(c) Basis of Consolidation (i) Subsidiaries The consolidated accounts include the accounts of the Bank and all its subsidiaries made up to 31st Decemb

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1 NOTES ON THE ACCOUNTS NOTES ON THE ACCOUNTS (continued) 1. PRINCIPAL ACTIVITIES The Bank and its subsidiaries (the Group ) are engaged in the provision of banking and related financial services, and business, corporate and investor services. 2. SIGNIFICANT ACCOUNTING POLICIES (a) Statement of Compliance These accounts have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (which includes all applicable Statements of Standard Accounting Practice ( SSAP ) and Interpretations) issued by the Hong Kong Society of Accountants, accounting principles generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance. In addition, these accounts comply fully with the guideline on Financial Disclosure by Locally Incorporated Authorized Institutions under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority. These accounts also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. A summary of the significant accounting policies adopted by the Group is set out below. (b) Basis of Preparation of the Accounts The accounts are prepared on a basis consistent with the accounting policies and methods adopted in the previous year except for the changes in accounting policies mentioned in Note 3. With effect from 26th May, 2003, East Asia Credit Company Limited ( EAC ) and East Asia Finance Company, Limited ( EAF ) have been merged with the Bank through The Bank of East Asia, Limited (Merger of Subsidiaries) Ordinance, under which all the assets and liabilities situated in Hong Kong and the rights and obligations of EAC and EAF as expressly governed by Hong Kong law have been transferred to the Bank. By virtue of this Ordinance, the accounts of the Bank for the year ended 31st December, 2003 were prepared as if the undertaking of EAC and EAF had vested in the Bank on 1st January, The measurement basis used in the preparation of the accounts is historical cost modified by the revaluation of certain land and buildings, and the marking to market of certain investments in securities and off-balance sheet financial instruments as explained in the accounting policies set out below. (a) (b) The Bank of East Asia, Limited Annual Report 2003

2 (c) Basis of Consolidation (i) Subsidiaries The consolidated accounts include the accounts of the Bank and all its subsidiaries made up to 31st December each year. A subsidiary, in accordance with the Hong Kong Companies Ordinance, is a company in which the Group, directly or indirectly, holds more than half of the issued share capital, or controls more than half of the voting power, or controls the composition of the Board of Directors. In the Bank s balance sheet, an investment in a subsidiary is stated at cost less any impairment losses (Note 2(k)). All material intercompany transactions and balances are eliminated on consolidation. The results of subsidiaries acquired or disposed of during the year are included in the consolidated profit and loss account from or to the date of their acquisition or disposal, as appropriate. Minority interests represent the interests of outside shareholders in the operating results and net assets of subsidiaries. (c) (i) (k) (ii) Associates (ii) An associate is a company in which the Group or the Bank has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions. An investment in an associate is accounted for in the consolidated accounts under the equity method and is initially recorded at cost and adjusted thereafter for the post-acquisition change in the Group s share of the associate s net assets, goodwill arising on acquisition of the associate and impairment loss (Note 2(k)). 2(k) The consolidated profit and loss account reflects the Group s share of the postacquisition results of the associates for the year, less any amortisation of goodwill and impairment loss charged during the year in accordance with Notes 2(j) and 2(k). When the Group s share of losses exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate. 2(j) 2(k) The Bank accounts for the results of associates to the extent of dividends received. Investments in associates are stated at cost less any impairment losses (Note 2(k)). 2(k)

3 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Translation of Foreign Currencies Transactions in foreign currencies are translated into Hong Kong dollars at the rates of exchange ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into Hong Kong dollars at the rates of exchange ruling at the balance sheet date. The exchange differences are dealt with in the profit and loss account. The balance sheets of overseas branches, subsidiaries and associates are translated into Hong Kong dollars at the rates of exchange ruling at the balance sheet date, whereas the profit and loss accounts are translated at the average rate for the period. The difference between the profit and loss account translated at an average rate and at the closing rate is recorded as a movement in reserves. Exchange differences arising from retranslation of opening net assets at the rates of exchange ruling at the balance sheet date are accounted for in reserves. On disposal of a foreign enterprise, the cumulative amount of the exchange differences which relate to that foreign enterprise is included in the calculation of the profit or loss on disposal. (e) Revenue Recognition Interest income and expense are recognised in the profit and loss account on a timeapportioned basis on the principal outstanding and at the rate applicable, except in the case of interest on doubtful debts (Note 2(f)(iii)). Fees and commission income is recognised in the profit and loss account when the corresponding service is provided, except where the fee is charged to cover the costs of a continuing service to, or risk borne for, the customer, or is interest in nature. In these cases, the fee is recognised as income in the accounting period in which the costs or risk incurred or accounted for as interest income. Finance income implicit in finance lease is recognised as interest income over the period of the lease so as to produce an approximately constant periodic rate of return of the outstanding net investment in the leases for each accounting period. Rental income receivable under operating leases is recognised as other operating income in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives granted are recognised in the profit and loss account as an integral part of the aggregate net lease payments receivables. Contingent rentals receivable are recognised as income in the accounting period in which they are earned. Dividend income from unlisted investments is recognised when the shareholder s right to receive payment is established. Dividend income from listed investments is recognised when the share price of the investment goes ex-dividend. (d) (e) 2(f)(iii) 84 The Bank of East Asia, Limited Annual Report 2003

4 (f) Advances and Doubtful Debts (i) Advances Advances to customers, banks and other financial institutions are measured at the cash consideration at the time of acquisition and are stated in the balance sheet after deducting provisions for estimated losses at subsequent periods. Cash rebates granted in relation to residential mortgage loans are capitalised and amortised to the profit and loss account over the early prepayment penalty period. (f) (i) (ii) Provision for bad and doubtful debts (ii) Provisions are made against specific doubtful debts as and when they are considered necessary by the Credit Committee with authority delegated by the Board of Directors and in addition an amount has been set aside as a general provision for advances. When there is no longer any realistic prospect of recovery, the outstanding debt is written off. General provision provides cover for loans which are impaired at the balance sheet date but which will not be identified as such until some time in the future. The Group maintains a general provision which is determined taking into account the structure and risk characteristics of the Group s loan portfolio and the expected loss of the individual components of the loan portfolio based on the historical loss experience. Historic level of latent risk are regularly reviewed to determine that the level of general provisioning continues to be appropriate. Together with specific provisions, general provisions are deducted from advances to customers in the balance sheet. (iii) Advances on which interest is being suspended Interest on doubtful loans and advances is credited to a suspense account which is netted in the balance sheet against the relevant balances. (iii) (iv) Repossession of assets Assets acquired by repossession of collateral for realisation continue to be treated as securities for loans and advances. In this regard, provision has been made on the shortfall between the carrying amount of the loans and advances and the expected net sales proceeds from realisation of the repossessed assets. (iv)

5 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (g) Properties (i) Bank premises are stated in the balance sheet at cost or at Directors valuation, by reference to an independent professional valuation, less accumulated depreciation and accumulated impairment loss (Note 2(k)). When a deficit arises on revaluation, it will be charged to the profit and loss account, if and to the extent that it exceeds the amount held in the bank premises revaluation reserve in respect of that same asset immediately prior to the revaluation; and when a surplus arises on revaluation, it will be credited to the profit and loss account, if and to the extent that a deficit on revaluation in respect of that same asset had previously been charged to the profit and loss account. In preparing these accounts, advantage has been taken of the transitional provisions set out in paragraph 80 of SSAP 17 Property, Plant and Equipment issued by the Hong Kong Society of Accountants, with the effect that bank premises have not been revalued to fair value at the balance sheet date. (g) (i) 2(k) (ii) Investment properties are stated in the balance sheet at open market value, less any accumulated depreciation. Investment properties are valued annually by persons holding a recognised professional qualification in valuing properties and at intervals of not more than three years by independent valuers. (ii) 3 Surpluses and deficits arising on revaluation of investment properties are recognised on a portfolio basis. The net surplus is credited to the investment property revaluation reserve. The net deficit is first set off against any investment property revaluation reserve and any resulting debit balance is thereafter charged to the profit and loss account. Where a deficit has previously been charged to the profit and loss account and a revaluation surplus subsequently arises, this surplus is credited to the profit and loss account to the extent of the deficit previously charged. (iii) Profit or loss on disposal of bank premises and investment properties is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the profit and loss account upon disposal. Surplus that is included in the bank premises revaluation reserve of the related bank premises disposed are transferred to the general reserve. Any revaluation surplus relating to the disposal of investment properties are transferred from the investment properties revaluation reserve to the general reserve. (iii) 86 The Bank of East Asia, Limited Annual Report 2003

6 (h) Amortisation and Depreciation (i) Bank premises Freehold land is not amortised. Leasehold land is amortised on a straight line basis over the remaining term of the lease. Buildings are depreciated on a straight line basis at rates calculated to write off the cost or valuation of each building over its estimated useful life of 50 years or the remaining lease period of the land on which it is situated, whichever is the shorter. (h) (i) 50 (ii) Investment properties (ii) No depreciation is provided on land where the residual lease is greater than 20 years. Buildings with either the remaining useful life or the remaining lease period of the land on which they are situated being 20 years or less are depreciated on a straight line basis at rates calculated to write off the cost or valuation of the building over the shorter of the remaining estimated useful life of the building or the remaining lease period of the land (iii) Other fixed assets (iii) Other fixed assets are stated in the balance sheet at cost less accumulated depreciation, which is calculated on a straight line basis to write off the assets over their estimated useful lives from 4 to 20 years. 420 (i) Investments in Securities (i) Investments in debt and equity securities, except those held either solely for the purpose of recovering advances or as investments in subsidiaries or associates, are accounted for as follows: Investments in securities are classified as held-to-maturity debt securities, investment securities and other investments in securities, and are recognised as assets from the date on which the Group is bound by the contract which gives rise to them. Transfer of a security between categories of investments is accounted for at fair value. The profit or loss arising from transfers between categories of investments is accounted for as if the investment had been sold and repurchased at the date of transfer. The profit or loss on disposal is accounted for in the period in which the disposal occurs as the difference between the sales proceeds and the carrying amount of the investments. (i) Held-to-maturity debt securities (i) Held-to-maturity debt securities are investments in dated debt securities which the Group has the expressed intention and ability to hold to maturity, and are stated at amortised cost less any provisions in their value which reflects their credit risk. Provisions are made and recognised immediately as an expense when carrying amounts are not expected to be fully recovered, but are written back to income when the circumstances and events that led to the write-downs or write-offs cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future. The amount written back is limited to the amount of the write-downs or write-offs

7 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (ii) Investment securities (ii) Investment securities are securities which are intended to be held on a continuing basis, and which are held for an identified long-term purpose documented at the time of acquisition or change of purpose and are clearly identifiable for the documented purpose. Investment securities are included in the balance sheet at cost less any provisions for diminution in value. Such provision is determined for each investment individually. Provisions are recognised as an expense immediately and are written back to income when the circumstances and events that led to the write-downs or write-offs cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future. The amount written back is limited to the amount of the write-downs or write-offs. (iii) Other investments in securities (iii) Other investments in securities are those securities which are not classified as held-to-maturity debt securities nor as investment securities, and are stated at fair value at the balance sheet date. Unrealised holding gains or losses arising on revaluation of securities to fair value are dealt with in the profit and loss account. (j) Goodwill (j) The excess of the purchase consideration in relation to the acquisition of subsidiaries and associates over the Group s share of fair value ascribed to their net tangible assets and identifiable intangible assets represents the goodwill arising on acquisition. In respect of subsidiaries, goodwill is capitalised and amortised on a straight line basis over its estimated useful life not exceeding 20 years, and is stated in the consolidated balance sheet at cost less accumulated amortisation and any impairment losses (Note 2(k)). The amortisation of goodwill is recognised in the consolidated profit and loss account as an operating expense. 20 2(k) Where an indication of impairment exists, the carrying amount of goodwill is assessed and written down immediately to its recoverable amount. The impairment of goodwill is recognised in the consolidated profit and loss account as an operating expense. On disposal of a subsidiary or an associate, any unamortised purchased goodwill is included in the calculation of the profit or loss on disposal. In respect of associates, goodwill is capitalised and amortised on a straight line basis over its estimated useful life not exceeding 20 years. The cost of goodwill less any accumulated amortisation and any impairment losses (Note 2(k)) is included in the carrying amount of the investments in associates. 20 2(k) 88 The Bank of East Asia, Limited Annual Report 2003

