Certified Financial Statements : Notes to the Financial Statements

The Land Registry Trading Fund Hong Kong

Certified Financial Statements
Notes to the Financial Statements

(Amounts expressed in thousands of Hong Kong dollars unless otherwise stated)

General

The Land Registry Trading Fund ("LRTF") 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.

Significant accounting policies

2.1

Statement of compliance

These financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong and all applicable Hong Kong Financial Reporting Standards ("HKFRSs"), a collective term which includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards ("HKASs") and Interpretations issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA"). A summary of the significant accounting policies adopted by the LRTF is set out below.

2.2

Basis of preparation of the financial statements

The measurement basis used in the preparation of the financial statements is historical cost.

The preparation of financial statements in conformity with HKFRSs requires the management of LRTF to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

There are no critical accounting judgements involved in the application of the LRTF's accounting policies. There are also no key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next year.

2.3

Financial assets and financial liabilities

2.3.1

Initial recognition

The LRTF classifies its financial assets and financial liabilities into different categories at inception, depending on the purpose for which the assets were acquired or the liabilities were incurred. The categories are: loans and receivables, held-to-maturity securities and other financial liabilities.

Financial assets and financial liabilities are measured initially at fair value, which normally equals to the transaction prices, plus transaction costs for loans and receivables, held-to-maturity securities and other financial liabilities that are directly attributable to the acquisition of the financial asset or issue of the financial liability.

The LRTF recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial assets are accounted for at settlement date.

2.3.2

Categorisation

2.3.2.1	Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and which the LRTF has no intention of trading. This category includes debtors, amounts due from related parties, bank deposits, and cash and bank balances. Loans and receivables are carried at amortised cost using the effective interest method less impairment losses, if any (note 2.3.4).
2.3.2.2	Held-to-maturity securities Held-to-maturity securities are non-derivative financial assets with fixed or determinable payments and fixed maturity which the LRTF has the positive intention and ability to hold to maturity, other than those that meet the definition of loans and receivables. Held-to-maturity securities are carried at amortised cost using the effective interest method less impairment losses, if any (note 2.3.4).
2.3.2.3	Other financial liabilities Other financial liabilities are carried at amortised cost using the effective interest method.

2.3.3

Derecognition

A financial asset is derecognised when the contractual rights to receive the cash flows from the financial asset expire, or where the financial asset together with substantially all the risks and rewards of ownership have been transferred.

A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expires.

2.3.4

Impairment of financial assets

The carrying amount of loans and receivables and held-to-maturity securities are reviewed at the end of each reporting period to determine whether there is objective evidence of impairment. If any impairment evidence exists, a loss is recognised in the statement of comprehensive income as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the asset's original effective interest rate. If in a subsequent period, the amount of such impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through the statement of comprehensive income.

2.4

Property, plant and equipment

Property, plant and equipment appropriated to the LRTF on 1 August 1993 were measured initially at deemed cost equal to the value contained in the Legislative Council Resolution for the setting up of the LRTF. Property, plant and equipment acquired since 1 August 1993 are capitalised at their costs of acquisition.

The following property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses (note 2.6):

-	buildings held for own use appropriated to the LRTF on 1 August 1993; and
-	plant and equipment, including computer equipment, furniture and fittings and other equipment.

Depreciation is calculated to write off the cost of property, plant and equipment, less their estimated residual value, on a straight-line basis over their estimated useful lives as follows:

-	Buildings	30 years
-	Plant and equipment	5 years

The land on which the LRTF's buildings are situated as appropriated to the LRTF on 1 August 1993 is regarded as a non-depreciating asset.

Gains or losses arising from the disposal of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognised in the statement of comprehensive income at the date of disposal.

2.5

Intangible assets

Intangible assets include acquired computer software licences and capitalised development costs of computer software programmes. Expenditure on development of computer software programmes is capitalised if the programmes are technically feasible and the LRTF has sufficient resources and the intention to complete development. The expenditure capitalised includes direct labour and cost of materials. Intangible assets are stated at cost less accumulated amortisation and any impairment losses (note 2.6).

Amortisation of intangible assets is charged to the statement of comprehensive income on a straight-line basis over the assets' estimated useful lives of 5 years.

2.6

Impairment of fixed assets

The carrying amounts of fixed assets, including property, plant and equipment and intangible assets, are reviewed at the end of each reporting period to identify any indication of impairment. If there is an indication of impairment, an impairment loss is recognised in the statement of comprehensive income whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its fair value less costs to sell and value in use.

