, fulfilled the obligation of information disclosure, and provides the materials relating to external guarantee to auditors. In general, in our opinion, the Company observed the Circular seriously, regulated the external guarantee, kept the financial risks under control, and protected the interests of investors (3) The publication for information disclosure of the Company is China Securities, Securities Daily and Hong Kong Business IX Report of the Board of the Supervisors 1. The basic information of the meeting During the reporting period, there are two meetings of the Board of the Supervisors. (1) The third session of the Board of the Supervisors’ third meeting was held on March 16, 2004 and the report of the Board of the Supervisors for the year 2003, the annual financial report and the extract for the year 2003, the final financial settlement for the year 2003, the financial budget for the year 2004 and the were discussed and passed. (2) The fourth session of the Board of the Supervisors’ third meeting was held on August 1, 2004, and the semi-annual financial report and the extract for the half year 2004 and the proposal of the semi-annual financial report were discussed and passed. 2. The working result of the Board of the Supervisors During the reporting period, all the supervisors of the Company sat in all of the meetings of the Board of the Directors, give their independent opinions and exercise the right of the supervision. In accordance with the Company Law and the Article of the Association, the supervisors exercise following rights: (1) Supervision of the compliance issues of the Company in its operation and management. The Board of Supervisors performed its supervisory duties through sitting in the meetings of Board of Directors. The Board of Supervisors was of the view that the decision-making procedures of the Company were in compliance with the Company Law and the Articles of Association, a proper internal control system had been established, and there had been no violations of the laws, regulations and the Articles of Association and no acts harmful to the interests of the Company by the directors, supervisors and senior managers in fulfilling their duties. (2) Review of the financial status of the company Through its review, the Board of Supervisors was of the view that the financial statements of the Company had been in compliance with relevant standards and regulations and truly reflected the financial status and operating performance of the Company. The auditor of the Company, PricewaterhouseCoopers Zhong Tian Certified Public Accountants issued an unqualified audit report. (3) Supervision of the use of proceeds from the public offering Through its review, the Board of Supervisors was of the view that the proceeds from public offering had been properly used in line with the commitments of the prospectus. (4) Supervision of the acquisition and disposal of the assets Through its review, the Board of the Supervision was of the view that the price of the acquisition and disposal of the assets was fair and reasonable and there is no under-table transaction, no acts harmful to the interests of the shareholders or leading to the loss of company’s assets. . (5) Supervision of the related party transaction Through its review, the Board of Supervisors was of the view that all related party transactions had been conducted fairly with pricing based on the market prices which are fair and there had been no harm done to the interests of the Company. X. Important Matters 1. Major litigations and arbitrations of the year In February, 2004, the Company’s subsidiary Changan Automobile Sales Co., Ltd. sued Beifang Pudong Economic and Technology Development Co., Ltd. for disputes over RMB 7,960,000 and RMB 1,500,000 has been executed and Chongqing Wanyou Economic Development Co., Ltd. paid back RMB 2,000,000 and will repay another RMB 3,800,000 by others means. 2. The acquisition and disposal of asset, and merger and acquisition during the year (1) Acquisition of assets The net profit Acquired Contributed to the Impact on the Transferring Acquired Price company from financial status and Company Assets (RMB acquisition date to operating results million) the year end (RMB million) Contribute to the arrangement and effectiveness of the 10 sales net of the CAC Subsidiaries of 2.47 -1.15 Company and no CAC disadvantage to the Company’s financial condition and operating results. (2) There was no sale of assets, merger and acquisitions in the reporting period. 3. Significant related party transactions In the reporting period, the information of the related party transactions with the accumulated amount over 30 million and 5% of the net assets is as follows: (1) Transaction Category a. Purchase of materials In the reporting period, the Company purchased automobile spare parts from Chongqing Changan Jinling Vehicles Parts Co., Ltd with the market price. The total transaction amount is RMB 521,098,456, which comprises 3.64% of the total transaction amount with same nature. The Company also sold raw materials to it at market price with total transaction amount of RMB59,929,453, which comprises 0.32% of the total amount of the same nature of transaction. In the reporting period, the Company purchased automobile spare parts from Chongqing Tsingshan Industries Co., Ltd at market price. The total transaction amount is RMB353,270,846, which comprises 2.47% of the total amount of the same nature transaction. The company also sold raw materials