8 (k) Impairment of Assets At each balance sheet date, if internal and external sources of information indicate that any property (other than investment properties), equipment, investments (including those Investments in subsidiaries and associates (Note 2(c)) but other than those accounted for as Other investments in securities under Note 2(i)) or goodwill is impaired, the asset s recoverable amount is estimated, and an impairment loss is recognised in the profit and loss account whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its net selling price and value in use. 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 time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit). In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is reversed only if the loss was caused by a specific external event of an exceptional nature that is not expected to recur, and the increase in recoverable amount relates clearly to the reversal of the effect of that specific event. A reversal of impairment losses is limited to the asset s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to the profit and loss account in the year in which the reversals are recognised. (k) 2(c)2(i) (l) Leased Assets (l) Leases of assets under which the lessee assumes substantially all the risks and benefits of ownership are classified as finance leases. Leases of assets under which the lessor has not transferred all the risks and benefits of ownership are classified as operating leases. (i) Assets held under finance leases (i) The amounts due from lessees in respect of finance leases are recorded in the balance sheet as advances to customers at the amounts of net investment which represent the total rentals receivable under finance leases less unearned income. Revenue arising from finance leases is recognised in accordance with the Group s revenue recognition policies, as set out in Note 2(e). 2(e) (ii) Assets held for use in operating leases (ii) Where the Group leases out assets under operating leases, the leased assets are included in the balance sheet according to their nature and, where applicable, are depreciated in accordance with the Group s depreciation policies, as set out in Note 2(h). Impairment losses are accounted for in accordance with the accounting policy as set out in Note 2(k). 2(h) 2(k)

9 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (iii) Operating lease charges Where the Group has the use of assets under operating leases, payments made under the leases are charged to the profit and loss account in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in the profit and loss account as an integral part of the aggregate net lease payments made. Contingent rentals are charged to the profit and loss account in the accounting period in which they are incurred. (iii) (m) Income Tax (i) Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in the profit and loss account except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity. (m) (i) (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. (ii) (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. Apart from certain limited exceptions, 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 asset can be utilised, are recognised. The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future. 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 balance sheet date. Deferred tax assets and liabilities are not discounted. The carrying amount of a deferred tax asset is reviewed at each 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 reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available. Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised. (iii) 90 The Bank of East Asia, Limited Annual Report 2003

10 (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 Bank or the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met: (iv) in the case of current tax assets and liabilities, the Bank or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either: the same taxable entity; or different taxable entities, which in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously. (n) Insurance Reserves and Provisions for Outstanding Claims Insurance reserves, except those attributable to long term business, represent the proportion of retained premiums written in the year relating to the period of risk from 1st January in the following year to the subsequent date of expiry of policies which is carried forward as a provision for unearned premiums and calculated on a daily basis. The insurance reserve of long term business is ascertained by actuarial valuation. Full provision is made for the estimated cost of claims notified but not settled at the balance sheet date and for the estimated cost of claims incurred but not reported by that date, after deducting the amounts due from reinsurers. Provision has also been made for the estimated cost of servicing claims notified but not settled at the balance sheet date and to meet expenses on claims incurred but not reported at the balance sheet date. These reserves and provisions are classified as other accounts and provisions. (n) 1 1 (o) Provisions and Contingent Liabilities Provisions are recognised for liabilities of uncertain timing or amount when the Bank or the Group has a legal or constructive obligation arising as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or nonoccurrence of one or more future events, are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote. (o)

11 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (p) Employee Benefits (i) Salaries, bonuses and leave benefits Employee entitlements to salaries, annual bonuses, paid annual leave, leave passage and the cost to the Group of non-monetary benefits are recognised when they accrue to employees. An accrual is made for the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet date. Employee entitlements to sick leave and maternity leave are recognised when the absences occur. (p) (i) (ii) Performance-related bonus plan (ii) Liabilities for performance-related bonus plan, which are due wholly within twelve months after the balance sheet date, are recognised when the Group has a present constructive obligation as a result of services rendered by employees and a reliable estimate of the obligation can be made. 12 (iii) Retirement benefits Retirement benefits are provided to eligible staff of the Group. Hong Kong employees enjoy retirement benefits under either the Mandatory Provident Fund Exempted ORSO Scheme ( MPFEOS ) or the Mandatory Provident Fund Scheme ( MPFS ). Both are defined contribution schemes. The employer s monthly contribution to both schemes are at a maximum of 10% of each employee s monthly salary. The pension schemes covering all the Group s PRC and overseas employees are defined contribution schemes at various funding rates, and are in accordance with the local practices and regulations. The cost of all these schemes is charged to the profit and loss account for the period concerned and the assets of all these schemes are held separately from those of the Group. Under the MPFEOS, the employer s contribution is not reduced by contribution forfeited by those employees who leave the scheme prior to vesting fully in the contributions. Under the MPFS, the employer s contribution is reduced by contribution forfeited by those employees who leave the scheme prior to vesting fully in the contributions. (iii) 10% (iv) Share options Share options are granted to employees to acquire shares of the Bank. For option schemes adopted before 2002, the option price was 95% of the average closing price of the existing shares of the Bank for the last five business days immediately preceding the date of offer. For option schemes adopted in and after 2002, the option exercise price equals the fair value of the underlying shares at the date of grant. At the date of offer or the date of grant, no employee benefit cost or obligation is recognised. When the options are exercised, equity is increased by the amount of the proceeds received. (iv) % The Bank of East Asia, Limited Annual Report 2003

12 (q) Off-balance Sheet Financial Instruments Off-balance sheet financial instruments, commonly referred to as derivatives, arise from futures, forward, swap and option transactions undertaken by the Group and the Bank in the foreign exchange, interest rate and equity markets. Netting is applied where a legal right of set-off exists, which would survive the insolvency of all parties. Mark-to-market assets and liabilities are presented gross, and are included in Advances and other accounts less provisions and Other accounts and provisions respectively. The method of accounting for these instruments is dependent upon whether the transactions are undertaken for dealing purposes, to hedge risk, or as part of the management of asset and liability portfolios. (q) (i) Derivatives used for dealing purposes (i) Transactions undertaken for dealing purposes are marked to market and the net present value of the gain or loss arising is recognised in the profit and loss account as dealing profits or losses. Unrealised gains on transactions are included in Advances and other accounts in the balance sheet. Unrealised losses on transactions are included in Other accounts and provisions. (ii) Derivatives used for asset and liability management purposes (ii) Transactions designated as hedges are valued on an equivalent basis to the assets, liabilities or net positions which they are hedging. Any profit or loss is recognised on the same basis as that arising from the related assets, liabilities or positions. To qualify as a hedge, a derivative must be effective in reducing the price or interest rate risk of the asset or liability to which it is linked and be designated as a hedge at inception of the derivative contract. Interest rate swap transactions undertaken as part of the management of asset and liability portfolios are separately identified and interest income or expense arising therefrom is netted off against the related interest income or expense on the on-balance sheet items which these transactions are hedging. Any gain or loss arising on the termination of a qualifying hedging derivative is deferred and amortised to earnings over the original life of the terminated contract. Where the underlying asset, liability or position is sold or terminated, the qualifying derivative is immediately marked-to-market through the profit and loss account

13 2. SIGNIFICANT ACCOUNTING POLICIES (continued) (r) Segment Reporting A segment is a distinguishable component of the Group that is engaged either in providing services (business segment), or in providing services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Group has chosen business segment information as the primary reporting format and geographical segment information as the secondary reporting format. Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment and those that can be allocated on a reasonable basis to that segment. Segment revenue, expenses, assets and liabilities are determined before intra-group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between Group enterprises within a single segment. The allocation of revenue reflects the benefits of capital and other funding resources allocated to the business or geographical segments by way of internal capital allocation and fund transfer mechanisms. Inter-segment pricing is based on similar terms as those available to other external parties. Segment capital expenditure is the total cost incurred during the year to acquire segment assets (both tangible and intangible) that are expected to be used for more than one year. (r) 1 (s) Related Parties For the purposes of these accounts, parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals or other entities. (s) (t) Cash and Cash Equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition including cash, balances with banks and other financial institutions, treasury bills, other eligible bills and certificates of deposit that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. (t) 3 94 The Bank of East Asia, Limited Annual Report 2003

14 3. CHANGES IN ACCOUNTING POLICIES In prior years, deferred tax liabilities were provided using the liability method in respect of the taxation effect arising from all material timing differences between the accounting and tax treatment of income and expenditure, which were expected with reasonable probability to crystallise in the foreseeable future. Deferred tax assets were not recognised unless their realisation was assured beyond reasonable doubt. With effect from 1st January, 2003, in order to comply with Statement of Standard Accounting Practice 12 (revised) issued by the Hong Kong Society of Accountants, the Group adopted a new policy for deferred tax as set out in Note 2(m). As a result of the adoption of this accounting policy, the Group s profit for the year has been decreased by HK$23,762,000 (2002: HK$18,592,000) and the net assets as at the year end have been decreased by HK$115,257,000 (2002: HK$88,520,000). The new accounting policy has been adopted retrospectively, with the opening balances of retained profits and reserves and the comparative information adjusted for the amounts relating to prior periods as disclosed in the consolidated statement of changes in equity (2(m)) 23,762, ,592, ,257, ,520, INTEREST INCOME Restated HK$ 000 HK$ 000 Interest income on listed investments 200, ,941 Interest income on unlisted investments 331, ,362 Other interest income 5,232,100 5,954,250 Total interest income 5,763,729 6,379, INTEREST EXPENSE HK$ 000 HK$ 000 Interest expense on customer deposits, deposits of banks and other financial institutions and certificates of deposit issued 1,827,231 2,388,517 Interest expense on Subordinated Notes 325, ,012 Interest expense on other borrowings 14,958 12,748 Total interest expense 2,167,649 2,727,

15 6. FEES AND COMMISSION INCOME Fees and commission income arises from the following services: : HK$ 000 HK$ 000 Corporate services 359, ,766 Loans, overdrafts and guarantees 240, ,307 Credit cards 188, ,821 Other retail banking services 129, ,304 Trade finance 101, ,332 Securities and asset management 135,816 92,125 Others 111,328 97,640 Total fees and commission income 1,266,294 1,133, NET TRADING PROFITS HK$ 000 HK$ 000 Profit on dealing in foreign currencies 135, ,212 Profit on other investments in securities 307,944 84,217 Profit on other dealing activities 29,512 6,431 Total net trading profits 473, , OTHER OPERATING INCOME HK$ 000 HK$ 000 Dividend income from listed equities 16,930 14,013 Dividend income from unlisted equities 9,341 10,969 Rental from safe deposit boxes 84,279 78,512 Net revenue from insurance activities 83,559 70,676 Rental income on properties 44,586 45,065 Others 32,917 39,326 Total other operating income 271, , The Bank of East Asia, Limited Annual Report 2003

16 9. OPERATING EXPENSES Restated HK$ 000 HK$ 000 Contributions to defined contribution plan 94,191 88,531 Salaries and other staff costs 1,251,150 1,202,764 Total staff costs 1,345,341 1,291,295 Premises and equipment expenses excluding depreciation: : Rental of premises 132, ,518 Maintenance, repairs and others 186, ,289 Total premises and equipment expenses excluding depreciation 319, ,807 Depreciation on fixed assets (Note 26) , ,223 Amortisation of goodwill (Note 25) , ,011 Impairment of goodwill 13,350 Other operating expenses Communications, stationery and printing 143, ,719 Advertising, business promotions and business trips 107, ,839 Legal and professional fees 78,421 81,395 Card related expenses 31,112 38,315 Stamp duty and PRC business taxes 24,858 30,625 Debt securities issue expenses 10,598 16,279 Administration expenses of secretarial business 7,237 27,839 Bank charges 5,844 5,210 Insurance expenses 5,550 2,869 Membership fees 4,943 5,521 Bank licence 4,770 5,772 Donations 3,881 2,008 Audit fee 3,803 4,509 Others 59,455 51,008 Total other operating expenses 491, ,908 Total operating expenses 2,525,540 2,542,

17 10. CHARGE FOR BAD AND DOUBTFUL DEBTS HK$ 000 HK$ 000 Net charge for bad and doubtful debts Specific provisions new provisions (Note 21(b)) 21(b) 878,346 1,085,668 releases (118,863) (92,109) recoveries (Note 21(b)) 21(b) (188,733) (214,267 ) 570, ,292 General provisions new provisions 31,647 releases (72,080) Net charge to profit and loss account 498, , PROFIT FOR THE YEAR BEFORE TAXATION Profit for the year before taxation is arrived at after (charging)/crediting: / HK$ 000 HK$ 000 Net loss on disposal of held-to-maturity debt securities (12,049) (388) Write-back of impairment loss on associates 10,228 8,249 The loss on disposal of held-to-maturity debt securities resulted from the settlement of a held-to-maturity debt security by the issuer upon maturity in Share of profits less losses of associates included HK$348,000 (2002: HK$418,000) amortisation of positive goodwill , , The Bank of East Asia, Limited Annual Report 2003

