15. Significant accounting policies and notes on accounts
15.1. Significant accounting policies
15.1.1. Accounting year
The accounting year of the Company is from January 1 to December 31.
15.1.2. Basis of preparation and measurement
The financial statements of the Company have been prepared on an accrual basis. Unless otherwise stated, the measurement basis used is historical cost.
15.1.3. Reporting currency
The Company’s reporting currency is the Renminbi.
15.1.4. Previous period figures
The previous period’s figures disclosed in these financial statements have been regrouped / reclassified wherever necessary.
15.1.5. Foreign currency transactions
Foreign currency transactions during the period are translated into Renminbi at the exchange rates quoted by the People’s Bank of China at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into Renminbi at the exchange rates quoted by the People’s Bank of China ruling at the Balance Sheet date. Exchange gains and losses on foreign currency translation are dealt with in the income statement.
Exchange differences which arise during the start-up period are aggregated in the long-term deferred expenses and are then fully charged to the income statement in the month of commencement of operations.
15.1.6. Cash and cash equivalents
Cash comprise cash and cash on deposits with bank.
15.1.7. Provision for bad and doubtful debts
The Company evaluates the accounts receivables periodically for collectability. The need for provisions is assessed based on various factors including the collectability of specific account receivable, risk perceptions of the industry in which the customer operates, and general economic factors, which could affect a customer’s ability to settle. The Company also provides for all receivables pending for greater than 180 days.
Provision for other receivables is determined based on their specific nature and management’s estimate of their collectability.
15.1.8. Fixed assets
Fixed assets are assets with comparatively high unit values held by the Company for use in the supply of services and for administrative purposes. They are expected to be used for more than one year.
Fixed assets are stated in the Balance Sheet at cost less accumulated depreciation and impairment losses. Construction in progress is stated in the Balance Sheet at cost less impairment losses.
All direct and indirect costs that are related to the construction of fixed assets and incurred before the assets are ready for their intended use are capitalized as construction in progress.
Construction in progress is transferred to fixed assets when it is ready for its intended use. No depreciation is provided against construction in progress.
Fixed assets are depreciated using the straight-line method over their estimated useful lives. The respective estimated useful lives and the estimated rate of residual values on cost adopted for the Company’s fixed assets are as follows :
Estimated |
Estimated rate of |
|
Leasehold improvement |
5 years |
0% |
Computer equipment |
2 years |
0% |
Furniture and fixtures |
5 years |
0% |
Plant and machinery |
5 years |
0% |
Vehicles |
5 years |
0% |
15.1.9. Operating lease charges
Rental payments under operating leases are charged as expenses on a straight-line basis over the lease term.
15.1.10. Provision for impairment
The carrying amounts of assets are reviewed regularly at each Balance Sheet date to determine whether their recoverable amounts have declined below their carrying amounts. Assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. The amount by which the carrying amount is reduced is the impairment loss.
The recoverable amount is the greater of the net selling price and the present value of the estimated future cash flows arising from the continuous use of the asset and from the disposal of the asset at the end of its useful life.
Provision for impairment loss is calculated on an item by item basis and recognized as an expense in the income statement.
15.1.11. Income taxes
Income tax is recognized when payable under the tax payable method. Income tax for the period is provided at the applicable tax rate on taxable income.
15.1.12. Provisions and contingent liabilities
Provisions are recognized when the Company has a present obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligations and a reliable estimate can be made.
Where it is not probable that the settlement of the above obligation will cause an outflow of economic benefits, or the amount of the outflow cannot be estimated reliably, the obligation is disclosed as a contingent liability.
15.1.13. Revenue recognition
When it is probable that the economic benefits will flow to the Company and costs can be measured reliably, revenue is recognized in the income statement according to the following methods :
15.1.13.a. Rendering of services
Revenue from software development on fixed-price, fixed-timeframe contracts is recognized as per the proportionate-completion method based on services performed to date as a percentage of the total services to be performed. On time-and-material contracts, revenue is recognized as the related services are rendered. Annual Technical Services revenue and revenue from fixed-price maintenance contracts are recognized proportionately over the period in which services are rendered.
15.1.13.b. Interest income
Interest income is recognized on a time proportion basis according to the principal outstanding and the applicable rate.
15.1.14. Research and development costs
Research and development costs are recognized in the income statement in the period in which they are incurred.
15.1.15. Repair and maintenance expenses
Repair and maintenance expenses (including major overhaul expenses) are recognized in the income statement when incurred.
15.1.16. Retirement benefits
Pursuant to the relevant laws and regulations in the Premature Retirement Compensation (PRC), the Company has joined a defined contribution retirement plan for the eligible employees arranged by a governmental organization. The Company contributes to the retirement scheme at the applicable rate(s) based on the employees’ salaries. The required contributions under the retirement plans are charged to the income statement when they are due.
15.1.17. Related parties
If the Company has the power, directly or indirectly, to control, jointly control or exercise significant influence over another party, or vice versa, or where the Company and one or more parties are subject to common control from another party, they are considered to be related parties. Related parties may be individuals or enterprises.
15.1.18. Compensated absences
The employees of the Company are entitled to compensated absences which are both accumulating and non-accumulating in nature. The expected cost of accumulating compensated absences is determined by actuarial valuation based on the additional amount expected to be paid as a result of the unused entitlement that has accumulated at the Balance Sheet date. Expense on non-accumulating compensated absences is recognized in the period in which the absences occur.
15.1.19. Use of estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported balances of assets and liabilities and disclosures relating to contingent liabilities as at the date of the financial statements and reported amounts of income and expenses during the period. Examples of such estimates include computation of percentage of completion which requires the Company to estimate the efforts expended to date as a proportion of the total efforts to be expended, provisions for doubtful debts, future obligations under employee retirement benefit plans, income taxes, post-sales customer support and the useful lives of fixed assets and intangible assets.
Accounting estimates could change from period to period. Actual results could differ from those estimates. Appropriate changes in estimates are made as the Management becomes aware of changes in circumstances surrounding the estimates. Changes in estimates are reflected in the financial statements in the period in which changes are made and, if material, their effects are disclosed in the notes to the financial statements.
The Management periodically assesses external and internal sources by checking indications of asset impairment. An impairment loss is recognized wherever the carrying value of an asset exceeds its recoverable amount. The recoverable amount is higher of the asset’s net selling price and value in use, which means the present value of future cash flows expected to arise from the continual use of the asset and its eventual disposal. An impairment loss for an asset is reversed if, and only if, the reversal can be related objectively to an event occurring after the impairment loss was recognized. The carrying amount of an asset is increased to its revised recoverable amount, provided that this amount does not exceed the carrying amount that would have been determined (net of any accumulated amortization or depreciation) had no impairment loss been recognized for the asset in the preceding years.