Consolidated Financial Statements and Statistics - Annual Report 2009/ The Hong Kong Jockey Club

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1 Consolidated Financial Statements & Statistics Trust Financial Statements

2 Report of the Stewards The Stewards have pleasure in submitting their annual report and the audited consolidated financial statements of The Hong Kong Jockey Club ( the Club ) and its subsidiaries (collectively the Group ) for the year ended 30 June Principal activities During the year, the Group was primarily engaged in the conduct and control of horse racing in Hong Kong and in operating authorised wagering activities on horse racing, football and lottery. The principal activities of its subsidiaries are shown on pages 169 to 170. Financial statements The results and appropriations of the Group for the year are set out in the consolidated income statement on page 125. All figures in the annual report and the audited consolidated financial statements are expressed in millions of Hong Kong dollars unless otherwise stated. Reserves Movements in the reserves of the Group and the Club during the year are set out in notes 27 to 29 to the consolidated financial statements. Donations During the year, the Group appropriated HK$1,500 million to The Hong Kong Jockey Club Charities Trust and donated HK$62 million for other charitable purposes. Property, plant and equipment Details of the movements in property, plant and equipment of the Group and the Club are shown in note 13 to the consolidated financial statements. Stewards The Board of Stewards is listed on page 4 of this annual report. Dr John C C Chan and Mr T Brian Stevenson were elected Chairman and Deputy Chairman respectively immediately after the 2009 Annual General Meeting. In accordance with the Club s Articles of Association, Dr Donald K T Li, Mr Philip N L Chen, Mr Stephen Ip Shu Kwan and Dr Rita Fan Hsu Lai Tai will retire by rotation at the forthcoming Annual General Meeting. All four Stewards retiring by rotation, being eligible, will offer themselves for re-election. Dr John C C Chan has decided to retire as Chairman and as a Steward of the Club at the conclusion of the forthcoming Annual General Meeting and his vacancy will be filled by election. Stewards act in an entirely honorary capacity and have received no emoluments in the year under review. No Steward had, during or at the end of the year, any material interest in any contract of significance to the business of the Club or any of its subsidiaries. Management contracts No contracts concerning the management and administration of the whole or any substantial part of the business of the Club were entered into or existed during the year. 122

3 Auditors The consolidated financial statements have been audited by PricewaterhouseCoopers who retire and, being eligible, offer themselves for re-appointment. This report is prepared in accordance with a resolution of the Board of Stewards and is signed for and on behalf of the Board. John C C Chan Chairman 23 July

4 Independent Auditor s Report 141 To the Members of The Hong Kong Jockey Club (incorporated in Hong Kong with liability limited by guarantee) We have audited the consolidated financial statements of The Hong Kong Jockey Club (the Club ) and its subsidiaries (together, the Group ) set out on pages 125 to 170, which comprise the consolidated and the Club s statements of financial position as at 30 June 2010, and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Stewards responsibility for the financial statements The Stewards of the Club are responsible for the preparation and the true and fair presentation of these consolidated financial statements in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants, and the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit and to report our opinion solely to you, as a body, in accordance with section 141 of the Hong Kong Companies Ordinance and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Stewards, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Group and of the Club as at 30 June 2010 and of the Group s surplus and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the Hong Kong Companies Ordinance. PricewaterhouseCoopers Certified Public Accountant Hong Kong, 23 July

5 Consolidated Income Statement for the year ended 30 June in HK$ million Note (note 1) (note 1) Amounts wagered , ,190 Betting and lottery revenue 4 21,154 20,144 Betting and lottery duty (13,339) (12,735) Payment to racing jurisdiction outside Hong Kong (39) (33) Lotteries Fund (956) (964) Net margin and commission 5 6,820 6,412 Other revenue 6 1,958 1,789 8,778 8,201 Operating costs 7 (6,311) (6,093) Operating surplus 2,467 2,108 Interest income from deposits Surplus/(deficit) from securities investments and long-term investment portfolios (1,151) Surplus/(deficit) from Contingency Fund investments 9 80 (1,157) Finance costs (61) (28) Financial surplus/(deficit) 880 (2,261) Share of loss of an associate 17 (8) (23) Share of loss of a jointly controlled entity 18 (25) Surplus/(deficit) before taxation, charitable donations to Charities Trust and transfer to Contingency Fund 3,314 (176) Appropriation to The Hong Kong Jockey Club Charities Trust 10 Allocations Fund (1,100) (500) Capital Fund (400) Surplus/(deficit) before taxation 1,814 (676) Taxation 11 (282) (241) Net surplus/(deficit) after appropriation and taxation 1,532 (917) Transfer to Contingency Fund 28 (80) 1,157 Retained surplus transferred to Accumulated Reserve 27 1,