18 12. INCOME TAX (a) Taxation in the Consolidated Profit and Loss Account Represents: (a) Restated HK$ 000 HK$ 000 Current tax provision for Hong Kong Profits Tax Tax for the year (Note 30(a)) 30(a) 62,839 62,805 Under/(over)-provision in respect of prior years / 197 (2,406) 63,036 60,399 Current tax overseas Tax for the year 50,668 57,677 Over-provision in respect of prior years (3,193) (9,775) 47,475 47,902 Deferred tax (Note 30(b)) 30(b) Origination and reversal of temporary differences 293, ,352 Effect of increase in tax rate on deferred tax balances at 1st January 1 1 7, , ,352 Share of associates taxation 21,203 9, , ,013 In March 2003, the Hong Kong Government announced an increase in the Profits Tax rate applicable to the Group s operations in Hong Kong from 16% to 17.5%. This increase is taken into account in the preparation of the Group s 2003 accounts. Accordingly, the provision for Hong Kong Profits Tax for 2003 is calculated at 17.5% (2002: 16%) of the estimated assessable profits for the year. Taxation for overseas subsidiaries is charged at the appropriate current rates of taxation ruling in the relevant countries % 17.5% % %

19 12. INCOME TAX (continued) (b) Reconciliation Between Tax Expense and Accounting Profit at Applicable Tax Rates (b) HK$ 000 HK$ 000 Profit before tax 2,374,308 1,572,870 Notional tax on profit before tax, calculated at the rates applicable to profits in the tax jurisdictions concerned 426, ,417 Tax effect of non-deductible expenses 88,207 72,280 Tax effect of non-taxable revenue (65,989) (30,737) Tax effect of unused tax losses not recognised 9,246 17,407 Tax effect of prior year s tax losses utilised this year (7,509) (14,242) Effect on opening deferred tax balances resulting from an increase in tax rate during the year 7,897 Over provision in prior years (2,996) (12,181) Tax benefits derived from leasing partnerships (42,918) (32,117) Others 63 13, , ,653 Share of associates taxation 21,203 9,360 Actual tax expense 433, , PROFIT ATTRIBUTABLE TO SHAREHOLDERS The consolidated profit attributable to shareholders includes a profit of HK$1,750,006,000 (2002 restated: HK$1,079,482,000) which has been dealt with in the accounts of the Bank. 1,750,006, ,079,482, The Bank of East Asia, Limited Annual Report 2003

20 14. DIVIDENDS (a) Dividends Attributable to the Year (a) HK$ 000 HK$ 000 Interim dividend declared and paid of 1,452,420,440 HK$0.23 per share on 1,452,420,440 shares 0.23 (2002: HK$0.21 per share 20021,439,752,317 on 1,439,752,317 shares) (Note 33(i)) (i) 334, ,348 Final dividend paid in respect of the previous financial year on shares issued under the share option schemes subsequent to the balance sheet date and before the close 0.35 of the Register of Members of the Bank, of HK$0.35 (2002: HK$0.33) Final dividend proposed after the balance sheet date of HK$0.62 per share 1,467,453,525 on 1,467,453,525 shares 0.62 (2002: HK$0.35 per share 20021,446,345,070 on 1,446,345,070 shares) , ,221 1,243, ,717 The final dividend proposed after the balance sheet date has not been recognised as a liability at the balance sheet date. (b) Dividends Attributable to the Previous Financial Year, Approved and Paid During the Year (b) HK$ 000 HK$ 000 Final dividend in respect of the previous financial year, 1,446,345,070 approved and paid during the year, 0.35 of HK$0.35 per share on 1,446,345,070 shares 2002 :1,433,484,586 (2002: HK$0.33 per share on 1,433,484,586 shares) , , EARNINGS PER SHARE (a) Basic Earnings Per Share The calculation of basic earnings per share is based on earnings of HK$1,921,714,000 (2002 restated: HK$1,269,786,000) and on the weighted average of 1,453,702,043 (2002: 1,440,175,619) ordinary shares outstanding during the year. (b) Diluted Earnings Per Share The calculation of diluted earnings per share is based on earnings of HK$1,922,793,000 (2002 restated: HK$1,274,182,000) and on 1,459,024,994 (2002: 1,451,175,354) ordinary shares, being the weighted average number of ordinary shares outstanding during the year, adjusted for the effects of all dilutive potential shares. (a) 1,921,714, ,269,786,000 1,453,702, ,440,175,619 (b) ,922,793, ,274,182,000 1,459,024, ,451,175,

21 15. EARNINGS PER SHARE (continued) (c) Reconciliations (c) Number of shares Number of shares Weighted average number of ordinary shares used in calculating basic earnings per share 1,453,702,043 1,440,175,619 Deemed issue of ordinary shares for no consideration 5,322,951 10,999,735 Weighted average number of ordinary shares used in calculating diluted earnings per share 1,459,024,994 1,451,175,354 (d) Cash Earnings Per Share The calculation of cash earnings per share is based on earnings of HK$2,061,801,000 (2002 restated: HK$1,408,147,000) adjusted for goodwill amortised and impaired of HK$140,087,000 (2002 restated: HK$138,361,000) and on the weighted average of 1,453,702,043 (2002: 1,440,175,619) ordinary shares outstanding during the year. This supplementary information is considered a useful additional indication of performance. 16. DIRECTORS REMUNERATION Directors remuneration disclosed pursuant to Section 161 of the Hong Kong Companies Ordinance is as follows: (d) 2,061,801, ,408,147, ,087, ,361,000 1,453,702, ,440,175, HK$ 000 HK$ 000 Fees 1,349 1,435 Salaries and other emoluments 13,000 15,043 Performance-related bonuses 12,622 12,622 Pension contributions 1,200 1,200 28,171 30,300 Included in the directors remuneration were fees of HK$494,000 (2002: HK$521,000) paid to the independent non-executive directors during the year. Included in the above remuneration, share options were granted to Executive Directors under the Bank s Staff Share Option Schemes. The details of these benefits in kind are disclosed under the paragraph Information on Share Options in the Report of the Directors and Note 38. The remuneration of the Directors is within the following bands: 494, , Number of Directors Number of Directors HK$ 0 1,000, ,500,001 5,000, ,000,001 5,500, ,000,001 17,500, ,500,001 19,000, The Bank of East Asia, Limited Annual Report 2003

22 17. FIVE TOP-PAID EMPLOYEES 5 The remuneration of the five top-paid employees, including Executive Directors, disclosed pursuant to the Listing Rules of The Stock Exchange of Hong Kong Limited is as follows: 5 HK$ 000 HK$ 000 Salaries and other emoluments 16,275 19,742 Performance-related bonuses 15,222 14,290 Share option 3,381 Pension contributions 1,502 1,650 36,380 35,682 The remuneration of the five top-paid employees is within the following bands: 5 Number of Number of Employees Employees HK$ 2,500,001 3,000, ,000,001 4,500, ,500,001 5,000, ,000,001 5,500, ,500,001 17,000, ,000,001 18,500,000 1 Included in the emoluments of the five top-paid employees were the emoluments of 3 (2002: 3) Directors. Their respective directors emoluments have been included in Note 16 above SEGMENT REPORTING Segment information is presented in respect of the Group s business and geographical segments. Business segment information is chosen as the primary reporting format because this is more relevant to the Group s internal financial reporting. (a) Business Segments The Group comprises the following main business segments: Personal banking business includes branch operations, personal Internet banking, consumer finance, property loans and credit card business. Corporate banking business includes corporate lending and loan syndication, asset based lending, commercial lending, community lending, securities lending, trust services, mandatory provident fund business and corporate Internet banking. Investment banking business includes treasury operations, securities broking and dealing, provision of Internet security trading services, and asset management. Corporate services include company secretarial services, share registration and business services, and offshore corporate and trust services. Other businesses include bancassurance, insurance business, and property-related business. Unallocated items mainly comprise the central management unit, bank premises, and any items which cannot be reasonably allocated to specific business segments. (a)

23 18. SEGMENT REPORTING (continued) (a) Business Segments (continued) (a) 2003 Personal Corporate Investment Corporate Inter-segment Banking Banking Banking Services Others Unallocated elimination Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 The Group Net interest income 1,932,393 1,170, , ,481 (68,514 ) 3,596,080 Other operating income from external customers 393, , , , ,970 78,389 1,800,167 Inter-segment income 136,566 (136,566 ) Total operating income 2,326,110 1,425,782 1,093, , , ,441 (136,566 ) 5,396,247 Operating profit/(loss) before provisions / 1,286, , , ,477 36,722 (303,794 ) 2,870,707 Inter-segment transactions 112,394 11,256 6,779 (130,429 ) Charge for bad and doubtful debts (343,519 ) (112,574 ) (16,138 ) (9,995 ) (15,944 ) (500 ) (498,670 ) Contribution from operations 1,055, , , ,482 20,778 (434,723 ) 2,372,037 Write-back of impairment loss for the year 1,333 8,895 10,228 Impairment loss on bank premises (113,782 ) (113,782 ) Share of profits less losses of associates (3,994 ) 26,007 1,314 97,932 (8,661 ) 112,598 Other income and expenses 1,917 (16,252 ) 5,941 1,621 (6,773 ) Profit/(loss) before taxation / 1,051, , , , ,651 (546,650 ) 2,374,308 Income tax (433,401 ) (433,401 ) Minority interests (18,992 ) (150 ) (51 ) (19,193 ) Profit/(loss) attributable to shareholders / 1,051, , ,132 83, ,501 (980,102 ) 1,921,714 Depreciation for the year (84,255 ) (40,938 ) (16,340 ) (6,468 ) (7,593 ) (73,248 ) (228,842 ) Amortisation of goodwill (31,425 ) (25,214 ) (45,638 ) (36,870 ) (940 ) (140,087 ) Segment assets 48,173,407 56,294,715 82,861,682 1,169,400 1,241,602 90, ,831,020 Investments in associates 31, ,601 53, ,705 3, ,484 Unallocated assets 7,908,614 7,908,614 Total assets 48,205,333 56,637,316 82,915,522 1,169,400 1,546,307 8,002, ,476,118 Segment liabilities 110,392,305 45,031,831 13,440,069 62, , ,664,744 Unallocated liabilities 4,424,705 4,424,705 Total liabilities 110,392,305 45,031,831 13,440,069 62, ,779 4,424, ,089,449 Capital expenditure incurred during the year 44,118 53,071 79,940 25,483 5,329 15, , The Bank of East Asia, Limited Annual Report 2003

24 2002 Restated Personal Corporate Investment Corporate Inter-segment Banking Banking Banking Services Others Unallocated elimination Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 The Group Net interest income 2,143,026 1,130, , ,268 (62,470 ) 3,652,276 Other operating income from external customers 454, , , ,309 87,773 66,577 1,404,020 Inter-segment income 17,052 56, ,263 (216,269 ) Total operating income 2,614,946 1,410, , , , ,370 (216,269 ) 5,056,296 Operating profit/(loss) before provisions / 1,377, , ,708 97,033 (22,873 ) (211,217 ) 2,513,702 Inter-segment transactions 180,185 (48,427 ) 6,794 (138,552 ) (Charge for)/write back of bad and doubtful debts / (640,238 ) (139,583 ) 10,029 (2,246 ) (10,092 ) (28,809 ) (810,939 ) Contribution from operations 916, , ,531 94,787 (32,965 ) (378,578 ) 1,702,763 Write-back of/(increase in) impairment loss for the year / 7, ,354 (3,983 ) 8,249 Share of profits less losses of associates ,039 1,886 (10,725 ) (58 ) 32,656 Other income and expenses 474 (46,609 ) (2,083 ) (122,580 ) (170,798 ) Profit/(loss) before taxation / 917, , ,374 94,787 (41,419 ) (505,199 ) 1,572,870 Income tax (277,013 ) (277,013 ) Minority interests (26,112 ) 41 (26,071 ) Profit/(loss) attributable to shareholders / 917, , ,374 68,675 (41,419 ) (782,171 ) 1,269,786 Depreciation for the year (90,633 ) (37,703 ) (14,024 ) (5,464 ) (7,878 ) (70,521 ) (226,223 ) Amortisation of goodwill (36,823 ) (27,353 ) (38,110 ) (21,785 ) (940 ) (125,011 ) Impairment of goodwill (13,350 ) (13,350 ) Segment assets 52,728,649 55,928,804 66,925, ,984 1,096,412 85, ,315,604 Investments in associates 36, ,590 53, ,895 2, ,500 Unallocated assets 7,459,207 7,459,207 Total assets 52,764,820 56,248,394 66,979, ,984 1,323,307 7,547, ,414,311 Segment liabilities 100,511,305 41,150,584 16,123,840 33, , ,272,576 Unallocated liabilities 4,034,281 4,034,281 Total liabilities 100,511,305 41,150,584 16,123,840 33, ,663 4,034, ,306,857 Capital expenditure incurred during the year 47,187 54,372 55,443 8,604 4,554 10, ,