2.7

Cash equivalents

Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition.

2.8

Employee benefits

Salaries and annual leave are accrued and recognised as expenditure 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 Hong Kong SAR Government") are charged to the LRTF and charged as expenditure in the year in which the associated services are rendered.

2.9

Income tax

(i)	The Government requires the LRTF to pay a notional profits tax calculated on the basis of the provisions of the Inland Revenue Ordinance (Cap. 112). Tax expense for the year comprises current tax and movements in deferred tax assets and liabilities.
(ii)	Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, 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 recognised is measured 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 end of the reporting period. Deferred tax assets and liabilities are not discounted. The carrying amount of a deferred tax asset is reviewed at the end of each reporting period 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 reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.

2.10

Revenue recognition

Revenue is recognised as services are provided. Interest income is recognised as it accrues using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the LRTF estimates cash flows considering all contractual terms of the financial instruments but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

2.11

Foreign currency translation

Foreign currency transactions during the year are translated into Hong Kong dollars at the exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into Hong Kong dollars at the exchange rates ruling at the end of the reporting period. Exchange gains and losses are recognised in the statement of comprehensive income.

2.12

Related parties

The LRTF is a separate accounting entity within the Government established under the Trading Funds Ordinance. During the year, the LRTF 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 Hong Kong SAR Government, in the ordinary course of its business.

2.13

Impact of new and revised HKFRSs

The HKICPA has issued a number of new and revised HKFRSs which are effective for the current accounting period. There have been no changes to the accounting policies applied in these financial statements for the years presented as a result of these developments. However, as a result of adopting HKAS 1 (Revised), Presentation of Financial Statements, there are changes to the presentation of these financial statements.

HKAS 1 (Revised) introduces the statement of comprehensive income and presents all items of recognised income and expense, either in one single statement, or in two linked statements. The LRTF has elected to present one statement. The standard also introduces title changes from "Balance Sheet" to "Statement of Financial Position" and from "Cash Flow Statement" to "Statement of Cash Flows".

The LRTF has not applied any new standard that is not yet effective for the current accounting period (note 22).

Turnover

	2010	2009
Registration of documents	266,858	223,643
Search	92,068	73,351
Copying	83,220	68,114
Reports on title	47,583	47,970
Owners incorporation	10,175	7,110
Others	5,857	5,323

Total	505,761	425,511

Operating costs

	2010	2009
Staff costs	237,567	234,563
General operating expenses	18,959	20,996
Computer service charges	29,655	23,942
Rental and management charges	15,404	15,471
Central administrative overheads	2,362	2,520
Depreciation and amortisation	33,362	42,818
Audit fees	463	470
Total	337,772	340,780

Other income

	2010	2009
Bank deposits interest	4,413	17,313
Held-to-maturity securities interest	5,273	5,267
Net exchange gain/(loss)	172	(397)
Total	9,858	22,183

Taxation

(i)

Taxation charged to the statement of comprehensive income represents:

	2010	2009
Current tax
Provision for notional profits tax for the year	28,800	17,913

Deferred tax
Origination and reversal of temporary differences	(662)	(3,607)
Reduction in opening deferred taxes resulting from reduction in tax rate	-	(908)

Total tax expense	28,138	13,398

(ii)

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

	2010	2009
Profit before tax	177,847	106,914

Tax at Hong Kong profits tax rate of 16.5% (2009: 16.5%)	29,345	17,641
Reduction in opening deferred taxes resulting from reduction in tax rate	-	(908)

Tax effect of non-taxable revenue	(1,207)	(3,335)
Actual tax expense	28,138	13,398

Rate of return on fixed assets

The rate of return on fixed assets is calculated as total comprehensive income (excluding interest income and interest expenses) divided by average net fixed assets, and expressed as a percentage. Fixed assets include property, plant and equipment and intangible assets. The LRTF is expected to meet a target rate of return on fixed assets of 8.3% per year as determined by the Financial Secretary.