6 Consolidated Statement of Comprehensive Income for the year ended 30 June in HK$ million Note Net surplus/(deficit) after appropriation and taxation 1,532 (917) Other comprehensive income Available-for-sale financial assets (Deficit)/surplus on revaluation of Debt securities and long-term investment portfolios 27 (33) (1,104) Contingency Fund investments (918) Development Fund long-term investment portfolios (61) Realised losses/(gains) reclassified to income statement Debt securities and long-term investment portfolios (147) Contingency Fund investments Currency translation differences 21 (2) Other comprehensive income/(loss) for the year, net of tax 1,137 (2,076) Total comprehensive income/(loss) for the year 2,669 (2,993) 126

7 Statement of Financial Position at 30 June Consolidated Club in HK$ million Note Non-current assets Property, plant and equipment 13 4,176 3,878 3,344 3,108 Leasehold land prepayments Investment properties Investments in subsidiaries 16 1,134 1,134 Investment in an associate 17 7 Investment in a jointly controlled entity Contingency Fund investments 28 10,562 9,403 10,562 9,403 Long-term investment portfolios 19 10,861 9,797 8,952 8,013 Long-term prepayments Other assets ,187 24,468 24,849 22,575 Current assets Debt securities portfolio 21 1,401 1,592 1,401 1,592 Loans to subsidiaries 16 1, Other current assets Amounts due from subsidiaries Amount due from an associate Short-term deposits 23 3,631 3,755 3,083 3,193 Bank balances, cash and other liquid funds 2,039 1, ,721 7,085 6,388 6,043 Current liabilities Short-term loans 24 (466) (483) Creditors and receipts in advance 25 (3,838) (3,189) (2,366) (2,113) Amounts due to subsidiaries 16 (3,094) (3,024) Taxation payable (298) (276) (109) (84) (4,602) (3,948) (5,569) (5,221) Net current assets 3,119 3, Non-current liabilities Deferred tax liabilities 26 (48) (16) (58) (22) 30,258 27,589 25,610 23,375 Reserves 27 18,696 17,232 15,048 13,972 Contingency Fund 28 10,562 9,403 10,562 9,403 Development Fund 29 1, Total equity 30,258 27,589 25,610 23,375 John C C Chan T Brian Stevenson Stewards 127

8 Consolidated Statement of Changes in Equity Contingency Development in HK$ million Reserves Fund Fund Total Balance at 1 July ,232 9, ,589 Total comprehensive income for the year 1,464 1, ,669 Balance at 30 June ,696 10,562 1,000 30,258 Balance at 1 July ,245 11,322 1,015 30,582 Total comprehensive loss for the year (1,013) (1,919) (61) (2,993) Balance at 30 June ,232 9, ,

9 Consolidated Statement of Cash Flows for the year ended 30 June in HK$ million Note Operating activities Cash inflow generated from operations 31 2, Interest paid (25) (32) Hong Kong profits tax paid (228) (233) Net cash inflow from operating activities 2, Investing activities Purchase of property, plant and equipment (1,221) (929) Sale of property, plant and equipment 1 2 Interest received Dividends received Capital injection to an associate (30) Capital injection to a jointly controlled entity (61) Purchase of available-for-sale financial assets (21,455) (20,029) Sale of available-for-sale financial assets 20,144 19,310 Purchase of financial assets at fair value through profit or loss (90) (150) Sale of financial assets at fair value through profit or loss Net receipt for derivative financial instruments Increase in deposits held in long-term investment portfolios (224) Net cash outflow from investing activities (1,260) (1,161) Financing activities (Repayment of)/proceeds from borrowings (17) 59 Net cash (outflow)/inflow from financing activities (17) 59 Net increase/(decrease) in cash and cash equivalents 795 (675) Cash and cash equivalents at the beginning of the year 4,854 5,618 Exchange gains/(losses) 21 (89) Cash and cash equivalents at the end of the year 5,670 4,854 Analysis of the balances of cash and cash equivalents Short-term deposits 3,631 3,755 Bank balances, cash and other liquid funds 2,039 1,099 5,670 4,