25 18. SEGMENT REPORTING (continued) (b) Geographical Segments The information concerning geographical analysis has been classified by the location of the principal operations of the subsidiaries, or in the case of the Bank itself, of the location of the branches of the Bank responsible for reporting the results or booking the assets. (b) 2003 People s Other Asian Inter-segment Hong Kong Republic of China Countries Others elimination Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 The Group Total operating income 4,582, , , ,688 (291,332 ) 5,396,247 Profit before taxation 2,028, ,833 74, ,287 2,374,308 Total assets 171,220,488 19,224,326 14,070,718 29,237,812 (35,277,226 ) 198,476,118 Total liabilities 151,169,264 19,173,706 13,876,847 22,078,299 (32,208,667 ) 174,089,449 Contingent liabilities and commitments 28,437,677 2,239,141 2,280,989 1,738,291 34,696,098 Capital expenditure during the year 154,168 47, , , Restated People s Other Asian Inter-segment Hong Kong Republic of China Countries Others elimination Consolidated HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 The Group Total operating income 4,168, , , ,241 (104,109 ) 5,056,296 Profit before taxation 1,110, ,505 98, ,372 1,572,870 Total assets 162,179,294 14,358,236 13,677,966 30,422,935 (35,224,120 ) 185,414,311 Total liabilities 143,230,434 14,316,709 13,499,047 23,397,196 (32,136,529 ) 162,306,857 Contingent liabilities and commitments 29,839,713 2,923,232 1,454,676 1,610,640 35,828,261 Capital expenditure during the year 134,825 29,521 3,393 13, , The Bank of East Asia, Limited Annual Report 2003

26 19. CASH AND SHORT-TERM FUNDS The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Cash and balances with banks and other financial institutions 2,695,618 1,963,261 2,560,012 1,871,725 Money at call and short notice 29,843,667 29,492,745 29,625,898 29,213,888 Treasury bills (Note 29) 29 3,494,225 3,481,634 3,321,527 3,435,537 36,033,510 34,937,640 35,507,437 34,521,150 An analysis of treasury bills held is as follows: Unlisted, held-to-maturity, at amortised cost 233, ,094 60, ,997 Unlisted, other investments in securities, at fair value 3,260,632 3,321,540 3,260,632 3,321,540 3,494,225 3,481,634 3,321,527 3,435,537 All treasury bills are issued by central governments and central banks. 20. INVESTMENTS IN SECURITIES (a) Certificates of Deposit Held Unlisted (Note 29) (a) 29 The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Non-trading, at fair value 1,418, ,925 1,418, ,876 Held-to-maturity, at amortised cost 1,598,195 1,464,826 1,140,958 1,124,396 3,016,556 2,370,751 2,559,319 1,950,

27 20. INVESTMENTS IN SECURITIES (continued) (b) Other Investments in Securities (b) The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Listed in Hong Kong equity securities 455, , , ,059 debt securities 13,137 outside Hong Kong equity securities 286,491 73, ,897 63,286 debt securities 4,016,859 4,427,727 3,641,903 4,068,353 4,759,171 4,842,927 4,346,151 4,437,698 Unlisted equity securities 48,392 44,379 38,090 37,353 debt securities 5,343,772 8,367,858 5,103,735 8,273,514 5,392,164 8,412,237 5,141,825 8,310,867 10,151,335 13,255,164 9,487,976 12,748,565 Equity securities 790, , , ,698 Debt securities (Note 29) 29 9,360,631 12,808,722 8,745,638 12,341,867 10,151,335 13,255,164 9,487,976 12,748,565 Market value of listed securities equity securities 742, , , ,345 debt securities 4,016,859 4,440,864 3,641,903 4,068,353 4,759,171 4,842,927 4,346,151 4,437,698 Issued by: Central governments and central banks 741,084 2,599, ,022 2,582,946 Public sector entities 1,929,256 2,432,280 1,929,096 2,155,318 Banks and other financial institutions 3,705,219 4,251,676 3,453,149 4,118,007 Corporate entities 3,717,394 3,937,941 3,681,191 3,868,941 Others 58,382 33,328 37,518 23,353 10,151,335 13,255,164 9,487,976 12,748, The Bank of East Asia, Limited Annual Report 2003

28 (c) Held-to-maturity Debt Securities (Note 29) (c) 29 The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Listed in Hong Kong 162,957 43, ,865 outside Hong Kong 2,179,303 1,956,937 2,046,496 1,837,971 2,342,260 2,000,041 2,178,361 1,837,971 Unlisted 9,366,965 1,125,645 8,912, ,756 11,709,225 3,125,686 11,090,880 2,591,727 Market value of listed securities 2,346,884 2,000,774 2,176,637 1,832,042 Issued by: Central governments and central banks 7,618,960 28,057 7,618,960 18,010 Public sector entities 124,021 54,195 Banks and other financial institutions 1,685,284 1,190,428 1,297, ,435 Corporate entities 2,280,960 1,853,006 2,174,777 1,796,282 11,709,225 3,125,686 11,090,880 2,591,727 (d) Investment Securities (d) The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Listed in Hong Kong equity securities outside Hong Kong debt securities 68,457 67,466 68,457 67,466 68,507 67,516 68,457 67,466 Unlisted equity securities 151, , , ,605 debt securities 22,655 22,814 18,003 18, , , , , , , , ,213 Equity securities 151, , , ,605 Debt securities (Note 29) 29 91,112 90,280 86,460 85, , , , ,213 Market value of listed securities equity securities debt securities 68,717 63,880 68,717 63,880 68,767 63,930 68,717 63,880 Issued by: Corporate entities 161, , , ,013 Others 81,756 86,933 62,995 72, , , , ,

29 21. ADVANCES AND OTHER ACCOUNTS LESS PROVISIONS (a) Advances to Customers and Other Accounts (a) The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Advances to customers (Note 29) ,908, ,408,574 99,684, ,316,862 Advances to banks and other financial institutions (Note 29) 29 1,563,981 1,088,562 1,563,981 1,088,562 Accrued interest 1,137,979 1,065,314 1,111,846 1,039,081 Other accounts 4,408,949 3,021,728 4,871,757 3,822, ,019, ,584, ,232, ,267,274 Less: Provisions for bad and doubtful debts Specific 380, , , ,672 General 1,259,551 1,333,257 1,209,630 1,222, ,379, ,824, ,783, ,764,730 (b) Provision Against Advances and Other Accounts for 2003 (b) 2003 The Group Advances to customers and Suspended other accounts Trade bills and others Total interest Specific General Specific General Specific General HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1st January ,713 1,333,257 1, ,713 1,334, ,576 New provisions charged to profit and loss account (Note 10) ,092 63, , ,346 65,265 Provisions released back to profit and loss account (307,382) (135,917) (214) (1,428 ) (307,596) (137,345) Amounts written off (824,582) (10,294) (254) (824,836) (10,294) (171,621) Recoveries (Note 10) ,519 4, ,733 4,038 Interest suspended during the year 201,591 Suspended interest recovered (81,381) Additions through acquisition of subsidiaries Other movements 15,836 (2,979) 15,836 (2,979) Exchange adjustments 3,204 7, ,204 7, At 31st December ,400 1,259,551 1, ,400 1,260, , The Bank of East Asia, Limited Annual Report 2003

30 The Bank Advances to customers and Suspended other accounts Trade bills and others Total interest Specific General Specific General Specific General HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1st January ,672 1,222, ,665 1, ,337 1,224, ,167 Additions through merger with EAC and EAF 20,228 80,296 20,228 80,296 1,175 New provisions charged to profit and loss account 832,605 52, , ,859 53,878 Provisions released back to profit and loss account (291,047) (132,996) (214) (1,427) (291,261) (134,423) Amounts written off (796,555) (9,662) (254) (796,809) (9,662) (171,579) Recoveries 182,723 1, ,937 1,533 Interest suspended during the year 200,959 Suspended interest recovered (81,110) Other movements 9,837 (8,625) 9,837 (8,625) Exchange adjustments 1,515 3, ,515 3, At 31st December ,978 1,209, ,665 1, ,643 1,210, ,338 Provision Against Advances and Other Accounts for The Group Advances to customers and Suspended other accounts Trade bills and others Total interest Specific General Specific General Specific General HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1st January ,150 1,320,087 3, ,150 1,323, ,646 New provisions charged to profit and loss account (Note 10) 10 1,082,952 70,381 2,716 1,990 1,085,668 72,371 Provisions released back to profit and loss account (304,524 ) (37,182 ) (1,852 ) (3,542 ) (306,376 ) (40,724 ) Amounts written off (1,196,148 ) (3,571 ) (2,716 ) (1,198,864 ) (3,571 ) (144,986 ) Recoveries (Note 10) , , , Interest suspended during the year 203,424 Suspended interest recovered (68,267 ) Other movements 28,901 (23,536 ) (419 ) 28,901 (23,955 ) Exchange adjustments 1,967 6, ,967 6,446 2,759 At 31st December ,713 1,333,257 1, ,713 1,334, ,

31 21. ADVANCES AND OTHER ACCOUNTS LESS PROVISIONS (continued) (b) Provision Against Advances and Other Accounts for 2002 (continued) (b) 2002 The Bank Advances to customers and Suspended other accounts Trade bills and others Total interest Specific General Specific General Specific General HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1st January ,679 1,029, ,420 2, ,099 1,032, ,001 Addition through merger with FPB 48, ,489 48, ,489 49,733 New provisions charged to profit and loss account 1,022,599 62, ,640 1,990 1,145,239 64,960 Provisions released back to profit and loss account (290,837 ) (33,423 ) (1,894 ) (3,542 ) (292,731 ) (36,965 ) Amounts written off (1,173,635 ) (1,155 ) (3,493 ) (1,177,128 ) (1,155 ) (144,060 ) Recoveries 205, , , Interest suspended during the year 202,429 Suspended interest recovered (67,695 ) Other movements 27,923 (22,559 ) 2,140 (122 ) 30,063 (22,681 ) Exchange adjustments 1,933 6, ,933 6,317 2,759 At 31st December ,672 1,222, ,665 1, ,337 1,224, ,167 Suspended interest related only to advances to customers and other accounts. (c) Non-performing advances to customers Non-performing advances to customers are advances on which interest is being placed in suspense or on which interest accrual has ceased. (c) The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Gross non-performing advances to customers 2,526,389 3,108,001 2,510,946 3,059,308 As percentage of total advances to customers 2.45% 2.87% 2.52% 2.96% Specific provisions 219, , , ,486 Suspended interest 508, , , ,167 There were no advances to banks and other financial institutions on which interest is being placed in suspense or on which interest accrual has ceased as at 31st December, 2003 and 31st December, 2002, nor were there any specific provisions made for them on these two dates The Bank of East Asia, Limited Annual Report 2003

32 22. ADVANCES TO CUSTOMERS NET INVESTMENT IN FINANCE LEASES Advances to customers include net investment in equipment leased under finance leases. The total minimum lease payments receivable under finance leases and their present values at the year end are as follows: The Group Present value of Interest Present value of Interest the minimum income relating Total minimum the minimum income relating Total minimum lease payments to future periods lease payments lease payments to future periods lease payments HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Amounts receivable: Within one year 1 550, , , , , ,105 After one year but within five years 15 1,034, ,777 1,332,630 1,022, ,163 1,328,948 After five years 5 1,750, ,457 2,139,118 1,649, ,349 2,033,822 3,336, ,949 4,140,204 3,199, ,757 4,013,875 Less: Provisions for bad and doubtful debts (7,453 ) (10,520 ) Net investment in finance leases 3,328,802 3,188,598 The net investment in finance leases is carried on the balance sheet as a receivable. No accrual is made for the interest income relating to future periods. The Bank Present value of Interest Present value of Interest the minimum income relating Total minimum the minimum income relating Total minimum lease payments to future periods lease payments lease payments to future periods lease payments HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Amounts receivable: Within one year 1 550, , , ,811 51, ,504 After one year but within five years 15 1,034, ,777 1,332, , , ,295 After five years 5 1,750, ,457 2,139, , , ,899 3,336, ,949 4,140,204 1,250, ,393 1,637,698 Less: Provisions for bad and doubtful debts (7,453 ) (730 ) Net investment in finance leases 3,328,802 1,249,575 The net investment in finance leases is carried on the balance sheet as a receivable. No accrual is made for the interest income relating to future periods