to it at market price with total transaction amount of RMB1,309,642, which comprised 0.01% of the total transaction amount with same nature. (2) Purchase of service In the reporting period, Chongqing Changan Minsheng Logistics Co. Ltd. Provide service of warehouse, logistic and transportation to the Company with the market price. The total transaction amount is RMB 608,554,286, which comprises 98.2% of the total transaction amount with same nature. (3) Impact on the Company Changan Jinling Vehicles Parts Co., Ltd and Chongqing Tsingshan Industries Co., Ltd are the mass producer of the automobile spare parts with the large capability and good quality, from whom the purchase could lower the cost and be good to the R&D of the new spare parts. The purchase from such related parties is necessary and will go on in the future. Chongqing Changan Minsheng Logistics Co. Ltd. is the professional provider of the logistic service, who transports the automobile and spare parts for the Company, which is good to the logistic management of the Company. Such transaction is necessary to the Company’s sales and production and will go on in the future. The above transaction is dealt based on the market price or the presumption price, and is fair and reasonable, which is necessary to the Company’s business and no harm to the Company and the non- related parties ‘benefits. 4. Major contracts and their fulfillment (1) There were no major entrustment, contracting by the Company of the assets of other companies and there were no major entrustment, contracting of the Company’s assets by other companies. The lease of the assets of other companies by the Company and lease of the assets of the Company was shown as follows According to the production needs, the Company rented the office building of Changan Automobile Group Company’s Sales Company, the total area is 4,560 square meters, the monthly rental is RMB 40 per sq. m., the remaining building is 34,355 square meters and monthly rental is RMB 35 per sq. m. The Company rented land of CAC of 405,152 square meters, monthly rental is RMB 10 per sq. m. CAC rented the offices of 5th, 8th, 9th and 10th floors of the Science and Technology Building of the Company due to office needs, the area is 9,056 square meters and monthly rental is RMB 40 per sq. m. (2) Major guarantee. There is no guarantee in the reporting period, or other guarantee, which occurred in the previous years and last in the reporting period. (3) Asset entrustment matters There is no entrustment of cash management occurred in the reporting period or one, which occurred in the previous years and last in the reporting period. 5. Commitment. During the reporting period, there is no commitment as to the Company or the shareholders who held more than 5% of total shares 6. During the reporting period, there were no changes of CPA firm. Auditor’s remuneration is shown below: In RMB Ten thousand Year Auditor Audit fees Others Note 2004 Pricewaterhous RMB 270 RMB 90 The Company provided eCoopers accommodation, but did not Zhongtian CPA bear traveling expenses Others is the charged due diligence service fee, which does not impact the audit opinion. PricewaterhouseCoopers Zhongtian CPA has provided the audit service to the Company for four years. 7 During the reporting period, nor did the Company, the Board and its directors receive any audit and investigation, disciplinary punishment, public criticism nor public censure from China Securities Regulatory Commission from the stock exchange. 8. Other important issues. (1)In August, 2004, the Company issues 148,850 thousand A shares, collecting RMB 1,058,580.thousand (2)On January 7, 2005, the Project of auto in No.2 factory, Changan Ford Automobile Co., Ltd obtained the approval from the National Development and Revolution Commission. For details of the issue, please refer to the notice of the Board of the Directors, notice No. 2005-02. (3) In the reporting period, the Company and Jiangling Automobile Group Corp jointly invested to in incorporate Jiangxi Jiangling Holding Co., Ltd. At present, the company is in the process of incorporation. For details of the issues, please refer to the notice of the Board of the Directors, notice No. 2004-17, 2004-18, 2004-19, 2004-20. CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF THE AUDITORS FOR THE YEAR ENDED 31 DECEMBER 2004 PwC ZT Shen Zi (2005) No. 2005/SH-081/WCML/MMJJ Report of the auditors To the shareholders of Chongqing Changan Automobile Co., Ltd. We have audited the accompanying consolidated balance sheet of Chongqing Changan Automobile Co., Ltd. (hereafter referred to as the “Company”) and its subsidiaries and its joint venture (hereafter collectively referred to as the “Group”) as of 31 December 2004 and the related consolidated statement of income, cash flow and changes in shareholders’ equity for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of 31 December 2004, and the Group’s results of operations and cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Zhong Tian CPAs Ltd., Co. Shanghai, the People’s Republic of China 13 April 2005 CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands, except per share data Year ended 31 December Note 2004 2003 Sales 4 18,526,610 14,358,768 Sales tax and surcharge (632,618) (370,448) Net sales 17,893,992 13,988,320 Cost of sales (13,973,491) (10,465,301) Gross profit 3,920,501 3,523,019 Distribution costs (1,504,775) (1,194,687) Administrative expenses (1,108,021) (630,150) Other operating income