10 Notes to the Financial Statements General information The Group is primarily engaged in the conduct and control of horse racing in Hong Kong and in operating authorised wagering activities on horse racing, football and lottery. The Club is incorporated in Hong Kong with liability limited by guarantee. The address of its registered office is 1 Sports Road, Happy Valley, Hong Kong. Details of the principal activities of its subsidiaries are mentioned on pages 169 to 170. The last race meeting of the 2008/09 racing season was held on 1 July 2009 and the last five race meetings of the 2009/10 racing season were held on 1 July 2010, 4 July 2010, 7 July 2010, 11 July 2010 and 14 July 2010 ( July 2010 race meetings ). Accordingly, the financial results of 1 July 2009 have been included in the consolidated financial statements for the year ended 30 June 2010 and the financial results of July 2010 race meetings will be shown in the consolidated financial statements for the year ending 30 June The consolidated financial results of the 2008/09 and 2009/10 full racing seasons covering 78 and 83 race meetings respectively are shown on page 171. The consolidated financial statements are presented in millions of Hong Kong dollars (HK$ million). The consolidated financial statements on pages 125 to 170 were approved by the Stewards on 23 July Principal accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards ( HKFRS ), which include all applicable individual HKFRS, Hong Kong Accounting Standards ( HKAS ) and interpretations issued by the Hong Kong Institute of Certified Public Accountants. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and financial liabilities at fair value through profit or loss, and derivative financial instruments which are carried at fair value. The preparation of consolidated financial statements in conformity with HKFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note

11 (a) 1 2. Principal accounting policies (Cont.) 2.1 Basis of preparation (Cont.) (a) Revised standards and amendments that are relevant to the Group s operations and are effective for the current accounting period HKAS 1 (Revised) Presentation of financial statements. The revised standard prohibits the presentation of items of income and expenses (that is, non-owner changes in equity ) in the statement of changes in equity, requiring non-owner changes in equity to be presented separately from owner changes in equity in a statement of comprehensive income. As a result, the Group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Entities can choose whether to present one performance statement (a statement of comprehensive income) or two statements (an income statement and a statement of comprehensive income). The Group has elected to present two statements, an income statement and a statement of comprehensive income. Comparative information has been re-presented so that it is also in conformity with the revised standard. 27 HKAS 27 (Revised) Consolidated and separate financial statements. The revised standard requires the effects of all transactions with minority interest to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in consolidated income statement. HKFRS 3 (Revised) Business combinations. The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the consolidated income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the noncontrolling interest s proportionate share of the acquiree s net assets. All acquisition-related costs should be expensed. HKFRS 7 (Amendments) Improving disclosures about financial instruments. The amendments require enhanced disclosures about fair value measurement and liquidity risk of financial instruments. In particular, the amendments require disclosure of fair value measurement of financial instruments into a three-level hierarchy according to the extent to which they are based on observable market data. In accordance with the transition provisions, the comparative information for the newly required disclosures about the fair value measurements has not been provided. The Group has adopted the above revised standards and amendments but there is no impact on the consolidated financial statements, apart from certain presentational changes. 131

12 Notes to the Financial Statements (b) 2. Principal accounting policies (Cont.) 2.1 Basis of preparation (Cont.) (b) New and revised standards, amendments and interpretation that are relevant to the Group s operations but are not yet effective The following new and revised standards, amendments and interpretation have been published and are mandatory for accounting periods beginning on or after 1 January 2010, but have not been early adopted by the Group: HKASs (Amendments) Improvements to HKFRSs HKAS 10 (Revised) HKAS 23 (Revised) HKFRS 9 Events after the Reporting Period Borrowing Costs Financial Instruments 9 HK(IFRIC)-Int 14 (Amendments) Prepayments of a Minimum Funding Requirement and their Interaction The adoption of the above new and revised standards, amendments and interpretation will not have material financial impact to the Group other than the disclosure impact on the consolidated financial statements. 2.2 Reconciliation of the amounts wagered by customers to betting and lottery revenue The Group reports net gains and losses arising from all betting and lottery activities as revenue, which is the amounts wagered net of betting dividends, rebates and lottery prizes. A reconciliation of the amounts wagered by customers to betting and lottery revenue is shown below for the year ended 30 June in HK$ million Horse race betting Football betting Lottery Total Amounts wagered by customers 71,647 38,908 6, ,930 Betting dividends, rebates and lottery prizes (59,840) (32,494) (3,442) (95,776) Betting and lottery revenue 11,807 6,414 2,933 21, for the year ended 30 June in HK$ million Horse race betting Football betting Lottery Total Amounts wagered by customers 67,653 35,108 6, ,190 Betting dividends, rebates and lottery prizes (56,266) (29,308) (3,472) (89,046) Betting and lottery revenue 11,387 5,800 2,957 20,144 The consolidated income statement presents the amounts wagered by customers but this is for information purposes only. Amounts wagered represent amounts received in respect of bets placed by customers on betting and lottery activities during the year. 132

