MICB Annual Report 2015

Mega ICBC

-32-

(G)

Information about significant changes with an adverse effect that have taken place in the technology, market, economic or legal

environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument may not be recovered;

(H)

A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.

(I)

Others are implemented in accordance with the Bank and its subsidiaries’ internal policies.

The assessment methods of impairment on loans and receivables are based on two categories: individual and collective assessments.

Individual assessments are classified as different groups based on whether there is objective evidence of significant impairment of the

asset or whether the individual asset has to be specially supervised. If no objective evidence of impairment exists for an individually

assessed financial asset, the asset will be classified into a group of financial assets with similar credit risk characteristics for collective

assessments.

After assessed impairment of loans and receivables, the Bank and its subsidiaries recognizes’impairment loss measured as the difference

between the asset’s carrying amount and the present value of estimated future cash flows of credit enhancement factors discounted at the

asset’s original effective interest rate. The credit enhancement factors include financial guarantee and net of collateral. If, in a subsequent

period, the amount of the impairment loss decreased and such decrease is objectively related to an event occurred after the impairment

was recognised, the amount of impairment loss recognised previously shall be reversed by adjusting the allowance for doubtful debts.

The reversal shall not cause a carrying amount of the financial asset that exceeds the amortized cost of the period before recognition of

the impairment loss. The amount of reversal shall be recognised in profit or loss.

Above-mentioned assessments on loans and receivables are performed in accordance with “Regulations Governing the Procedures for

Banking Institutions to Evaluate Assets and Deal with Non-performing/Non-accrual Loans” as issued by the FSC, as well as “Financial-

Supervisory-Banks Letter No. 10410001840” issued on April 23, 2015 relating to the strengthening of domestic banks’ risk endurance to

management of exposures in China.

(10)

Derivatives

Derivatives are initially recognised at fair value at the contract date and subsequently measured by fair value. The fair value includes the

public quotation in an active market or the latest trade price (e.g., Exchange-traded options), and evaluation techniques such as cash flow

discounting model or option pricing model (e.g., Swap contract and foreign exchange contracts). All derivatives are recognised as assets when

the fair value is positive and as liabilities when the fair value is negative.

Hybrid contract refers to financial instruments of the embedded derivatives. Economic characteristics and risks of the embedded derivatives

and the economic characteristics of the main contract should be examined for the embedded derivatives. If the two are not closely correlated

and the main contract is not a financial asset or liability at fair value through profit and loss, the main contract and embedded derivatives

should be respectively recognised unless the overall hybrid contract is designated as assets or liabilities at fair value through profit and loss.

The embedded derivatives are the financial assets or liabilities at fair value through profit and loss.

(11)

Investments accounted for under the equity method

Associates are all entities over which the Bank and its subsidiaries have significant influence but not control. In general, it is presumed that

the investor has significant influence, if an investor holds, directly or indirectly 20 percent or more of the voting power of the investee.

Investments in associates are accounted for using the equity method and are initially recognised at cost.

The Bank and its subsidiaries’ share of its associates’ post-acquisition profits or losses is recognised in profits or loss, and its share of post-

acquisition movements in other comprehensive income is recognised in other comprehensive income. When the Bank and its subsidiaries’

share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Bank and its

subsidiaries do not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate.

Unrealised gains on transactions between the Bank and its subsidiaries and its associates are eliminated to the extent of the Bank and its

subsidiaries’ interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the

asset transferred. Accounting policies of associates have been adjusted where necessary to ensure consistency with the policies adopted by the

Bank and its subsidiaries.

When changes in an associate’s equity that are not recognised in profit or loss or other comprehensive income of the associates and such

changes not affecting the Bank and its subsidiaries’ ownership percentage of the associate, the Bank and its subsidiaries recognised the Bank

and its subsidiaries’ share of change in equity of the associate in ‘capital reserve’ in proportion to its ownership.

When the bank and its subsidiaries disposes its investment in an associate, if it loses significant influence over this associate, the amounts

previously recognised as other comprehensive income in relation to the associate are transferred to profit or loss. If it still retains significant

influence over this associate, then the amounts previously recognised as other comprehensive income in relation to the associate are transferred

to profit or loss proportionately.

(12)

Property and equipment

The property and equipment of the Bank and its subsidiaries are recognised on the basis of the historical cost less accumulated depreciation.

Historical cost includes all costs directly attributable to the acquisition of the assets.

Such assets are subsequently measured using the cost model. Subsequent costs are included in the asset’s carrying amount or recognised as a

separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and its

subsidiaries and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and

maintenance are charged to profit or loss during the financial period in which they are incurred.

Land is not affected by depreciation. Depreciation for other assets is provided on a straight-line basis over the estimated useful lives of the

assets till residual value, if each part of an item of property and equipment with a cost that is significant in relation to the total cost of the item

must be depreciated separately.