and expenses 132,198 52,539 Profit from operations 5 1,439,903 1,750,721 Finance income – net 6 28,336 45,309 Share of result of associates 14 - 946 Profit before tax 1,468,239 1,796,976 Taxation 8 (147,988) (258,496) Profit before minority interests 1,320,251 1,538,480 Minority interests 33 (123,036) (102,864) Net profit 1,197,215 1,435,616 Basic earnings per share (RMB per share) 9 0.84 1.17 The accompanying notes form an integral part of these consolidated financial statements. These consolidated financial statements have been approved by the Board of Directors of Chongqing Changan Automobile Co., Ltd. on 13 April 2005. CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands As at 31 December Note 2004 2003 ASSETS Non-current assets Property, plant and equipment 11 4,759,172 3,553,950 Land use rights 12 451,556 241,147 Intangible assets 13 176,637 118,307 Investments in associates 14 4,500 4,500 Available-for-sale investments 15 21,780 44,798 Other non-current assets 16 3,982 67,339 Deferred tax assets 17 97,410 100,447 5,515,037 4,130,488 Current assets Inventories 18 3,043,572 1,994,629 Receivables and prepayments 19 1,814,237 1,663,154 Trading investments 20 219,254 - Held-to-maturity investments 21 247,298 99,729 Pledged deposits 22 17,500 10,000 Term deposits with initial terms of over three months 23 423,000 680,000 Cash and cash equivalents 24 3,568,367 2,406,325 9,333,228 6,853,837 Total assets 14,848,265 10,984,325 The accompanying notes form an integral part of these consolidated financial statements. These consolidated financial statements have been approved by the Board of Directors of Chongqing Changan Automobile Co., Ltd. on 13 April 2005. CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED BALANCE SHEET (CONTINUED) AS AT 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands As at 31 December Note 2004 2003 EQUITY Shareholders’ equity Ordinary shares 30 1,620,849 1,226,666 Share premium 31 1,743,168 833,438 Reserves 32 1,451,496 1,053,878 Retained earnings 1,943,987 1,696,390 6,759,500 4,810,372 Minority interests 33 1,144,218 947,461 LIABILITIES Non-current liabilities Borrowings 26 535,000 245,000 Retirement benefit obligations 28 21,976 19,884 Deferred income 29 369,613 - 926,589 264,884 Current liabilities Trade and other payables 25 5,236,788 4,366,684 Current tax liabilities (17,032) 121,056 Borrowings 26 523,943 277,759 Provisions 27 274,259 196,109 6,017,958 4,961,608 Total liabilities 6,944,547 5,226,492 Total equity and liabilities 14,848,265 10,984,325 The accompanying notes form an integral part of these consolidated financial statements. These consolidated financial statements have been approved by the Board of Directors of Chongqing Changan Automobile Co., Ltd. on 13 April 2005. CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED SATATEMENT OF CHANGES IN SHAREHOLDERS’ EQUTIY FOR THE YEAR ENDED 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands Share Share Retained Note capital premium Reserves earnings Total (Note 30) (Note 31) (Note 32) Balance at 1 January 2003 1,226,666 833,438 627,955 784,830 3,472,889 Dividend relating to 2002 - - - (98,133) (98,133) Net profit for the year - - - 1,435,616 1,435,616 Reserve transfer - - 425,923 (425,923) - Balance at 1 January 2004 1,226,666 833,438 1,053,878 1,696,390 4,810,372 Cash dividend relating to 2003 10 - - - (306,667) (306,667) Bonus share relating to 2003 30 245,333 - - (245,333) - Issue of shares 30 148,850 909,730 - - 1,058,580 Net profit for the year - - - 1,197,215 1,197,215 Reserve transfer 32 - - 397,618 (397,618) - Balance at 31 December 2004 1,620,849 1,743,168 1,451,496 1,943,987 6,759,500 The accompanying notes form an integral part of these consolidated financial statements. These consolidated financial statements have been approved by the Board of Directors of Chongqing Changan Automobile Co., Ltd. on 13 April 2005. CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands Year ended 31 December Note 2004 2003 Cashflow from Operating Activities Cash generated from operations 35 1,687,480 1,882,912 Tax paid (234,981) (270,760) Net cash generated from operating activities 1,452,499 1,612,152 Cashflow from Investing Activities Proceeds from disposal of property, plant and equipment 35 17,255 2,613 Proceeds from disposal of land use rights - 1,780 Decrease in term deposits with initial terms of over three months 257,000 - Investment income from securities investment 9,275 958 Cash received in relation to obtaining government grant 78,561 - Sub-total of cash inflow 362,091 5,351 Purchase of property, plant and equipment (1,470,312) (1,129,241) Purchase of land use rights (99,915) (27,302) Purchase of intangible assets (2,784) (14,310) Purchase of deferred assets (1,941) (1,288) Purchase of held-to-maturity investment (172,432) - Increase in term deposits with initial terms of over three months - (223,950) Purchase of available-for-sale investments - (2,900) Acquisition of a jointly controlled entity, net of cash acquired - (139,313) Acquisition of subsidiaries, net of cash acquired 34 (2,008) - Cash paid relating to other investing activities - (6,800) Sub-total of cash outflow (1,749,392) (1,545,104) Net cash used in investing activities (1,387,301) (1,539,753) CHONGQING CHANGAN AUTOMOBILE CO., LTD. CONSOLIDATED CASH FLOW STATEMENT (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2004 All amounts in Renminbi (“RMB”) thousands Year ended 31 December Note 2004 2003 Cashflow from Financing Activities Contribution