13 Principal accounting policies (Cont.) 2.3 Consolidation The consolidated financial statements include the financial statements, made up to 30 June 2010, of the Club and its direct and indirect subsidiaries. (a) (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Inter-company transactions and balances between Group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. In the Club s statement of financial position, the investments in subsidiaries are stated at cost less provision for impairment losses. The results of subsidiaries are accounted for by the Club on the basis of dividends received and receivable. (b) (b) Associate and jointly controlled entity Associate is an entity over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Jointly controlled entity is a joint venture whereby the Group and other parties undertake an economic activity which is subject to joint control and none of the participating parties has unilateral control over the economic activity. Investment in an associate/a jointly controlled entity is accounted for using the equity method of accounting and is initially recognised at cost. The Group s share of the associate/ jointly controlled entity s post-acquisition results is recognised in the consolidated income statement, and its share of post-acquisition movements in other comprehensive income is recognised in the consolidated statement of comprehensive income. In the consolidated statement of financial position, the investment in an associate/a jointly controlled entity comprises the Group s share of net assets and its net advances made to the associate/jointly controlled entity, plus goodwill identified on acquisition and net of accumulated impairment losses, if any. When the Group s share of losses in the associate/jointly controlled entity equals or exceeds its interest in the associate/jointly controlled entity, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate/jointly controlled entity. Unrealised gains on transactions between the Group and its associate/jointly controlled entity are eliminated to the extent of the Group s interest in the associate/jointly controlled entity. Unrealised losses are also eliminated unless the transactions provide evidence of an impairment of the assets transferred. 133

14 Notes to the Financial Statements Principal accounting policies (Cont.) 2.4 Contingency Fund The Club s Contingency Fund is held to provide a source of funds in the event that income from betting operations should cease temporarily; to finance major capital projects, either for the Club or for the Hong Kong community; to finance major renovations to improve the Club s substantial investment in property, plant and equipment; or for any other special purposes as deemed appropriate by the Stewards. The Contingency Fund represents the market value of the Contingency Fund investments and this is adjusted annually through the receipt of investment income, realised surplus or deficit, revaluation of investments and, when necessary, the transfer of additional funds. The Contingency Fund investments are held for non-trading purpose and are stated at fair value at the end of the reporting period. The surplus derived from Contingency Fund investments is reinvested and deficit absorbed in the Contingency Fund portfolio. The accounting policy for the financial assets of the Contingency Fund investments is stated in note 2.8 below. 2.5 Development Fund The Development Fund maintained under The Jockey Club Membership Services Limited, is held to accumulate adequate funds to finance future membership facilities. The annual transfer from the net surplus of the year is approved by the Stewards taking into consideration the operating surplus, interest income earned by this Fund, and the amounts of entrance and qualification fees of Full and Corporate Members, and Country Concession Scheme joining fees received during the year. The financial assets of the Development Fund are included in long-term investment portfolios. 2.6 Long-term investment portfolios The primary purpose of the long-term investment portfolios is to invest surplus funds in excess of normal operational requirements for capital appreciation over the medium to long-term. These portfolios are held for non-trading purpose and are stated at fair value at the end of the reporting period. The surplus derived from these investments is reinvested and deficit absorbed within these portfolios. The accounting policy for the financial assets of the longterm investment portfolios is stated in note 2.8 below. 2.7 Debt securities portfolio The primary purpose of debt securities is to invest surplus funds for cash management and yield enhancement. They are held for non-trading purpose and are stated at fair value at the end of the reporting period. The accounting policy for the financial assets of debt securities portfolio is stated in note 2.8 below. 2.8 Financial assets The Group classifies its financial assets in the following categories: available-for-sale financial assets, derivative financial instruments, financial assets at fair value through profit or loss, loans and receivables, and cash and cash equivalents. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of the financial assets at initial recognition and re-evaluates this designation at every reporting date. The Contingency Fund investments, long-term investment portfolios, and debt securities portfolio may contain these financial assets. Purchases and sales of financial assets are recognised on trade day the date on which the Group commits to purchase or sell the assets. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. 134