Property, plant and equipment

	Land and Buildings	Computer Equipment	Equipment, Furniture and Fittings	Total
Cost
At 1 April 2008	350,000	112,975	14,758	477,733
Additions	-	1,180	1,795	2,975

At 31 March 2009	350,000	114,155	16,553	480,708
At 1 April 2009	350,000	114,155	16,553	480,708
Additions	-	8,642	2,922	11,564
At 31 March 2010	350,000	122,797	19,475	492,272
Accumulated depreciation
At 1 April 2008	56,482	73,284	10,956	140,722
Charge for the year	3,851	21,100	1,879	26,830
At 31 March 2009	60,333	94,384	12,835	167,552
At 1 April 2009	60,333	94,384	12,835	167,552
Charge for the year	3,851	15,972	2,143	21,966
At 31 March 2010	64,184	110,356	14,978	189,518
Net book value
At 31 March 2010	285,816	12,441	4,497	302,754
At 31 March 2009	289,667	19,771	3,718	313,156

Intangible assets

	Computer software licences and system development costs
	2010	2009
Cost
At beginning of year	153,898	140,006
Additions	13,889	13,892
At end of year	167,787	153,898
Accumulated amortisation
At beginning of year	100,127	84,139
Charge for the year	11,396	15,988

At end of year	111,523	100,127

Net book value
At end of year	56,264	53,771

10.

Held-to-maturity securities

	2010	2009
At amortised cost
Listed:
- in Hong Kong	55,209	55,057
- outside Hong Kong	15,042	14,991
	70,251	70,048
Unlisted	30,282	30,034
Total	100,533	100,082

11.

Deferred revenue

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

	2010	2009
Search tickets	369	369
Subscription fees/other service charges	13,404	9,850
Balance at end of year	13,773	10,219

12.

Customers' deposits

	2010	2009
Online services subscribers	24,772	24,601
Government departments	984	984

Balance at end of year	25,756	25,585

13.

Deferred tax

Major components of deferred tax recognised in the statement of financial position and the movements during the year are as follows:

	Depreciation allowances in excess of the related depreciation and amortisation	Other temporary differences	Total
Balance at 1 April 2008	15,951	(63)	15,888
Credited to statement of comprehensive income	(4,506)	(9)	(4,515)
Balance at 31 March 2009	11,445	(72)	11,373

Balance at 1 April 2009	11,445	(72)	11,373
Credited to statement of comprehensive income	(656)	(6)	(662)
Balance at 31 March 2010	10,789	(78)	10,711

14.

Trading fund capital

This represents the Government's investment in the LRTF.

15.

Retained earnings

	2010	2009
Balance at beginning of year	586,094	639,337
Total comprehensive income for the year	149,709	93,516
Proposed dividend	(74,854)	(146,759)

Balance at end of year	660,949	586,094

16.

Proposed dividend

A dividend of $74.854 million (2009: $146.759 million), based on 50% of the total comprehensive income (2009: plus an additional amount of $100 million), is proposed for the year ended 31 March 2010.

17.

Cash and cash equivalents

	2010	2009
Cash and bank balances	221,414	19,169
Bank deposits (cash equivalents portion)	150,000	-

Cash and cash equivalents at end of year	371,414	19,169

18.

Related party transactions

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

(i)	Services provided to related parties included registration of land documents, search of land registers and records, supply of copies of land records and reports on title. The total revenue derived from these services amounted to $88 million (2009: $85 million). This amount is included in turnover under note 3.
(ii)	Services received from related parties included computer services, accommodation, central administration and auditing. The total cost incurred on these services amounted to $25 million (2009: $21 million). This amount is included in operating costs under note 4.
(iii)	Acquisition of fixed assets from related parties included fitting out projects. The total cost of these assets amounted to $3 million (2009: $2 million).

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.

19.

Financial risk management

(i)

Investment policy

The LRTF maintains a conservative approach on investments in financial assets including debt securities and bank deposits. Investment decisions are made according to the guidelines from the Secretary for Financial Services and the Treasury, Hong Kong Monetary Authority and other relevant regulations. Invested debt securities are issued by the Hong Kong SAR Government or quasi-government bodies in Hong Kong with sound credit ratings and are in general held to maturity.

(ii)

Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.

The LRTF does not have significant concentrations of credit risk. The maximum exposure to credit risk at the end of the reporting period without taking account of any collateral held or other credit enhancements is shown below:

	2010	2009
Held-to-maturity securities	100,533	100,082
Debtors	11,126	10,092
Amounts due from related parties	8,804	9,773
Bank deposits	307,000	471,000
Bank balances	221,371	19,123

Total	648,834	610,070

To minimise credit risks, all fixed deposits are placed with licenced banks in Hong Kong.