from minority shareholders 56,900 2,650 Gross proceeds from issue of shares 1,100,002 - Proceeds from borrowings 911,270 416,259 Sub-total of cash inflow 2,068,172 418,909 Repayment of borrowings (375,086) (260,000) Payment of interest expenses (28,132) (16,352) Dividends paid to shareholders (306,667) (98,133) Dividends paid to minority shareholders (18,130) (18,620) New share issue expenses (41,422) - Increase in pledged deposits (7,500) - Sub-total of cash outflow (776,937) (393,105) Net cash generated from financing activities 1,291,235 25,804 Net Increase in cash and cash equivalents 1,356,433 98,203 Cash and cash equivalents at beginning of year 2,506,054 2,407,851 Cash and cash equivalents at end of year 24 3,862,487 2,506,054 The accompanying notes form an integral part of these consolidated financial statements. These consolidated financial statements have been approved by the Board of Directors of Chongqing Changan Automobile Co., Ltd. on 13 April 2005. 1 General information Chongqing Changan Automobile Co. Ltd. (hereafter referred to as “the Company”) was established in the People’s Republic of China (hereafter referred to as the “PRC”) under the Company Law of the PRC on 31 October 1996. The Legal Representative’s Operating License issued by Chongqing Industrial and Commercial Administrative Bureau is Yu-Jing No. 28546236-3. 2 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below: A Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), including International Accounting Standards (“IAS”) and Interpretations issued by the International Accounting Standards Board (“IASB”). The consolidated financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. The Group adopted IFRS 3 “Business Combinations”, IAS 36 “Impairment of Assets” and IAS 38 “Intangible Assets” in relation to acquisitions with respective agreements dated on or after 31 March 2004 (Notes 2 G and I). Goodwill arising from the acquisitions with respective agreements dated before 31 March 2004 was amortised using the straight-line method over their estimated useful lives and recognised in the income statement. In accordance with the provisions of IFRS 3, goodwill arising from acquisitions with respective agreements dated on or after 31 March 2004 is not amortised but tested annually for impairment and carried at cost less accumulated impairment losses. There is no impact on opening retained earnings as at 1 January 2004 from the adoption of these standards. IASB has issued a number of new and revised IFRS which are effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new IFRS in these financial statements for the year ended 31 December 2004. The Group has already commenced an assessment of the impact of these new IFRS but is not yet in a position to state whether these new IFRS would have a significant impact on its results of operations and financial position. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current event and actions, actual results ultimately may differ from those estimates. 2 Summary of significant accounting policies (continued) B Group accounting (1) Subsidiaries Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies, are consolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the net assets of the subsidiary acquired is recorded as goodwill. See note G for the accounting policy on goodwill. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless cost cannot be recovered. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. (2) Jointly controlled entities A jointly controlled entity is a joint venture in respect of which a contractual arrangement is established between the participating venturers and whereby the Group together with the other venturers undertake an economic activity which is subject to joint control and none of the venturers has unilateral control over the economic entity. The Group’s interests in jointly controlled entities are accounted for by proportionate consolidation. The Group combines its share of the jointly controlled entity’s individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Group’s financial statements. The Group recognises the portion of gains or losses on the sale of assets by the Group to the jointly controlled entity that is attributable to the other venturers. The Group does not recognise its share of profits or losses from the jointly controlled entity that results from the purchase of assets by the Group from the jointly controlled entity until it resells the assets to an independent party. However, if a loss on the transaction provides evidence of a reduction in the net realisable value of current assets or an impairment loss, the loss is recognised immediately. (3) Associates Investments in associates are accounted for by the equity method of accounting. Under this method the Company’s share of the post-acquisition profits or losses of associates is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. Associates are entities over which the Group generally has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Group’s investment in associates includes goodwill (net of accumulated amortisation) on acquisition. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not to recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates. 2 Summary of significant accounting policies (continued) C Foreign currency translation (1) Measurement currency Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the measurement currency”).The consolidated financial statements are presented in RMB, which is the measurement currency of the Company. (2) Transactions and balances Foreign currency transactions are translated into the measurement currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement. D Property, plant and equipment (1) Owned assets Property, plant and equipment are stated at historical cost or, in the case of assets injected into the Group at the time of its reorganisation, at valuation less accumulated depreciation representing the deemed cost to the Group, less accumulated depreciation and any impairment losses. All direct and indirect costs relating to the acquisition or construction of property, plant and equipment including interest costs on related borrowed funds during the construction period are capitalised as property, plant and equipment. (2) Subsequent expenditure Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful life of the related asset. (3) Depreciation Depreciation is calculated over the actual production output or on a straight-line basis over their estimated useful life to write off the cost of each asset, to their residual values. Estimated useful life of property, plant and equipment is as follows: Buildings & Plants 20-40 years Equipment & Machinery 10-20 years Motor Vehicles 5-8 years Others 5 years 2 Summary of significant accounting policies (continued) D Property, plant and equipment (continued) (4) Construction in progress Construction of a building or plant is considered to be completed and transferred to property, plant and equipment on the date when substantially all the activities necessary to prepare the asset for its intended use are complete notwithstanding any delays in the issue of the relevant commissioning certificate by the appropriate PRC authorities. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised, during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed. (5) Disposal and impairment Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in operating profit. E Land use rights Land use rights are stated at cost less accumulated amortisation and impairment losses. Cost represents consideration paid for the rights to use the land on which various plants and buildings are situated for periods varying from 30 to 50 years. Amortisation of the land use rights is calculated on a straight-line basis over the period of the land use rights. F Investments The Group classified its investments in debt and equity securities into the following categories: trading, held-to-maturity and available-for-sale. The classification is dependent on the purpose for which the investments were acquired. Management determines the classification of its investments at the time of the purchase and re-evaluates such designation on a regular basis. Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included in current assets. Investments with a fixed maturity that management has the intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets, except for maturities within 12 months from the balance sheet date which are classified as current assets. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; and are included in non-current assets unless management has the express intention of holding the investment for less than 12 months from the balance sheet date or unless they will need to be sold to raise operating capital, in which case they are included in current assets. Purchase and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset. Cost of purchase includes transaction costs. Trading and available-for-sale investments are subsequently carried at fair value at each balance sheet date where an active market exists. The fair values of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted investments are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the investee company. Realised and unrealised gains and losses arising from changes in the fair value of trading and available-for-sale investments are included in the consolidated income statement in the period in which they arise. 2 Summary of significant accounting policies (continued) F Investments (continued) Investments for which fair values cannot be measured reliably because of the absence of a quoted market price in an active market, and for which other methods of reasonably estimating fair value are clearly unworkable, are recognised at cost less impairment. Held-to-maturity investments are carried at amortised cost using the effective yield method. G Intangible assets (1) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/jointly controlled entity/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill arising from acquisitions with respective agreements dated before 31 March 2004 is amortised using the straight-line method over its estimated useful life. Management determines the estimated useful life of goodwill based on its evaluation of the respective companies at the time of the acquisition, considering factors such as existing market share, potential growth and other factors inherent in the acquired companies. For all acquisitions, goodwill is generally amortised over 10 years. At each balance sheet date the Group assesses whether there is any indication of impairment. If such indications exist an analysis is performed to assess whether the carrying amount of goodwill is fully recoverable. A write down is made if the carrying amount exceeds the recoverable amount. In accordance with the provisions of IFRS 3, goodwill arising from acquisitions with respective agreements dated on or after 31 March 2004 is