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

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, 2003. 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) 3 2003 5 26 2003 12 31 2003 1 1 82 The Bank of East Asia, Limited Annual Report 2003

(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) 12 31 2(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) 2003 83

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

(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) 2003 85

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) 17 80 (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

(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. 20 20 (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. 2003 87

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

(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) 2003 89

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

(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) 2003 91

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) 2002 5 95%2002 92 The Bank of East Asia, Limited Annual Report 2003

(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. 2003 93

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

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$88,520,000). The new accounting policy has been adopted retrospectively, with the opening balances of retained profits and reserves and the comparative information adjusted for the amounts relating to prior periods as disclosed in the consolidated statement of changes in equity. 122003 1 1 (2(m)) 23,762,000 200218,592,000 115,257,0002002 88,520,000 4. INTEREST INCOME Restated HK$ 000 HK$ 000 Interest income on listed investments 200,547 149,941 Interest income on unlisted investments 331,082 275,362 Other interest income 5,232,100 5,954,250 Total interest income 5,763,729 6,379,553 5. 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 325,460 326,012 Interest expense on other borrowings 14,958 12,748 Total interest expense 2,167,649 2,727,277 2003 95

6. FEES AND COMMISSION INCOME Fees and commission income arises from the following services: : HK$ 000 HK$ 000 Corporate services 359,370 282,766 Loans, overdrafts and guarantees 240,330 230,307 Credit cards 188,164 213,821 Other retail banking services 129,911 110,304 Trade finance 101,375 106,332 Securities and asset management 135,816 92,125 Others 111,328 97,640 Total fees and commission income 1,266,294 1,133,295 7. NET TRADING PROFITS HK$ 000 HK$ 000 Profit on dealing in foreign currencies 135,623 105,212 Profit on other investments in securities 307,944 84,217 Profit on other dealing activities 29,512 6,431 Total net trading profits 473,079 195,860 8. 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 271,612 258,561 96 The Bank of East Asia, Limited Annual Report 2003

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 132,703 142,518 Maintenance, repairs and others 186,639 205,289 Total premises and equipment expenses excluding depreciation 319,342 347,807 Depreciation on fixed assets (Note 26) 26 228,842 226,223 Amortisation of goodwill (Note 25) 25 140,087 125,011 Impairment of goodwill 13,350 Other operating expenses Communications, stationery and printing 143,858 144,719 Advertising, business promotions and business trips 107,598 122,839 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 491,928 538,908 Total operating expenses 2,525,540 2,542,594 2003 97

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 ) 570,750 779,292 General provisions new provisions 31,647 releases (72,080) Net charge to profit and loss account 498,670 810,939 11. 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 2003. Share of profits less losses of associates included HK$348,000 (2002: HK$418,000) amortisation of positive goodwill. 2003 348,0002002418,000 98 The Bank of East Asia, Limited Annual Report 2003

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 293,790 159,352 Effect of increase in tax rate on deferred tax balances at 1st January 1 1 7,897 301,687 159,352 Share of associates taxation 21,203 9,360 433,401 277,013 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. 2003 3 16% 17.5% 2003 17.5% 200216% 2003 99

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 426,197 253,417 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 13,826 412,198 267,653 Share of associates taxation 21,203 9,360 Actual tax expense 433,401 277,013 13. 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. 1,750,006,0002002 1,079,482,000 100 The Bank of East Asia, Limited Annual Report 2003

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)) 0.21 33(i) 334,057 302,348 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) 20020.33 11 148 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$0.35 per share 20021,446,345,070 on 1,446,345,070 shares) 0.35 909,821 506,221 1,243,889 808,717 The final dividend proposed after the balance sheet date has not been recognised as a liability at the balance sheet date. (b) Dividends Attributable to the Previous Financial Year, Approved and Paid During the Year (b) HK$ 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) 0.33 506,221 473,050 15. 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) 1,921,714,000 20021,269,786,000 1,453,702,043 20021,440,175,619 (b) 2003 1,922,793,0002002 1,274,182,000 1,459,024,99420021,451,175,354 2003 101

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$138,361,000) and on the weighted average of 1,453,702,043 (2002: 1,440,175,619) ordinary shares outstanding during the year. This supplementary information is considered a useful additional indication of performance. 16. DIRECTORS REMUNERATION Directors remuneration disclosed pursuant to Section 161 of the Hong Kong Companies Ordinance is as follows: (d) 2,061,801,000 20021,408,147,000 140,087,000 2002138,361,000 1,453,702,043 20021,440,175,619 161 HK$ 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$521,000) paid to the independent non-executive directors during the year. Included in the above remuneration, share options were granted to Executive Directors under the Bank s Staff Share Option Schemes. The details of these benefits in kind are disclosed under the paragraph Information on Share Options in the Report of the Directors and Note 38. The remuneration of the Directors is within the following bands: 494,0002002521,000 38 Number of Directors Number of Directors HK$ 0 1,000,000 13 14 4,500,001 5,000,000 2 5,000,001 5,500,000 2 17,000,001 17,500,000 1 18,500,001 19,000,000 1 102 The Bank of East Asia, Limited Annual Report 2003

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 1 4,000,001 4,500,000 1 1 4,500,001 5,000,000 2 5,000,001 5,500,000 1 2 16,500,001 17,000,000 1 18,000,001 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. 5320023 16 18. 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) 2003 103

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 1,170,885 526,811 24 34,481 (68,514 ) 3,596,080 Other operating income from external customers 393,717 254,897 566,819 358,375 147,970 78,389 1,800,167 Inter-segment income 136,566 (136,566 ) Total operating income 2,326,110 1,425,782 1,093,630 358,399 182,451 146,441 (136,566 ) 5,396,247 Operating profit/(loss) before provisions / 1,286,224 880,649 858,429 112,477 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 1,055,099 779,331 849,070 102,482 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 / 1,051,105 808,588 834,132 102,482 124,651 (546,650 ) 2,374,308 Income tax (433,401 ) (433,401 ) Minority interests (18,992 ) (150 ) (51 ) (19,193 ) Profit/(loss) attributable to shareholders / 1,051,105 808,588 834,132 83,490 124,501 (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 90,214 189,831,020 Investments in associates 31,926 342,601 53,840 304,705 3,412 736,484 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 8,002,240 198,476,118 Segment liabilities 110,392,305 45,031,831 13,440,069 62,760 737,779 169,664,744 Unallocated liabilities 4,424,705 4,424,705 Total liabilities 110,392,305 45,031,831 13,440,069 62,760 737,779 4,424,705 174,089,449 Capital expenditure incurred during the year 44,118 53,071 79,940 25,483 5,329 15,732 223,673 104 The Bank of East Asia, Limited Annual Report 2003