33 23. INVESTMENTS IN SUBSIDIARIES The Bank HK$ 000 HK$ 000 Unlisted shares, at cost 1,980,975 2,046,273 Less: impairment loss (169,850) (169,850) 1,811,125 1,876,423 Acquisition of subsidiaries: The Group acquired 71.3% interest of Strath Corporate Services Limited on 10th January, 2003 for a cost of HK$300,509,000. On 30th May, 2003, the Group increased its shareholding in Tricor Holdings Limited by 4.3% for a cost of HK$39,139,000. The following list contains only the particulars of subsidiaries which principally affected the results, assets or liabilities of the Group. The class of shares held is ordinary unless otherwise stated ,509,000 Strath Corporate Services Limited 71.3% ,139,000Tricor Holdings Limited 4.3% Details of these companies are as follows: Place of incorporation Issued and % Held by Name of company and operation paid-up capital The Bank The Group Nature of business Bank of East Asia (Trustees) Hong Kong HK$150,000, % Trustee Limited BEA Pacific Asia Limited Hong Kong US$13,000, % Investment holding BEA Pacific Bank (Vanuatu) Vanuatu US$100, % Holding of a single Limited (Note 1) 1 outstanding deposit Blue Cross (Asia-Pacific) Hong Kong HK$189,000, % Insurance Insurance Limited East Asia Asset Management Hong Kong HK$10,000, % Asset management Company Limited East Asia Corporate Services BVI US$250, % Corporate services (BVI) Limited East Asia Electronic Data PRC US$2,400, % Servicing Processing (Guangzhou) Limited (Note 2) 2 East Asia Facility Management Hong Kong HK$10, % Facility management Limited 114 The Bank of East Asia, Limited Annual Report 2003

34 Place of incorporation Issued and % Held by Name of company and operation paid-up capital The Bank The Group Nature of business East Asia Financial Holding BVI US$1 100% Issuer of (BVI) Limited subordinated notes East Asia Financial Services BVI US$19,820, % Investment holding (BVI) Ltd. East Asia Futures Limited Hong Kong HK$7,000, % Options and futures trading East Asia Holding Company, U.S.A. US$5 100% Bank holding company Inc. East Asia Indonesian Mauritius US$2 100% Investment holding Holdings Ltd. East Asia Investment Hong Kong HK$100,000, % Securities trading Holdings Limited East Asia Investments BVI HK$186,038, % Investment holding Holdings (BVI) Ltd. East Asia Properties Holding Hong Kong HK$10, % Investment holding Company Limited East Asia Properties Hong Kong HK$10, % Property holding Investment Company Limited East Asia Properties (US), U.S.A. US$5 100% Property holding Inc. East Asia Property Agency Hong Kong HK$1,000, % Property agency Company Limited East Asia Property Holdings Jersey STG 9 100% Property holding (Jersey) Limited East Asia Secretaries (BVI) BVI HK$300,000, % Investment holding Limited East Asia Securities Company Hong Kong HK$25,000, % Securities broking Limited East Asia Strategic Holdings BVI US$50,000, % Investment holding Limited

35 23. INVESTMENTS IN SUBSIDIARIES (continued) Place of incorporation Issued and % Held by Name of company and operation paid-up capital The Bank The Group Nature of business Golden Wings International BVI US$10, % Property investment Ltd. Leader One Limited BVI US$1 100% Investment holding Secretaries Limited Hong Kong HK$2 75.6% Business, corporate and investor services Strath Corporate Services Hong Kong HK$2 75.6% Business and Limited corporate services Tengis Limited Hong Kong HK$ % Business, corporate and investor services The Bank of East Asia (BVI) BVI US$1,000, % Banking services Limited The Bank of East Asia Canada C$38,000, % Banking services (Canada) The Bank of East Asia U.S.A. US$4,000, % Banking (U.S.A.) N.A. Tricor Holdings Limited BVI US$7, % Investment holding Tricor Services Limited Hong Kong HK$2 75.6% Business, corporate and investor services Notes: 1. The company has changed its name to BEA Pacific (Vanuatu) Limited with effect from 22nd January, Represents a wholly foreign owned enterprise BEA Pacific (Vanuatu) Limited BVI denotes the British Virgin Islands and PRC denotes the People s Republic of China. 116 The Bank of East Asia, Limited Annual Report 2003

36 24. INVESTMENTS IN ASSOCIATES The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Unlisted shares, at cost 375, ,955 Share of net assets 760, ,163 Goodwill unamortised , , , ,955 Less: impairment loss (24,171) (34,399) (192,373) (192,373) 736, , , ,582 Loans to associates amounting to HK$213,837,000 (2002: HK$251,108,000) are included under advances to customers. The following list contains only the particulars of associates, all of which are unlisted corporate entities, which principally affected the results or assets of the Group: 213,837, ,108,000 % of Place of % of ordinary shares preference incorporation held by shares held by Name of company and operation The Bank The Group The Group Nature of business Cementhai SCT Hong Kong 20% Trading (Hong Kong) Limited (formerly Cementhai Trading (Hong Kong) Limited) DaimlerChrysler Services Hong Kong 20% Financing and China Limited leasing services DaimlerChrysler Services Republic of Korea 20% Financial services Korea Limited East Asia Heller Limited Hong Kong 50% Factoring East Asia MBK Limited BVI 50% 50% Investment holding Hainan International Finance PRC 35% General financial Company Limited services ICEA Finance Holdings BVI 25% Investment holding Limited Platinum Holdings Company Cayman Islands 30% Investment holding Limited

37 24. INVESTMENTS IN ASSOCIATES (continued) % of Place of % of ordinary shares preference incorporation held by shares held by Name of company and operation The Bank The Group The Group Nature of business PT. Bank Resona Perdania Indonesia 24.9% Banking & related (formerly P.T. Bank financial services Daiwa Perdania) Sunfire Enterprises Limited BVI 20% Property development Transatlantic Trust Canada 20% Administration of trusts Corporation Trans-Ocean Insurance Hong Kong 48.7% Insurance Company, Limited Trilease International Hong Kong 20% Leasing Limited Note: BVI denotes the British Virgin Islands and PRC denotes the People s Republic of China. 25. GOODWILL The Group HK$ 000 The Bank HK$ 000 Cost At 1st January, As previously reported 2,368,083 1,788,612 Prior period adjustments in respect of deferred tax 145, ,626 As restated 2,513,583 1,933,238 Additions through acquisition of subsidiaries 302,527 Exchange adjustments (519) At 31st December, ,815,591 1,933,238 Accumulated amortisation and impairment losses At 1st January, As previously reported 280, ,242 Prior period adjustments in respect of deferred tax 51,449 51,381 As restated 332, ,623 Amortisation for the year (Note 9) 9 140,087 96,661 Exchange adjustments (54) At 31st December, , ,284 Carrying amount at 31st December, ,343,408 1,556,954 Carrying amount at 31st December, 2002 (Restated) ,181,433 1,653, The Bank of East Asia, Limited Annual Report 2003

38 26. FIXED ASSETS The Group Furniture, Investment Fixtures and Properties Bank Premises Equipment Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 Cost or valuation At 1st January, ,300 3,958,888 1,547,148 5,825,336 Additions 25 2, , ,673 Revaluation 12,775 12,775 Transfers 15,100 (15,100) Disposals (82,568) (4,812) (105,399) (192,779) Exchange adjustments 3, ,157 14,014 At 31st December, ,279 3,941,229 1,673,511 5,883,019 Accumulated depreciation and amortisation At 1st January, , ,913 1,044,693 1,418,279 Charge for the year (Note 9) , , ,842 Impairment loss 235, ,795 Written back on revaluation (41) (41) Transfers 826 (826) Written back on disposals (2,248) (2,421) (88,823) (93,492) Exchange adjustments 1, ,682 8,938 At 31st December, , ,727 1,135,154 1,798,321 Net book value at 31st December, ,839 3,289, ,357 4,084,698 Net book value at 31st December, ,627 3,595, ,455 4,407,057 The gross amounts of the above assets are stated: At cost 38,229 2,551,429 1,673,511 4,263,169 At Directors valuation ,228,224 1,228, , ,576 At professional valuation , , ,279 3,941,229 1,673,511 5,883,

39 26. FIXED ASSETS (continued) The Bank Furniture, Investment Fixtures and Properties Bank Premises Equipment Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 Cost or valuation At 1st January, ,926 3,420,523 1,396,859 5,015,308 Additions through merger with EAC and EAF 4,830 4,830 Additions 25 2, , ,472 Revaluation 13,025 13,025 Transfers 15,100 (15,100) Disposals (82,568) (4,812) (95,542) (182,922) Exchange adjustments ,895 5,949 At 31st December, ,690 3,403,526 1,471,446 5,018,662 Accumulated depreciation and amortisation At 1st January, , , ,657 1,260,199 Additions through merger with EAC and EAF 3,530 3,530 Charge for the year , , ,574 Impairment loss 44,522 44,522 Written back on revaluation (41) (41) Transfers 826 (826) Written back on disposals (2,248) (2,421) (79,288) (83,957) Exchange adjustments ,801 4,028 At 31st December, , ,778 1,022,889 1,421,855 Net book value at 31st December, ,502 3,005, ,557 3,596,807 Net book value at 31st December, ,678 3,113, ,202 3,755,109 The gross amounts of the above assets are stated: At cost 5,890 2,175,301 1,471,446 3,652,637 At Directors valuation ,228,225 1,228,225 At professional valuation , , ,690 3,403,526 1,471,446 5,018, The Bank of East Asia, Limited Annual Report 2003

40 The net book value of bank premises and investment properties comprises: : The Group Investment Investment Properties Bank Premises Properties Bank Premises HK$ 000 HK$ 000 HK$ 000 HK$ 000 Freeholds Held outside Hong Kong 26, ,903 30, ,782 Leaseholds Held in Hong Kong On long lease (over 50 years) ,850 2,341, ,500 2,549,014 On medium-term lease (10 50 years) , ,736 77, ,196 On short lease (below 10 years) Held outside Hong Kong On long lease (over 50 years) , ,976 On medium-term lease (10 50 years) , , ,839 3,289, ,627 3,595,975 The Bank Investment Investment Properties Bank Premises Properties Bank Premises HK$ 000 HK$ 000 HK$ 000 HK$ 000 Freeholds Held outside Hong Kong 4,702 12,918 10,128 12,793 Leaseholds Held in Hong Kong On long lease (over 50 years) ,600 2,211, ,000 2,269,716 On medium-term lease (10 50 years) , ,736 77, ,196 On short lease (below 10 years) Held outside Hong Kong On long lease (over 50 years) , ,976 On medium-term lease (10 50 years) , , ,502 3,005, ,678 3,113,

41 26. FIXED ASSETS (continued) The carrying amount of bank premises of the Group and the Bank would have been HK$2,659,416,000 (2002 : HK$2,713,140,000) and HK$1,964,292,000 (2002 : HK$2,011,804,000) respectively had they been stated at cost less accumulated depreciation. Investment properties in Hong Kong were valued at HK$230,050,000 by an independent valuer, DTZ Debenham Tie Leung Limited, Chartered Surveyors who have among their staff Fellows of the Hong Kong Institute of Surveyors, as at 21st December, 2003 and the valuation has been incorporated in the accounts as at 31st December, The valuation was performed on an open market value basis. Investment properties outside Hong Kong were not valued as they are considered immaterial to the Group. These properties are carried at cost. The impairment loss of HK$235,795,000 in 2003 was related to certain bank premises in Hong Kong intended to be vacant after the back offices are centralised to Millennium City 5 in 2005, and an overseas bank premise. The Group leases out investment properties under operating leases. The leases typically run for an initial period from 1 to 10 years, with an option to renew the leases after that date at which time all terms are renegotiated. None of the leases includes contingent rentals. Rental income receivable from bank premises and investment properties held for use under operating leases amounted to HK$44,586,000 in 2003 (2002 : HK$45,065,000). There was no contingent rental recognised during the year 2003 (2002 : Nil). The cost or valuation of bank premises and investment properties held for use under operating leases and the related accumulated depreciation charge as at 31st December, 2003 were HK$720,459,000 (2002 : HK$745,100,000) and HK$66,906,000 (2002 : HK$47,591,000) respectively. The total future minimum lease payments of bank premises and investment properties held for use under non-cancellable operating leases are receivable as follows: 2,659,416, ,713,140,000 1,964,292, ,011,804, ,050, ,795, ,586, ,065, ,459, ,100,000 66,906, ,591,000 The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Within one year 1 40,844 39,905 23,123 22,049 After one year but within five years 15 61,573 62,536 32,381 26,679 After five years 5 8,328 6,808 2,043 1, , ,249 57,547 50, The Bank of East Asia, Limited Annual Report 2003