not amortised but tested annually for impairment and carried at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Negative goodwill represents the excess of the fair value of the Group’s share of the net assets of the acquired subsidiary/jointly controlled entity/associate over the cost of an acquisition. Negative goodwill arising from acquisitions with respective agreements dated before 31 March 2004 is amortised using the straight-line method over their estimated useful lives and recognised in the income statement until 31 December 2004, and will be derecognised on 1 January 2005, with a corresponding adjustment to retained earnings as at 1 January 2005. Management determines the estimated useful lives of negative goodwill based on the remaining weighted average useful lives of the identifiable acquired depreciable /amortisable assets of the respective business at the time of the acquisition. For negative goodwill arising from acquisitions with respective agreements dated on or after 31 March 2004, the Group reassesses the identification and measurement of the identifiable assets and liabilities and contingent liabilities and the measurement of the cost of the combination. Any excess of the fair value of the Group’s share of net assets of the subsidiary/jointly controlled entity/associate over the cost of the acquisition after that reassessment is recognised immediately in the income statement. (2) Proprietary technology Proprietary technology is stated at cost less amortisation. Amortisation is calculated on a straight-line basis over the expected beneficial period starting from the date of use. 2 Summary of significant accounting policies (continued) G Intangible assets (continued) (3) Trademark Trademark is stated at cost less accumulated amortisation. Amortisation is calculated on a straight-line basis over the expected beneficial period starting from the date of use. (4) Software Software is stated at cost less accumulated amortisation. Amortisation is calculated on a straight- line basis over the expected beneficial period starting from the date of use. H Deferred assets Deferred assets are stated at cost less accumulated amortisation. Amortisation is calculated on a straight-line basis over the useful life of the deferred assets. I Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. 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). J Leases (1) A group company is the lessee Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. (2) A group company is the lessor Assets leased out under operating leases are included in property, plant and equipment in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income (net of any incentives given to lessees) is recognised on a straight-line basis over the lease term. K Inventories Inventories are stated at the lower of cost or net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. 2 Summary of significant accounting policies (continued) L Trade receivables Trade receivables are carried at original invoice amount less provision made for impairment of these receivables. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement. M Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are included within borrowings in current liabilities on the balance sheet. N Share capital Share capital consists of “A” and “B” ordinary shares. Incremental external costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. O Borrowings Borrowings are recognised initially at the proceeds received, net of any transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective yield method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings. P Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Currently enacted tax rates are used in the determination of deferred income tax. 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 from investments in subsidiaries, associates and jointly controlled entities, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. 2 Summary of significant accounting policies (continued) Q Employee benefits (1) Pension obligations The Group contributes on a monthly basis to various defined contribution retirement schemes managed by the PRC government. The contributions to the schemes are charged to the income statement as and when incurred. The Group’s obligations are determined at a certain percentage of the salaries of the employees. In addition, the Group provides supplementary pension subsidies to certain qualified employees. Such pension obligation is estimated based on the present value of the estimated future cash outflows discounted using interest rates typically available to the Group through bank deposit accounts. (2) Termination benefits Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after balance sheet date are discounted to present value. (3) Housing fund and other benefits The Group’s full-time employees are entitled to participate in a state-sponsored housing fund. The fund can be used by the employees for the purchase of apartment accommodation, or may be withdrawn upon their retirement. The Group is required to make annual contributions to the state- sponsored housing fund equivalent to a certain percentage of the employees’ salaries. In addition, the Company provided subsidies to eligible employees for the purchase of flats and accounted for such subsidies when occurred. In addition, the Group makes a provision at 14% of the total salary of its employee for general welfare. (4) Profit sharing and bonus plan The Company recognises a liability and expense for bonus plans based on a formula that takes into consideration the profit attributable to the Company’s shareholders. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. R Provisions Provisions, mainly warranty cost, are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. 2 Summary of significant accounting policies (continued) S Revenue recognition Revenue comprises the invoiced value for the sale of goods and services net of value-added tax, rebates and discounts, and after eliminating sales within the Group. Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyer. Revenue from rendering of services is based on the stage of completion determined by reference to services performed to date as a percentage of total services to be performed. Rental income is recognised on an accrual basis. Interest income is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. Dividends are recognised when the right to receive payment is established. T Dividends Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statement in the period in which they are approved by the Company’s shareholders. U Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other development expenditures are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs that have been capitalised are amortised from the commencement of the commercial production of the product on a straight-line basis over the period of its expected benefit. No development costs were capitalised by the Group during the year ended 31 December 2004 (2003: nil). V Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate. Government grants not relating to future costs are recognised on receipt basis. Government grants relating to the purchase of property, plant and equipment are included in non-- current liabilities as deferred income and are credited to the income statement on a straight line basis over the expected lives of the related assets. 2 Summary of significant accounting policies (continued) W Segment reporting The Group’s turnover and profit for the year were mainly derived from the manufacture and domestic sale of automobiles and the principal assets employed by the Group are located in the PRC. Accordingly, no segmental analysis by business and geographical segments has been provided for the year. 3 Financial risk management The financial assets of the Group include cash and bank balances, cash and time deposits with a related financial institution, investments, accounts and bills receivable, prepayments and other receivables, and amounts due from related companies. The financial liabilities of the Group include bank loans, accounts and bills payable, receipts in advance, accruals and other payables, accrued staff welfare and benefits and amounts due to related companies. (1) Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market rates. The interest rates and terms of the repayment of bank borrowings of the Group are disclosed in Note 26 to the financial statements. (2) Credit risk The Group does not have a significant exposure to any individual customer or counterparty. Credit risk on receivables has already been accounted for in the financial statements as they are shown net of provisions for bad and doubtful debts. (3) Liquidity risk Due to the dynamic nature of the underlying businesses, the Group aims at maintaining flexibility in funding by keeping committed credit lines available. (4) Fair values The fair values of cash and bank balances, cash placed with a related financial institution, short term investments, receivables and prepayments, trade and other payables, current tax liabilities, provisions, are not materially different from their carrying amounts. The carrying values of short term borrowings are estimated to approximate their fair values based on the nature or short term maturity of these instruments. The fair values of long term borrowings, estimated by applying a discounted cash flow using current market interest rates for similar financial instruments, approximate their carrying values. Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Notes to the consolidated financial statements 4 Sales The Group principally derives its turnover from the manufacture, assembly and sale of automobiles, related spare parts and components. Sales represent the total invoiced value of goods supplied to customers, net of returns and allowances. Sales are made principally in the PRC. 5 Profit from operations The following items have been included in arriving at profit from operations: 2004 2003 Depreciation on property, plant and equipment (Note 11) 373,104 287,086 Amortisation of land use rights (Note 12) 7,688 4,343 Amortisation of intangible assets (Note 13) 17,081 12,013 Amortisation of deferred assets (Note 16) 3,131 6,438 Impairment charge for property, plant and equipment (Note 11) 767 2,164 (Reversal of)/Impairment charge for bad and doubtful debts (Note 35) (11,512) 32,609 Loss on disposal of property, plant and equipment (Note 35) 9,753 98,118 Loss on disposal of land use rights (Note 35) - 1,873 Loss on disposal of other non-current assets (Note 35) 67 - Repairs and maintenance expenditure on property, plant and equipment 106,273 113,722 Research and development expenditure 546,884 297,801 Operating lease rentals − property and land use rights 56,589 28,276 Cost of inventories included in cost of sales 13,973,491 10,465,301 Provision for/(reversal of) slow moving and obsolete inventories (Note 35) 5,323 (38,688) Staff costs (Note 7) 596,170 505,584 Impairment charge for/(reversal of) available-for-sale investment (Note 35) 27,918 (678) Income from securities investment (Note 35) (9,275) (958) Government grants relating to costs (Note a) (27,168) (21,409) Amortisation of deferred income (Note 29) (8,815) - Note a: In 2004, the Group obtained and recognised government grants of RMB 27,168 in relation to research and development activities (2003: RMB 21,409). 