15 (a) 2. Principal accounting policies (Cont.) 2.8 Financial assets (Cont.) (a) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They comprise local and overseas listed or unlisted equities, debt securities and/or alternative investments. The equities and debt securities are initially measured at fair value plus direct and incremental transaction costs and are subsequently remeasured at fair value. Changes in fair value are recognised in other comprehensive income and retained in the investment revaluation reserve until the assets are sold. On the sale of these assets, the differences between the net sale proceeds and the carrying value and the cumulative gains or losses previously recognised in other comprehensive income are reclassified from investment revaluation reserve to Surplus/ deficit from securities investments and long-term investment portfolios or Surplus/deficit from Contingency Fund investments. Alternative investments include investments in hedge funds, private equity funds and private real estate funds. They follow the same accounting treatment as the equities and debt securities. They do not have quoted market prices in an active market, their fair values will be determined with reference to the values established by external fund managers using valuation techniques. (b) (b) Derivative financial instruments and hedging activities The Group uses derivatives such as interest rate swaps, equity options and foreign exchange forward contracts to manage its financial risks and to facilitate the implementation of its investment strategies. Derivatives are initially recognised at fair value on the date derivative contracts are entered into and are subsequently re-measured at their fair value. The Group has designated certain forward contracts as hedges of highly probable forecast transactions (cash flow hedge). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The fair values of various derivative instruments used for hedging purposes are disclosed in note 30 under other current assets. Movements on the hedging reserve in equity are included in exchange reserve and shown in note 27. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity is more than 12 months, and as a current asset or liability when the remaining maturity is less than 12 months. The effective portion of changes in the fair value of derivatives, that is designated and qualified as cash flow hedge, is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement within Surplus/(deficit) from securities investments and long-term investment portfolios. (c) (c) Financial assets at fair value through profit or loss This category consists of notes with embedded derivatives and certain investments in securities. The economic characteristics and risks of the embedded derivatives are not closely linked to the underlying assets. The Group designates these assets at fair value at inception. Changes in the fair value of these assets are included in the consolidated income statement in the period in which they arise. Upon disposal or repurchase, the difference between the net sale proceeds or the net payment and the carrying value is included in the consolidated income statement. 135

16 Notes to the Financial Statements (d) Principal accounting policies (Cont.) 2.8 Financial assets (Cont.) (d) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortised cost using the effective interest method and are included in current assets, except for maturities greater than 12 months after the end of the reporting period where these are classified as non-current assets. The Group s loans and receivables comprise Loans and receivables as shown in note 22, and Short-term deposits in the consolidated and Club s statements of financial position. (e) 2.9 (e) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement is reclassified from investment revaluation reserve to income. Impairment losses recognised in the consolidated income statement on equity instruments are not reversed through the consolidated income statement. 2.9 Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. They are depreciated over the period of their estimated useful lives on a straight-line basis at the following rates: Buildings 25 years Plant and equipment ranging from 10% to 33% per annum Projects in progress no depreciation is provided on projects in progress since they are not in use. On completion, the project costs are transferred to the appropriate property, plant and equipment. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the consolidated income statement during the year in which they are incurred. The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the consolidated income statement. 136