42 27. CONVERTIBLE BONDS ISSUED The 2 per cent Convertible Bonds issued amounting to HK$119,621,000 (USD15,340,000) were redeemed at par on 19th July, Interest expense for the year amounted to HK$1,307,000 (2002 : HK$5,352,000) ,621,00015,340,000 2% 1,307, : 5,352, AMOUNTS DUE FROM AND DUE TO SUBSIDIARIES During the year, the Bank entered into transactions with certain subsidiaries in the ordinary course of its banking business. Details of the amounts due from and due to subsidiaries are as follows: (a) Amounts Due from Subsidiaries (a) The Bank HK$ 000 HK$ 000 Financial institutions ,025 Others 1,371,199 1,205,073 1,371,701 2,161,098 (b) Amounts Due to Subsidiaries (b) The Bank HK$ 000 HK$ 000 Financial institutions 5,077,157 6,749,249 Others 5,619,563 4,730,845 10,696,720 11,480,

43 29. MATURITY PROFILE Maturity Profile for The Group 1 year or 5 years or Repayable 3 months less but over less but After on demand or less 3 months over 1 year 5 years Undated Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Treasury bills (Note 19) 19 2,394,706 1,099,519 3,494,225 Placements with banks and other financial institutions 15,265,942 5,809,579 21,075,521 Certificates of deposit held (Note 20(a)) 20(a) 1,049,763 1,082, , ,677 3,016,556 Advances to customers (Note 21(a)) 21(a) 4,774,844 12,736,626 11,907,410 35,639,296 35,828,711 2,021, ,908,836 Advances to banks and other financial institutions (Note 21(a)) 21(a) 44,741 25, ,741 30,632 1,251,563 1,563,981 Debt securities included in: Held-to-maturity debt securities (Note 20(c)) 20(c) 251, ,891 9,922, ,993 11,709,225 Investment securities (Note 20(d)) 20(d) 68,457 4,000 18,655 91,112 Other investments in securities (Note 20(b)) 20(b) 178,103 1,061,797 6,716,523 1,386,942 17,266 9,360,631 4,774,844 31,921,110 21,832,053 53,311,692 38,070,955 3,309, ,220,087 Liabilities Deposits and balances of banks and other financial institutions 1,202,565 4,741,645 1,509,087 63,268 7,516,565 Deposits from customers 49,140,816 99,140,663 6,406, , ,420,612 Demand deposits and current accounts 9,612,966 9,612,966 Savings deposits 37,552, ,553,395 Time, call and notice deposits 1,975,084 99,140,034 6,406, , ,254,251 Certificates of deposit issued 3,161,000 2,366,339 5,527,339 50,343, ,882,308 11,077,084 3,161, ,464, The Bank of East Asia, Limited Annual Report 2003

44 The Bank 1 year or 5 years or Repayable 3 months less but over less but After on demand or less 3 months over 1 year 5 years Undated Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Treasury bills (Note 19) 19 2,222,008 1,099,519 3,321,527 Placements with banks and other financial institutions 15,192,146 5,809,579 21,001,725 Certificates of deposit held (Note 20(a)) 20(a) 1,010, , ,525 2,559,319 Advances to customers (Note 21(a)) 21(a) 4,411,817 11,685,647 11,232,709 35,005,105 35,550,892 1,798,588 99,684,758 Advances to banks and other financial institutions (Note 21(a)) 21(a) 44,741 25, ,741 30,632 1,251,563 1,563,981 Debt securities included in: Held-to-maturity debt securities (Note 20(c)) 20(c) 157, ,867 9,780, ,226 11,090,880 Investment securities (Note 20(d)) 20(d) 68,457 4,000 14,003 86,460 Other investments in securities (Note 20(b)) 20(b) 178,103 1,011,409 6,398,237 1,157,889 8,745,638 4,411,817 30,491,067 20,655,233 52,160,378 37,271,639 3,064, ,054,288 Liabilities Deposits and balances of banks and other financial institutions 1,202,296 4,727,439 1,499,111 7,428,846 Deposits from customers 47,353,784 92,916,805 5,007, , ,952,847 Demand deposits and current accounts 8,773,169 8,773,169 Savings deposits 37,032, ,033,569 Time, call and notice deposits 1,547,675 92,916,176 5,007, , ,146,109 Certificates of deposit issued 3,161,000 2,366,339 2,200,000 7,727,339 48,556,080 97,644,244 9,667,718 3,040,990 2,200, ,109,

45 29. MATURITY PROFILE (continued) Maturity Profile for The Group 1 year or 5 years or Repayable 3 months less but over less but After on demand or less 3 months over 1 year 5 years Undated Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Treasury bills (Note 19) 19 3,357, ,181 3,481,634 Placements with banks and other financial institutions 10,281,796 1,388,856 11,670,652 Certificates of deposit held (Note 20(a)) 20(a) 984, , ,440 35,338 2,370,751 Advances to customers (Note 21(a)) 21(a) 5,132,933 12,215,605 11,119,301 38,567,348 39,420,916 1,952, ,408,574 Advances to banks and other financial institutions (Note 21(a)) 21(a) 45,239 32,886 96, , ,005 1,088,562 Debt securities included in: Held-to-maturity debt securities (Note 20(c)) 20(c) 120, ,237 1,762, ,526 11,260 3,125,686 Investment securities (Note 20(d)) 20(d) 67,466 22,814 90,280 Other investments in securities (Note 20(b)) 20(b) 147, ,273 10,692,486 1,314,886 12,808,722 5,132,933 27,151,510 15,026,595 51,795,909 41,156,364 2,781, ,044,861 Liabilities Deposits and balances of banks and other financial institutions 306,208 4,255,199 1,171,983 21,447 5,754,837 Deposits from customers 36,895,482 97,869,207 6,622, , ,661,889 Demand deposits and current accounts 7,044,517 7,044,517 Savings deposits 27,747,379 13,372 8, ,769,116 Time, call and notice deposits 2,103,586 97,855,835 6,614, , ,848,256 Certificates of deposit issued 7,502,440 2,655,317 10,157,757 Convertible bonds issued 119, ,637 37,201, ,124,406 15,416,860 2,951, ,694, The Bank of East Asia, Limited Annual Report 2003

46 The Bank 1 year or 5 years or Repayable 3 months less but over less but After on demand or less 3 months over 1 year 5 years Undated Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Assets Treasury bills (Note 19) 19 3,357,453 78,084 3,435,537 Placements with banks and other financial institutions 10,149,059 1,349,882 11,498,941 Certificates of deposit held (Note 20 (a)) 20(a) 971, , ,590 1,950,272 Advances to customers (Note 21(a)) 21(a) 4,871,272 11,226,044 10,178,867 37,306,946 38,069,885 1,663, ,316,862 Advances to banks and other financial institutions (Note 21(a)) 21(a) 45,239 32,886 96, , ,005 1,088,562 Debt securities included in: Held-to-maturity debt securities (Note 20(c)) 20(c) 27, ,214 1,596, ,579 11,260 2,591,727 Investment securities (Note 20(d)) 20(d) 67,466 18,142 85,608 Other investments in securities (Note 20(b)) 20(b) 131, ,042 10,402,887 1,257,533 12,341,867 4,871,272 25,907,516 13,431,634 49,986,004 39,624,695 2,488, ,309,376 Liabilities Deposits and balances of banks and other financial institutions 305,905 4,244,054 1,147,479 5,697,438 Deposits from customers 36,051,243 89,557,841 5,701, , ,438,933 Demand deposits and current accounts 6,660,762 6,660,762 Savings deposits 27,636,599 13,372 8, ,658,336 Time, call and notice deposits 1,753,882 89,544,469 5,693, ,542 97,119,835 Certificates of deposit issued 7,502,440 2,655,317 2,200,000 12,357,757 Convertible bonds issued 119, ,637 36,357,148 93,801,895 14,471,551 2,783,171 2,200, ,613,765 The maturity of convertible bonds issued is based on expected Bondholders option as mentioned in Note

47 30. INCOME TAX IN THE BALANCE SHEET (a) Current Taxation in the Balance Sheet Represents: (a) : The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Provision for Hong Kong Profits Tax for the year (Note 12(a)) 12(a) 62,839 62,805 26,923 26,164 Provisional Profits Tax paid (25,382) (23,778 ) (3,786) (3,592) 37,457 39,027 23,137 22,572 Balance of Profits Tax provision relating to prior years 57,009 37,622 54,150 33,370 Overseas taxation 50,178 46,886 45,388 41, , , ,675 97,026 (b) Deferred Tax Assets and Liabilities Recognised The components of deferred tax (assets)/liabilities recognised in the consolidated balance sheet and the movements during the year are as follows: (b) )/ : The Group Depreciation Unrealised allowances gains on FX in excess of Leasing Revaluation contracts/ related partnership of unearned Tax depreciation transactions properties Provisions discount losses Others Total / Deferred tax arising from: : HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1st January, As previously reported 28, ,636 (14,526 ) 450,758 Prior period adjustments in respect of deferred tax 228, ,044 (164,620 ) 23,972 (77,860 ) 3, ,571 As restated 256, , ,044 (164,620 ) 23,972 (92,386 ) 3, ,329 Write off against investment (166,823 ) (166,823 ) Charged/(credited) to consolidated / profit and loss account (Note 12(a)) 12(a) 24, ,710 (6,693 ) (23,972 ) 23,846 (2,187 ) 301,687 Charged to reserves (Note 33(c)) 33(c) 15,302 15,302 Exchange and other adjustments 167 (167 ) 1,216 1,216 At 31st December, , , ,346 (171,480 ) (67,324 ) 1, , The Bank of East Asia, Limited Annual Report 2003

48 The Group Depreciation Unrealised allowances gains on FX in excess of Leasing Revaluation contracts/ related partnership of unearned Tax depreciation transactions properties Provisions discount losses Others Total / Deferred tax arising from: : HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1st January, As previously reported 33, , ,329 Prior period adjustments in respect of deferred tax 232, ,141 (168,452 ) 18,267 (83,684 ) 3, ,352 As restated 266, , ,141 (168,452 ) 18,267 (83,684 ) 3, ,681 Additions through acquisition of subsidiaries Write off against investment (51,314 ) (51,314 ) Charged/(credited) to consolidated / profit and loss account (Note 12(a)) 12(a) (9,904 ) 158,844 3,832 5,705 (9 ) ,352 Credited to reserves (Note 33(c) & (d)) 33(c)&(d) (6,097 ) (6,097 ) Exchange and other adjustments (8,693 ) (8,693 ) At 31st December, , , ,044 (164,620 ) 23,972 (92,386 ) 3, ,329 The Bank Depreciation Unrealised allowances gains on FX in excess of Leasing Revaluation contracts/ related partnership of unearned Tax depreciation transactions properties Provisions discount losses Others Total / Deferred tax arising from: : HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1st January, As previously reported 20, ,636 (4,928 ) 451,860 Prior period adjustments in respect of deferred tax 205, ,044 (151,676 ) 24,253 (69,454 ) 3, ,080 As restated 226, , ,044 (151,676 ) 24,253 (74,382 ) 3, ,940 Additions through acquisition of subsidiaries 12,364 (12,848 ) (484 ) Write off against investment (166,823 ) (166,823 ) Charged/(credited) to consolidated profit and loss account / 25, ,710 (6,790 ) (24,253 ) 19,224 (607 ) 298,967 Charged to reserves (Note 33 (c)) 33(c) 15,302 15,302 Exchange and other adjustments At 31st December, , , ,346 (171,314 ) (55,135 ) 3, ,

