-

548

Bank deposits interest

4,037

7,847

4,037

8,395

2004

2003

Interest on Government loans

395

1,606

(i)

In March 2003, the Government announced an increase in the Hong Kong profits tax rate from 16% to 17.5% for the fiscal year 2003/04. Notional profits tax is provided at 17.5% (2003 : 16%) of the estimated assessable profits for the year. A payment in lieu of profits tax calculated on the basis of the provisions of the Inland Revenue Ordinance (Cap. 112) will be made to the Government. The amount of taxation charged/(credited) to the profit and loss account represents :

2004

2003

Current Tax

Notional profits tax

8,957

5,490

Over-provision in previous year
(see note 7(ii))

(10,309)

-

(1,352)

5,490

Deferred Tax

Origination and reversal of
temporary differences

6,913

8,069

Total income tax expense

5,561

13,559

(ii)

The provision for untaken leave liability (i.e. the estimated liability for annual leave earned but untaken by the employees) recognised in the accounts in provision for employee benefits in accordance with the Statement of Standard Accounting Practice (SSAP) 34 "Employee Benefits" since 2002-03 had previously been ruled by the Commissioner of Inland Revenue (CIR) as a non-deductible expense for tax purpose.

After seeking legal advice, CIR advised in August 2004 that the provision for untaken leave liability (for the current year and for the one-off adjustment for prior years effected in the first year when adopting SSAP 34) would be allowed as a deductible expense for tax purpose.

As a result, adjustments have been made in respect of profits tax previously over provided.

(iii)

Reconciliation between tax expense and accounting profit at applicable tax rates :

2004

2003

Profit before tax

95,105

88,924

Notional tax on profit before tax

16,643

14,227

Over-provision in previous year
(see note 7(ii))

(10,309)

-

Recognition of a previously
unrecognised deferred tax asset

(66)

-

Tax effect of non-deductible expenses

-

(353)

Tax effect of non-taxable revenue

(707)

(1,255)

Effect on opening deferred tax balances
resulting from an increase in tax rate

-

940

Actual tax expense

5,561

13,559

A dividend of $ 44.772 million being 50% of the profit after tax is proposed for the year ended 31 March 2004 (2003 : $ 37.682 million).

This is calculated as a percentage of operating profit and interest income after taxation to Average Net Fixed Assets (ANFA). The Land Registry Trading Fund is expected to meet a target return of 10% per annum on ANFA as determined by the Financial Secretary.

Land

Equipment,

Set-

and

Computer

Furniture

Office

up

Buildings

and Fittings

Car

Costs

Total

Cost or
Valuation

At 1 April 2003

350,000

426,166

23,059

192

3,800

803,217

Additions

-

40,110

190

-

-

40,300

Disposal

-

-

(8,146)

(192)

-

(8,338)

At 31 March
2004

350,000

466,276

15,103

-

3,800

835,179

Aggregate
Depreciation/
Amortisation

At 1 April 2003

37,227

346,640

22,744

143

3,800

410,554

Charge for
the year

3,851

6,194

350

25

-

10,420

Disposal

-

-

(8,146)

(168)

-

(8,314)

At 31 March
2004

41,078

352,834

14,948

-

3,800

412,660

Net Book
Value

At 31 March
2004

308,922

113,442

155

-

-

422,519

At 31 March
2003

312,773

79,526

315

49

-

392,663

This represents outstanding search tickets and subscription fees/other service charges received in advance of which services have not yet been rendered.

2004

2003

Search tickets

700

665

Subscription fees/other service charges

1,020

1,155

Balance at 31 March

1,720

1,820

2004

2003

Government loan repayable within
one year at 31 March

Set-up loan

-

23,660

A set-up loan of $236.6 million from the Capital Investment Fund was made in accordance with the resolution passed by the Legislative Council on 30 June 1993 to finance part of initial assets valued at $354.9 million appropriated to the Land Registry Trading Fund effective from 1 August 1993. The loan is repayable in ten equal annual instalments of $23.66 million starting from 1 August 1994. The last instalment had already been paid on 1 August 2003.

Interests for the loan is paid on the amount outstanding at the average of the best lending rates quoted by the continuing members of the Committee of the Hong Kong Association of Banks.

2004

2003

Direct Access Services customers

20,115

20,261

Government departments

1,156

1,152

Balance at 31 March

21,271

21,413

Major components of deferred tax recognised in the balance sheet and the movements during the year are as follows :

Depreciation allowances in excess of the related depreciation

Other temporary differences

Total

Balance at
1 April 2003

10,966

-

10,966

Charged/(credited) to
profit and loss account

7,020

(107)

6,913

Balance at
31  March 2004

17,986

(107)

17,879

Balance at
1 April 2002

2,897

-

2,897

Charged/(credited) to
profit and loss account

8,069

-

8,069

Balance at
31  March 2003

10,966

-

10,966

This represents the Government's investment in the Land Registry Trading Fund .

2004

2003

Balance at 1 April

118,300

118,300

Addition

-

-

Balance at 31 March

118,300

118,300

2004

2003

Balance at 1 April, as  previously reported

508,989

537,827

Change in accounting policy in
respect of employee benefits

-

(66,521)

Balance at 1 April, as  restated

508,989

471,306

Profit for the year

89,544

75,365

Proposed dividend

(44,772)

(37,682)

Balance at 31 March

553,761

508,989

2004

2003

Cash and bank balances

3,925

1,722

Placements with banks
(cash equivalents portion)

-

650

3,925

2,372

Apart from those separately disclosed in the accounts, the other material related party transactions for the year are summarised as follows :

Charging for services rendered to or received from related parties was on the same basis, that is, at the rates payable by the general public for services which were also available to the public or on a full cost recovery basis for services which were available only to related parties.

At 31 March 2004, the Land Registry Trading Fund had capital commitments, so far as not provided for in the financial statements, as follows :

2004

2003

Contracted for

91,000

105,600

Authorised but not contracted for

37,300

71,700

128,300

177,300

At 31 March 2004, the total future minimum lease payments under operating leases of the Land Registry Trading Fund are payable as follows :

2004

2003

Land and Buildings

Operating leases which expire :

within one year

5,867

5,952

in the second to fifth years inclusive

9,897

2,776

15,764

8,728

The revised Statement of Standard Accounting Practice (SSAP) 12, Income Taxes, which was issued by the Hong Kong Institute of Certified Public Accountants (previously known as the Hong Kong Society of Accountants), sets out a revised method for the recognition of and accounting for deferred tax and additional disclosure requirements for income tax and deferred tax. SSAP 12 (revised) is applicable to financial statements relating to periods beginning on or after 1 January 2003. The Land Registry Trading Fund has adopted the provisions of SSAP 12 (revised) in preparing the financial statements for the year.

In prior years, deferred tax liabilities were provided under the liability method in respect of all material timing differences attributable to accelerated depreciation allowances on fixed assets except where it was considered that no liability would crystallise in the foreseeable future. Deferred tax assets were not recognised unless the realisation was assured beyond reasonable doubt.

In order to comply with the revised SSAP 12, the Land Registry Trading Fund adopted a new policy for deferred tax as set out in note 2(d). As a result of the adoption of this accounting policy, no material adjustment is required.