17 Principal accounting policies (Cont.) 2.10 Investment properties Properties that are held for long-term rental yields or for capital appreciation or both, and that are not occupied by the companies in the Group, are classified as investment properties. Investment properties are measured initially at its cost, including related transaction costs, and subsequently carried at cost less accumulated depreciation and accumulated impairment losses. They are depreciated over the period of their estimated useful lives on a straight-line basis at the same rate as buildings Leasehold land prepayments Upfront prepayments made for leasehold land are included in the consolidated and Club s statements of financial position as leasehold land prepayments and expensed in the consolidated income statement on a straight-line basis over the period of the lease Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using weighted average cost less provision for diminution in value. Spare parts are amortised over a period of five years on a straight-line basis Current and deferred taxation The tax expense for the period comprises current and deferred tax. Tax is recognised in the consolidated income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Club s subsidiaries, associate and jointly controlled entity operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. The principal temporary differences arise from depreciation on property, plant and equipment, investment properties, amortisation on leasehold land prepayments, and employee retirement benefit cost. Taxation rates enacted or substantively enacted by the end of the reporting period are used to determine deferred taxation. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investment in an associate and a jointly controlled entity, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. 137

18 Notes to the Financial Statements Principal accounting policies (Cont.) 2.14 Foreign currency translation Items included in the consolidated financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The consolidated financial statements are presented in Hong Kong dollars, which is the Club s functional currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions are recognised directly in the consolidated income statement. Assets and liabilities denominated in foreign currencies are translated at the closing rate at the end of the reporting period. The differences arising from translation are recognised in the consolidated income statement except for translation differences on non-monetary items of available-for-sale financial assets, such as equities, which are included in the investment revaluation reserve. The results and financial position of all Group entities that have a functional currency different from Hong Kong dollars are translated into Hong Kong dollars as follows: assets and liabilities are translated at the closing rate at the end of each reporting period; income and expenses are translated at average exchange rates; and all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments are recognised in other comprehensive income. When a foreign entity is partially disposed of or sold, such exchange differences are recognised in the consolidated income statement, as part of the gain or loss on sale Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred, and are subsequently carried at amortised cost. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised in the consolidated income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period Operating leases Leases where substantially all the risks and rewards of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases are charged to the consolidated income statement on a straight-line basis over the lease periods. 138

19 (a) 2. Principal accounting policies (Cont.) 2.17 Revenue recognition Revenue from horse race betting represents amounts wagered net of betting dividends and rebates and is recognised when the relevant betting service has been rendered. Revenue from football betting represents amounts wagered net of betting dividends and is recognised when the relevant betting service has been rendered. Revenue from lottery represents commission income and is recognised when the relevant betting service has been rendered. Revenue from admission to race events and racing sponsorship income is recognised when the event has been held. Revenue from food and beverage sales, other member services and livery charges is recognised when the relevant services have been rendered. Interest income is recognised on a time-proportion basis using the effective interest method. Dividend income is recognised when the right to receive payment is established. Royalty income is shown net of overseas withholding taxes and recognised on the accruals basis in accordance with the substance of the relevant agreements Staff costs (a) Defined benefit scheme The defined benefit scheme (the Scheme ) provides pension benefits to employees upon retirement with reference to the final salaries of the employees. The retirement benefit costs are assessed using the projected unit credit method and the cost of providing pensions is charged to the consolidated income statement so as to spread the cost over the service lives of employees in accordance with the advice of the actuary who carries out a full valuation of the Scheme periodically. The pension obligation is measured at the present value of the estimated future cash outflows using market yields of government securities which have terms of maturity approximating the terms of the related liability. Actuarial gains and losses, to the extent that any cumulative unrecognised actuarial gain or loss exceeds ten per cent of the greater of the present value of the defined benefit obligation and the fair value of Scheme assets, are recognised over the average remaining service lives of employees. Past service costs, if any, are recognised as an expense on a straight-line basis over the average period until the benefits become vested. Pension liabilities, if any, are included under other liabilities in the consolidated and Club s statements of financial position. They represent the net total of the Group and Club s pension obligations; plus any unrecognised actuarial gains (less any actuarial losses); minus any unrecognised past service costs; and minus the fair value of Scheme assets. If the net total determined is negative, then the resulting asset, which is included under other assets in the consolidated and Club s statements of financial position, is limited to the net total of any cumulative unrecognised actuarial losses and past service costs and the present value of any future refunds from the Scheme or reductions in future contributions to the Scheme. (b) (b) Defined contribution scheme Employer s contributions to the defined contribution scheme applicable to each year are charged to the consolidated income statement for the year and are reduced by contributions forfeited by those employees who leave the scheme prior to vesting fully for the contributions. The Group has no further payment obligations once the contributions have been paid. 139