49 30. INCOME TAX IN THE BALANCE SHEET (continued) (b) Deferred Tax Assets and Liabilities Recognised (continued) (b) The Bank Depreciation Unrealised allowances gains on FX in excess of Leasing Revaluation contracts/ related partnership of unearned Tax depreciation transactions properties Provisions discount losses Others Total / Deferred tax arising from: : HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1st January, As previously reported 25, , ,363 Prior period adjustments in respect of deferred tax 159, ,141 (126,096 ) 18,547 (76,426 ) 3, ,841 As restated 185, , ,141 (126,096 ) 18,547 (76,426 ) 3, ,204 Additions through acquisition of subsidiaries 55,424 24,167 (28,926 ) 50,665 Write off against investment (51,314 ) (51,314 ) Charged/(credited) to consolidated profit and loss account / (14,342 ) 158,844 3,346 5,706 2, ,482 Credited to reserves (Note 33(c) & (d)) 33(c)&(d) (6,097 ) (6,097 ) Exchange and other adjustments At 31st December, , , ,044 (151,676 ) 24,253 (74,382 ) 3, ,940 The Group The Bank Restated Restated HK$ 000 HK$ 000 HK$ 000 HK$ 000 Net deferred tax assets recognised on the balance sheet (79,217) (77,029 ) (65,725) (69,453) Net deferred tax liabilities recognised on the balance sheet 863, , , , , , , ,940 (c) Deferred Tax Assets Not Recognised The Group has not recognised deferred tax assets in respect of tax losses of HK$68,978,000 (2002: HK$64,219,000). Under the current tax legislation, the expiry dates of the tax losses were as follows: (c) 68,978, : 64,219,000 : HK$ 000 HK$ 000 To be expired within 5 years 5 15,520 14,208 No expiry date 53,458 50,011 68,978 64, The Bank of East Asia, Limited Annual Report 2003

50 31. LOAN CAPITAL Loan capital of face value of HK$4,269,650,000 (US$550,000,000) and carrying amount of HK$4,260,751,000 (US$548,854,000) represents 7.5% subordinated notes qualifying as tier 2 capital which were issued on 30th January, 2001 by East Asia Financial Holding (BVI) Limited, a single purpose wholly owned finance subsidiary of the Bank. The Bank unconditionally and irrevocably guarantees all amounts payable under the notes which are listed on the Luxembourg Stock Exchange. The notes will mature on 1st February, ,269,650,000550,000,000 4,260,751, ,854,000 East Asia Financial Holding (BVI) Limited % SHARE CAPITAL No. of shares Nominal value No. of shares Nominal value 000 HK$ HK$ 000 Authorised: Ordinary shares of HK$2.50 each ,600,000 6,500,000 2,600,000 6,500,000 Issued and fully paid: At 1st January 1 1 1,446,345 3,615,863 1,433,485 3,583,711 Shares issued under Staff Share Option Schemes 14,204 35, ,343 Shares issued in lieu of dividends 6,904 17,261 11,923 29,809 At 31st December ,467,453 3,668,634 1,446,345 3,615,863 Pursuant to the approved Staff Share Option Schemes (the Schemes ), options to purchase ordinary shares in the Bank were granted to eligible Executive Directors and employees. The option price of the Schemes granted prior to the year 2002 was 95% of the average closing price of the existing shares of the Bank on The Stock Exchange of Hong Kong Limited on the five business days immediately preceding the date of offer of such options. For the Schemes adopted in and after 2002, the exercise price is determined at the date of grant being not less than the highest of: (a) the closing price on the date of grant; (b) the average closing price for the five business days immediately preceding the date of grant; and (c) the nominal value. The options granted under the Schemes will be exercisable between the first and the fifth anniversaries of the date of grant. At 31st December, 2003, the outstanding options were: %2002 (a) (b) 5 (c) Date of options granted Option price Number of shares 21/4/1999 HK$ ,000 20/4/2000 HK$ ,698,000 19/4/2001 HK$ ,435,000 18/4/2002 HK$ ,450,000 02/5/2003 HK$ ,165,

51 33. RESERVES 2003 The Group The Bank Associates HK$ 000 HK$ 000 HK$ 000 (a) Share Premium (undistributable) (a) At 1st January , ,210 Net premium on shares issued under Staff Share Option Schemes 181, ,493 Shares issued in lieu of dividends (17,261) (17,261) Capital fee (137) (137) As 31st December , ,305 (b) General Reserve (b) At 1st January ,623,411 10,909,359 39,170 Transfer from retained profits 12,524 12,524 Shares issued in lieu of dividends 111, ,161 Additions through merger with EAC & EAF 567,000 At 31st December ,747,096 11,587,520 51,694 (c) Revaluation Reserve on Bank Premises (c) (undistributable) At 1st January 1 1 As previously reported 1,249,152 1,089,980 Prior period adjustments in respect of deferred tax (169,043) (169,043) As restated 1,080, ,937 Recognition of net deferred tax liabilities (Note 30(b)) 30(b) (15,302) (15,302) Impairment loss (122,013) (12,839) At 31st December , ,796 (d) Revaluation Reserve on Investment Properties (d) (undistributable) At 1st January and 31st December (e) Statutory Reserves (undistributable) (e) At 1st January and 31st December ,532 5,532 (f) Capital Reserve (undistributable) (f) At 1st January and 31st December ,436 (g) Exchange Revaluation Reserve (undistributable) (g) At 1st January 1 1 (17,905) 11,555 (12,271) Exchange adjustments 42,844 8,347 7,818 At 31st December ,939 19,902 (4,453) (h) Other Revaluation Reserve (undistributable) (h) At 1st January and 31st December The Bank of East Asia, Limited Annual Report 2003

52 2003 The Group The Bank Associates HK$ 000 HK$ 000 HK$ 000 (i) Retained Profits (i) At 1st January 1 1 As previously reported 1,956,340 1,146, ,551 Prior period adjustments in respect of deferred tax 80,523 80,207 As restated 2,036,863 1,226, ,551 Additions through merger with EAC and EAF 16,219 Net profit for the year (Note 13) 13 1,921,714 1,750,006 91,395 Transfer to general reserve (12,524) (12,524) Dividends (Note 14) 14 Interim dividend (334,057) (334,057) Final dividend in respect of previous year (506,232) (506,232) At 31st December ,105,764 2,152, ,422 (j) Total Reserves (j) 16,432,866 15,172, , The Group The Bank Associates HK$ 000 HK$ 000 HK$ 000 (a) Share Premium (undistributable) (a) At 1st January , ,694 Net premium on shares issued under Staff Share Option Schemes 10,335 10,335 Shares issued in lieu of dividends (29,809 ) (29,809 ) Capital fee (10 ) (10 ) As 31st December , ,210 (b) General Reserve (b) At 1st January ,418,601 10,457,693 30,508 Transfer from retained profits 8,662 8,662 Shares issued in lieu of dividends 177, ,809 Realised surplus on disposals transferred from revaluation reserve on investment properties 14, ,922 bank premises 3, ,935 At 31st December ,623,411 10,909,359 39,

53 33. RESERVES (continued) 2002 The Group The Bank Associates HK$ 000 HK$ 000 HK$ 000 (c) Revaluation Reserve on Bank Premises (c) (undistributable) At 1st January 1 1 As previously reported 1,257,509 1,262,909 Prior period adjustments in respect of deferred tax (171,180 ) (171,180) As restated 1,086,329 1,091,729 Release of net deferred tax liabilities (Note 30 (b)) 30(b) 2,137 2,137 Realised surplus on disposals transferred to general reserve (3,363 ) (167,935) Transfer to revaluation reserve on investment properties (4,994 ) (4,994 ) At 31st December ,080, ,937 (d) Revaluation Reserve on Investment Properties (d) (undistributable) At 1st January 1 1 As previously reported 118, ,323 Prior period adjustments in respect of deferred tax (3,960 ) (3,960 ) As restated 114, ,363 Release of net deferred tax liabilities (Note 30(b)) 30(b) 3,960 3,960 Revaluation deficit (108,341 ) (17,395) Realised surplus on disposals transferred to general reserve (14,976 ) (105,922) Transfer from revaluation reserve on bank premises 4,994 4,994 At 31st December (e) Statutory Reserves (undistibutable) (e) At 1st January and 31st December ,532 5,532 (f) Capital Reserve (undistributable) (f) At 1st January and 31st December ,436 (g) Exchange Revaluation Reserve (undistributable) (g) At 1st January 1 1 (49,712 ) (6,377 ) (29,478 ) Exchange adjustments 31,807 17,932 17,207 At 31st December (17,905 ) 11,555 (12,271 ) (h) Other Revaluation Reserve (undistributable) (h) At 1st January 1 1 (763 ) (763 ) Revaluation At 31st December The Bank of East Asia, Limited Annual Report 2003

54 2002 The Group The Bank Associates HK$ 000 HK$ 000 HK$ 000 (i) Retained Profits (i) At 1st January 1 1 As previously reported 1,452, , ,494 Prior period adjustments in respect of deferred tax (Note 3) 3 99,115 95,278 As restated 1,551, , ,494 Addition through merger with FPB 18,085 Net profit for the year As previously reported 1,288,378 1,094,553 23,296 Prior period adjustments in respect of deferred tax (Note 3) 3 (18,592 ) (15,071 ) As restated (Note 13) 13 1,269,786 1,079,482 23,296 Transfer to general reserve (8,662 ) (8,662 ) Dividends (Note 14) 14 Interim dividend (302,348 ) (302,348 ) Final dividend in respect of previous year (473,198 ) (473,198 ) Disposal of associates 88,004 Change of status from an associate to a subsidiary 15,419 At 31st December ,036,863 1,226, ,551 (j) Total Reserves (j) 15,170,656 13,424, ,982 The application of the share premium account is governed by Section 48B of the Hong Kong Companies Ordinance. General reserve was set up from the transfer of retained earnings, the realised revaluation surplus on disposal of properties and the value of shares issued in lieu of dividend. Revaluation reserve on bank premises, revaluation reserve on investment properties and exchange revaluation reserve have been set up and are dealt with in accordance with the accounting policies adopted for the revaluation of bank premises, investment properties and foreign currency translation. Capital reserve represents the capitalisation of subsidiaries reserves. Statutory reserves are set up to supplement the paid-up capital until the sum of paidup capital and the statutory reserves are equal to the registered capital for certain associates. Total distributable reserves of the Bank amounted to HK$13,739,726,000 (2002 restated: HK$12,135,630,000). 48B 13,739,726, ,135,630,

55 34. OFF-BALANCE SHEET EXPOSURES (a) Contingent Liabilities and Commitments The following is a summary of the contractual amounts of each significant class of contingent liabilities and commitments: (a) The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Direct credit substitutes 4,381,620 4,125,735 4,350,990 4,097,553 Transaction-related contingencies 496, , , ,227 Trade-related contingencies 2,596,662 2,152,000 2,549,609 2,133,553 Other commitments with an original maturity of: under 1 year or which are 1 unconditionally cancellable 20,395,121 20,615,082 20,174,252 20,353,725 1 year or over 1 6,775,946 8,416,217 6,778,653 8,429,717 Others 50,117 50,117 34,696,098 35,828,261 34,400,253 35,533,775 Contingent liabilities and commitments are credit-related instruments which include acceptances, letters of credit, guarantees and commitments to extend credit. The contractual amounts represent the amounts at risk should the contract be fully drawn upon and the client default. Since a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements. (b) Derivatives Derivatives refer to financial contracts whose value depends on the value of one or more underlying assets or indices. The following is a summary of the notional amounts of each significant type of derivative for the Group and the Bank: (b) The Group Trading Hedging Total Trading Hedging Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Exchange rate contracts Forwards and futures 5,051, ,583 5,193,988 4,732, ,628 5,091,740 Swaps 18,817,961 5,781,087 24,599,048 5,649,654 7,916,316 13,565,970 Options purchased 2,828,762 2,828,762 1,202,429 1,202,429 Options written 2,712,886 2,712,886 1,202,429 1,202,429 Interest rate contracts Forwards and futures 325, , , ,000 Swaps 728,989 12,487,682 13,216, ,758 10,405,074 11,127,832 Options purchased 19,498 19,498 Equity contracts Options purchased 420, , , ,131 Options written 420, , , ,131 31,305,641 18,411,352 49,716,993 14,081,644 18,700,516 32,782, The Bank of East Asia, Limited Annual Report 2003