The LRTF's credit risk is primarily attributable to debtors and investments in debt securities. The LRTF has a credit policy in place and the exposure to these credit risks is monitored on an ongoing basis.

In respect of debtors, deposits are required from our online services subscribers.

For investments in debt securities, only those classified under the investment grade by Moody's or Standard & Poor's are considered. At the end of the reporting period, the credit quality of investments in debt securities, analysed by the lower of ratings designated by Moody's or Standard & Poor's, is as follows:

	2010	2009
Held-to-maturity securities by credit rating
Aa1 to Aa3/AA+ to AA-	100,533	100,082

(iii)

Liquidity risk

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

Under the Trading Funds Ordinance, the LRTF is responsible for its own cash management, including short-term and long-term investment of cash surpluses, subject to approval by the Secretary for Financial Services and the Treasury. The LRTF's policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash to meet its liquidity requirements in the short and longer term. As the LRTF has a strong liquidity position, it has a very low level of liquidity risk.

(iv)

Interest rate risk

Interest rate risk refers to the risk of loss arising from changes in market interest rates. This can be further classified into fair value interest rate risk and cash flow interest rate risk.

Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. Since the LRTF's held-to-maturity securities and bank deposits bear interest at fixed rates, their fair values will fall when market interest rates increase. However, as all the held-to-maturity securities and bank deposits are stated at amortised cost, changes in market interest rates will not affect their carrying amounts and the LRTF's profit and reserves.

Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The LRTF is not exposed to material cash flow interest rate risk because it has no major financial instruments bearing interest at a floating rate.

The table below sets out the LRTF's exposure to interest rate risk, based on the major interest bearing assets stated at carrying amounts at the end of the reporting period and categorised by maturity dates.

	3 months or less	More than 3 months but not more than 1 year	More than 1 year but not more than 5 years	More than 5 years but not more than 10 years	Total
2010
Held-to-maturity securities	-	-	100,533	-	100,533
Bank deposits	257,000	50,000	-	-	307,000
Total	257,000	50,000	100,533	-	407,533
2009
Held-to-maturity securities	-	-	45,026	55,056	100,082
Bank deposits	291,000	180,000	-	-	471,000
Total	291,000	180,000	45,026	55,056	571,082

(v)

Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

The LRTF's normal business transactions are denominated in Hong Kong dollars and therefore do not give rise to currency risk.

In respect of investments denominated in United States dollars, owing to the linked exchange rate of the Hong Kong dollar to the United States dollar, the LRTF has a very low level of currency risk.

At the end of the reporting period, financial assets totalling $101 million (2009: $101 million) were denominated in United States dollars. The remaining financial assets and all financial liabilities were denominated in Hong Kong dollars.

(vi)

Fair values

The fair value of financial instruments traded in active markets is based on quoted market prices at the end of the reporting period. In the absence of such quoted market prices, fair values are estimated using present value or other valuation techniques, using inputs based on market conditions existing at the end of the reporting period.

The fair values of held-to-maturity securities at the end of the reporting period were as follows:

Carrying value

Fair value

2010

2009

2010

2009

Held-to-maturity securities

100,533

100,082

109,593

107,421

All other financial instruments are stated in the statement of financial position at amounts equal to or not materially different from their fair values.

20.

Capital commitments

At 31 March 2010, the LRTF had capital commitments, so far as not provided for in the financial statements, as follows:

	2010	2009
Authorised and contracted for	51,234	8,019
Authorised but not yet contracted for	167,507	229,510
Total	218,741	237,529

21.

Operating lease commitments

At 31 March 2010, the total future minimum lease payments under non-cancellable operating leases for land and buildings were payable as follows:

	2010	2009
Not later than one year	3,531	2,569
Later than one year and not later than five years	4,051	-

Total	7,582	2,569

22.

Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended 31 March 2010

Up to the date of issue of these financial statements, the HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended 31 March 2010 and which have not been early adopted in these financial statements.

The LRTF is in the process of making an assessment of what the impact of these amendments, new standards and interpretations is expected to be in the period of initial adoption. So far it has concluded that the adoption of them is unlikely to have a significant impact on the LRTF's results of operations and financial position.

The following developments may result in new or amended disclosures in future financial statements:

	Effective for accounting periods beginning on or after
HKAS 24 (Revised), Related Party Disclosures	1 January 2011
HKFRS 9, Financial Instruments	1 January 2013

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