20 Notes to the Financial Statements (c) 2. Principal accounting policies (Cont.) 2.18 Staff costs (Cont.) (c) Mandatory Provident Fund scheme Employer s contributions to the Mandatory Provident Fund scheme (the MPF scheme ) are charged to the consolidated income statement for the year. (d) (d) Short-term employee benefits Salaries, bonuses, paid annual leave are recognised in the year in which the associated services are rendered by employees Related party For the purposes of these consolidated financial statements, a party is 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. Related parties may be individuals or entities Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested at least annually for impairment and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Assets that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. 3. Critical accounting estimates and judgements In preparing the consolidated financial statements, management is required to exercise significant judgements in the selection and application of accounting principles, including making estimates and assumptions. The following significant accounting policies are impacted by judgements and uncertainties and for which different amounts may be reported under a different set of conditions or using different assumptions. 3.1 Estimated useful life and depreciation of property, plant and equipment The Group estimates the useful lives of the various categories of property, plant and equipment on the basis of a planned asset maintenance programme and actual usage experience. Depreciation is calculated using the straight-line method at rates sufficient to write off their cost or valuation over their estimated useful lives (note 2.9). Actual useful lives may differ from estimated useful lives. Periodic reviews could result in a change in depreciable lives and therefore depreciation expense in future periods. 3.2 Pension costs The Group employs independent valuation professionals to conduct annual assessments of the actuarial position of the Group s retirement plans. The determination of the Group s obligation and expense for the defined benefit element of these plans is dependent on certain assumptions and factors provided by the Club, which are disclosed in note 20. Changes to the principal actuarial assumptions can affect the present value of plan obligations and service costs in future periods. 140

21 Critical accounting estimates and judgements (Cont.) 3.3 Income tax Certain tax treatments adopted by the Group in past years are yet to be finalised with the relevant tax authority. In assessing the Group s income tax and deferred taxation in the 2010 consolidated financial statements, the Group recognises liabilities based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made Provisions The Group recognises provisions for liabilities of uncertain timing or amount when 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. 3.5 (1) (2) (3) 3.5 Asset impairment Management judgement is required in the area of asset impairment, particularly in assessing whether: (1) an event has occurred that may affect asset values; (2) the carrying value of an asset can be supported by the net present value of future cash flows from the asset using estimated cash flow projections; and (3) the cash flows are discounted using an appropriate rate. Changing the assumptions selected by management to determine the level, if any, of impairment, including the discount rates or the growth rate assumptions in the cash flow projections, could significantly affect the Group s reported financial condition and results of operations Betting and lottery revenue The betting revenue of the Group comprises horse race betting, football betting and lottery. in HK$ million Horse race betting 11,807 11,387 Football betting 6,414 5,800 Lottery 2,933 2,957 21,154 20, Net margin and commission Net margin represents the amounts wagered on horse race betting and football betting net of the related betting dividends, rebates, betting duty, and payment to racing jurisdiction outside Hong Kong. Commission represents the amounts wagered on lottery net of related prizes, duty and payment to Lotteries Fund. in HK$ million Horse race betting net margin 3,230 3,126 Football betting net margin 3,207 2,900 Lottery commission ,820 6,

22 Notes to the Financial Statements Other revenue Other revenue of the Group principally comprises admission charges, livery charges, royalty income, catering sales and charges for services provided to Members. 7. Operating costs in HK$ million Staff costs (note 12) 2,812 2,600 Prize money Operating lease rentals on land and buildings Auditor s remuneration 3 3 Stewards remuneration 13 Depreciation of property, plant and equipment (note 13) Amortisation for leasehold land prepayments (note 14) Depreciation of investment properties (note 15) 1 13 Asset impairment (note 13) 9 Cost of inventories sold Other operating costs 1,366 1,487 6,311 6, Surplus/(deficit) from securities investments and long-term investment portfolios in HK$ million Surplus/(deficit) on disposal of available-for-sale financial assets: realisation of amounts previously recognised in investment revaluation reserve at 1 July (24) 147 amount arising in current year 91 (1,501) 67 (1,354) Dividend income from listed equities Dividend income from unlisted equities 353 Interest income from listed debt securities Interest income from unlisted debt securities Net gains of derivative financial instruments Net gains/(losses) of financial assets at fair value through profit or loss 15 (51) Management fees (13) (12) 838 (1,151) 142