56 The Bank Trading Hedging Total Trading Hedging Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Exchange rate contracts Forwards and futures 5,052,181 5,052,181 4,979,811 4,979,811 Swaps 18,817,961 5,781,087 24,599,048 5,649,654 7,916,316 13,565,970 Options purchased 2,828,762 2,828,762 1,202,429 1,202,429 Options written 2,712,886 2,712,886 1,202,429 1,202,429 Interest rate contracts Forwards and futures 325, , , ,000 Swaps 728,989 12,604,127 13,333, ,758 10,405,074 11,127,832 Options purchased 19,498 19,498 Equity contracts Options purchased 420, , , ,131 Options written 420, , , ,131 31,306,417 18,385,214 49,691,631 14,329,343 18,340,888 32,670,231 Derivatives arise from futures, forward, swap and option transactions undertaken by the Group and the Bank in the foreign exchange, interest rate and equity markets. The notional amounts of these instruments indicate the volume of transactions outstanding at the balance sheet date; they do not represent amounts at risk. The replacement costs and credit risk weighted amounts of the aforesaid off-balance sheet exposures are as follows. These amounts do not take into account the effects of bilateral netting arrangements. The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Replacement costs Exchange rate contracts 583, , , ,387 Interest rate contracts 865, , , ,654 Options purchased exchange rate contracts 5, , equity contracts 3, , ,458, ,196 1,457, ,856 Credit risk weighted amounts Contingent liabilities and commitments 8,087,367 8,559,065 8,061,762 8,538,585 Exchange rate contracts 259, , , ,532 Interest rate contracts 192,086 61, ,163 61,098 Equity contracts 19,519 8,000 19,519 8,000 8,558,797 8,778,016 8,532,420 8,756,

57 34. OFF-BALANCE SHEET EXPOSURES (continued) (b) Derivatives (continued) The tables above give the contractual or notional amounts, replacement cost and credit risk weighted amounts of off-balance sheet transactions. The replacement cost is calculated for the purposes of deriving the credit risk weighted amounts. These are assessed in accordance with the Hong Kong Monetary Authority s guidelines which implement the Basle agreement on capital adequacy and depend on the status of the counterparty and the maturity characteristics. The risk weights used range from 0% to 100% for contingent liabilities and commitments, and from 0% to 50% for exchange rate, equity and interest rate contracts. Replacement cost represents the cost of replacing all contracts which have a positive value when marked to market. Replacement cost is a close approximation of the credit risk for these contracts as at the balance sheet date. The credit risk weighted amount refers to the amount as computed in accordance with the Third Schedule to the Hong Kong Banking Ordinance. (b) 0% 100% 0% 50% (c) Capital Commitments Capital commitments outstanding at 31st December not provided for in the accounts were as follows: (c) The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Expenditure authorised and contracted for* * 1,122,082 1,257,317 1,104,710 1,249,488 Expenditure authorised but not contracted for 377, , ,555 6,168 1,499,637 1,589,486 1,482,265 1,255,656 * The amounts as at 31st December, 2003 and 31st December, 2002 included the capital commitments amounting to HK$873,470,000 and HK$1,133,768,000 respectively in relation to the Bank s acquisition of a portion of Millennium City 5, a new building being erected in Kwun Tong. Other amounts as at 31st December, 2003 mainly included the commitments amounting to HK$102,180,000 in relation to the implementation of a new core banking system. * ,470,0001,133,768, ,180, The Bank of East Asia, Limited Annual Report 2003

58 (d) Operating Lease Commitments At 31st December, 2003, the total future minimum lease payments under non-cancellable operating leases are payable as follows: (d) The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Properties within one year 1 93,134 83, , ,290 after one year but within five years ,665 84, ,329 67,920 after five years 5 27,580 32,066 52,641 25, , , , ,104 Other within one year 1 1,857 2,365 1,017 1,217 after one year but within five years 15 2,069 2, ,413 3,926 4,968 1,586 2,630 The Group and the Bank lease certain properties and equipment under operating leases. The leases typically run for an initial period of one to twenty five years, with an option to renew the lease when all terms are renegotiated. Lease payments are usually adjusted annually to reflect market rentals. None of the leases includes contingent rentals. (e) Obligations under Mortgage Loans Sold Included in the captions set out below are balances which are established as reserve funds for mortgage loan purchasers pursuant to the terms of mortgage sale agreements. The reserve funds are available to the purchasers to cover any losses or cash flow shortfalls that result from both credit risk and basis risk with respect to the loans sold and to protect the purchasers in the event that they have to appoint a substitute servicer. These reserve funds are either set up in the name of the Bank and are charged in favour of the purchaser as security for the Bank s obligations to the purchaser or, in the name of the loan purchaser who retains absolute ownership, title, right and interest in the reserve funds, pursuant to the terms of the mortgage sale agreements. 125 (e) The Group The Bank HK$ 000 HK$ 000 HK$ 000 HK$ 000 Held-to-maturity debt securities 30,494 39,815 30,494 39,815 Accrued interest and other accounts 73,136 68,805 73,136 68, , , , ,

59 35. NOTES ON CONSOLIDATED CASH FLOW STATEMENT (a) Purchase of Subsidiaries (a) HK$ 000 HK$ 000 Net assets acquired Placements with banks and other financial institutions maturing between one and twelve months ,414 Advances and other accounts less provisions 5,185 Investment securities 2,667 Fixed assets 4,479 Deferred tax (400) Other accounts and provisions (6,567) Minority interest (3,050) Share of net assets under equity accounting (1,980) 5,748 Goodwill arising on consolidation 300, , , ,209 Investment cost payable as at 1st January 1 1 1,682 as at 31st December Total purchase price paid, satisfied in cash 300, ,891 Less: cash and cash equivalents acquired : (5,414) Net cash outflow in respect of the acquisition of subsidiaries 300, ,477 (b) Increase in Shareholding of a Subsidiary The Group increased its shareholding in a subsidiary by 4.3% for a cash consideration of HK$39,139,000 in The net asset value and goodwill attributable to the increase in shareholding was HK$37,121,000 and HK$2,018,000 respectively. (b) ,139, % 37,121,000 2,018, The Bank of East Asia, Limited Annual Report 2003

60 (c) Cash and Cash Equivalents (i) Components of cash and cash equivalents in the consolidated cash flow statement (c) (i) HK$ 000 HK$ 000 Cash and balances with banks and other financial institutions 2,695,618 1,963,261 Money at call and short notice 21,264,261 28,442,335 Placements with banks and other financial institutions with original 3 maturity within three months 6,899,332 2,319,674 Treasury bills with original maturity within three months 3 2,294,706 3,373,137 Certificates of deposit held with original 3 maturity within three months 736, ,615 33,890,538 36,325,022 (ii) Reconciliation with the consolidated balance sheet (ii) HK$ 000 HK$ 000 Cash and short term funds 36,033,510 34,937,640 Placements with banks and other financial institutions maturing between one and twelve months ,075,521 11,670,652 Certificates of deposit held 3,016,556 2,370,751 Amount shown in the consolidated balance sheet 60,125,587 48,979,043 Less: amount with an original maturity of beyond three months : 3 (26,235,049) (12,654,021) Cash and cash equivalents in the consolidated cash flow statement 33,890,538 36,325,

61 36. LOANS TO OFFICERS The aggregate of loans to officers of the Bank disclosed pursuant to Section 161B (4B) and (4C) of the Hong Kong Companies Ordinance is as follows: 161B (4B) (4C) HK$ 000 HK$ 000 Aggregate amount of relevant loans outstanding at 31st December By the Bank 671, ,024 By subsidiaries 15, , ,621 The maximum aggregate amount of relevant loans outstanding during the year By the Bank 1,044,475 1,023,528 By subsidiaries 16,806 There was no interest due but unpaid nor any specific provision made against these loans at 31st December, MATERIAL RELATED PARTY TRANSACTIONS The Group maintains certain retirement benefit schemes for its staff as per Note 2(p)(iii). In the year 2003, the total amount of contributions the Group made to the schemes was HK$65,854,000 (2002: HK$64,172,000). The Group enters into a number of transactions with the Group s related parties, including its associates, and key management personnel and their close family members and companies controlled or significantly influenced by them. The transactions include accepting deposits from and extending credit facilities to them. Except that there is an interest free shareholder s advance extended to one associate amounting to HK$10,700,000 at 31st December, 2003 (2002: HK$31,526,000), all interest rates in connection with the deposits taken and credit facilities extended are under terms and conditions normally applicable to customers of comparable standing. The interest received from and interest paid to the Group s related parties for the year, and the outstanding balances of amounts due from and due to them at the year end are aggregated as follows: 2(p)(iii) ,854, ,172, ,700, ,526, % to Group total % to Group total Interest income Interest expense Amount due from related parties (Note a) a Amount due to related parties (Note b) b Notes: (a) Based on total assets excluding cash and short-term funds, placements with banks and other financial institutions maturing between one and twelve months, investments in associates and fixed assets. (a) 1 12 (b) Based on deposits from customers and debt instruments issued. (b) 142 The Bank of East Asia, Limited Annual Report 2003

62 38. EQUITY COMPENSATION PLANS The Bank has adopted Staff Share Option Schemes whereby the Board of the Bank may at its discretion grant to any employees, including Executive Directors and Chief Executive, of the Group options to subscribe for shares of the Bank. The options may be exercised during the period beginning on the first anniversary of the Date of Grant and ending on the fifth anniversary of the Date of Grant. All options were granted for nil consideration. 1 5 (a) Particulars of Share Options Date of Grant Vesting Period Exercise Period Exercise Price Per Share HK$ 20/4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /4/ /5/ /5/ /5/ /5/ /5/ (b) Movement of Share Options Number of Share Options Outstanding Outstanding Date of Grant at 1/1/2003 Granted Exercised Lapsed at 31/12/ /4/1998 5,361,200 5,361,200 21/4/1999 4,510,000 3,764,000 10, ,000 20/4/ ,128,000 6,990, ,000 3,698,000 19/4/2001 5,360,000 1,665, ,000 3,435,000 18/4/2002 5,505,000 1,785, ,000 3,450,000 02/5/ ,525, ,000 15,165,000 Total 31,864,200 15,525,000 14,204,000 6,701,200 26,484,000 Number of Share Options Outstanding Outstanding Date of Grant at 1/1/2002 Granted Exercised Lapsed at 31/12/ /4/ ,395,000 13,395,000 20/4/1998 5,783, , ,800 5,361,200 21/4/1999 5,063, ,000 4,510,000 20/4/ ,700,000 98, ,000 11,128,000 19/4/2001 5,520, ,000 5,360,000 18/4/2002 5,625, ,000 5,505,000 Total 41,461,200 5,625, ,200 14,284,800 31,864,

63 38. EQUITY COMPENSATION PLANS (continued) (c) No share options were cancelled during the years ended 31st December, 2003 and (c) (d) Details of share options exercised (d) Number of Share Options Exercise Period Date of Grant January 1 20/4/ ,000 21/4/ ,000 20/4/ ,000 February 2 20/4/ ,600 21/4/ , ,000 March 3 21/4/ ,000 6,000 April 4 21/4/ ,000 22,000 May 5 20/4/ ,000 21/4/ ,000 58,000 20/4/ ,000 June 6 20/4/ ,600 21/4/ , ,000 July 7 21/4/ ,000 22,000 August 8 21/4/ ,000 18/4/ ,000 September 9 21/4/1999 1,089,000 37,000 20/4/ ,000 18/4/ ,000 October 10 21/4/ ,000 20/4/2000 2,767,000 19/4/ ,000 18/4/ ,000 November 11 21/4/ ,000 20/4/2000 2,458,000 19/4/ ,000 December 12 21/4/ ,000 20/4/ ,000 19/4/ ,000 18/4/ , COMPARATIVE FIGURES 14,204, ,200 (a) Comparative figures for 2002 are restated to conform with the current year s presentation. The restatements for the consolidated profit and loss account, consolidated and the Bank s balance sheet are due to the change in accounting policy for deferred taxation. (b) Cash rebates for mortgage loans amounting to HK$181,749,000 (2002: HK$173,362,000), which were previously classified under operating expenses, are netted off against interest income to be in line with market practice. Prior year figures are restated to conform with the current year s presentation. (c) Commission related expenses amounting to HK$206,504,000 (2002: HK$178,268,000), which were previously classified under operating expenses is now shown as fees and commission expense to be in line with market practice. Prior year figures are restated to conform with the current year s presentation. (a) (b) (c) ,749, ,362, ,504, ,268, The Bank of East Asia, Limited Annual Report 2003