6 Finance income – net 2004 2003 Interest expense (Note 35) (25,366) (15,115) Interest income 66,506 66,314 Net foreign exchange gain 1,130 1,612 Discount expense (10,921) (7,412) Others (3,013) (90) 28,336 45,309 7 Staff costs 2004 2003 Wages and salaries 439,737 384,602 Social security costs 85,178 66,546 Pension costs − defined contribution plans 66,140 56,569 Other pension costs 5,115 (2,133) 596,170 505,584 The average number of employees in 2004 was 14,571 (2003: 13,158), 696 of whom (2003: 460) were part-time. The employees of the Group participate in various defined contribution pension plans organised by relevant municipal and provincial governments under which the Group was required to make monthly contributions to these plans. Other pension costs represent supplementary pension subsidies provided by the Group to certain qualified employees (See also Note 28). 8 Taxation (1) Enterprise Income Tax (“ EIT”) Details of taxation charged during the year are as follows: 2004 2003 Current tax charge (144,951) (261,731) Deferred tax (charge)/credit (Note 17) (3,037) 3,235 (147,988) (258,496) The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the applicable tax rate of the Company as follows: 2004 2003 Profit before tax 1,468,239 1,796,976 Tax calculated at the Company’s tax rate of 15% (2003: 15%) 220,236 269,546 Effect of different tax rates for subsidiaries (59,444) (21,667) Tax credit/refund (3,000) (23,993) Tax deduction arising from research and development expenditure (25,375) (424) Expenses not deductible for tax purposes 18,261 35,034 Utilisation of previously unrecognised tax losses (2,690) - Tax charge 147,988 258,496 8 Taxation (continued) The Company is qualified as a domestic enterprise in encouraged industries. As approved by the relevant tax authorities, the Company is entitled to a preferential EIT rate of 15% and is exempt from local income tax. Chongqing Changan Suzuki Automobile Co., Ltd. (hereafter referred to as “Changan Suzuki”) is qualified as a foreign investment production enterprise as well as advanced technology enterprise. Accordingly, the applicable EIT rate is 15%. As approved by the tax authorities, Changan Suzuki is entitled to a two year exemption from income taxes followed by three years of a 50% tax reduction, commencing from the first cumulative profit-making year net of losses carried forward. Year 2002 was the third year of 50% tax reduction. According to Preferential Policies for Encouraging Foreign Investment issued by local government of Chongqing, Changan Suzuki is entitled to three additional years of 50% tax reduction at a minimum EIT rate of 10%. Accordingly, Changan Suzuki is subject to a preferential EIT rate of 10% for three years from 2003 to 2005. Changan Ford Automobile Co., Ltd. (hereafter referred to as “Changan Ford”), a jointly controlled entity of the Company, is qualified as a foreign investment production enterprise as well as advanced technology enterprise. Accordingly, the applicable EIT rate is 15%. As approved by the tax authorities, Changan Ford is entitled to a two year exemption from income taxes followed by three years of a 50% tax reduction, commencing from the first cumulative profit-making year net of losses carried forward. Year 2004 is the first cumulative profit-making year net of losses carried forward. Accordingly, Changan Ford is entitled to EIT exemption in 2004. As approved by relevant tax authorities, Chongqing Changan Special Automobile Co., Ltd. (hereafter referred to as “Changan Special”) is entitled to EIT exemption for 2004. The EIT rate of other subsidiaries of the Group is 33%. (2) Value-Added Tax (“VAT”) Output VAT is levied at a general rate of 17% on the selling price of goods. Input VAT paid on purchase of goods can be used to offset the output VAT to determine the net VAT payable. (3) Consumption Tax (“CT”) The Group’s automobile sale is subject to CT at rates ranging from 3% to 8% on the selling price of goods. In October 2003, Changan Suzuki obtained an approval from the Ministry of Finance (hereafter referred to as “MOF”) and the National Tax Bureau (hereafter referred to as “NTB”) (Document caishui [2003] No. 218) to enjoy a 30% CT reduction for certain of its products manufactured and sold during the period from April 2002 to December 2003. During the year, Changan Suzuki recognised RMB 35.38 million (2003: RMB 37.49 million) of such CT reduction. In February 2004, the Company obtained an approval from the MOF and the NTB (Document caishui [2004] No. 5) to enjoy a CT reduction amounting to RMB 3.76 million for certain of its products manufactured and sold during the period from March 2001 to December 2003. 9 Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to shareholders of the Company by the weighted average number of ordinary shares in issue during the year. 2004 2003 Net profit attributable to shareholders of the Company 1,197,215 1,435,616 Weighted average number of ordinary shares in issue (thousands) 1,419,394 1,226,666 Basic earnings per share (RMB per share) 0.84 1.17 No diluted earnings per share is presented as there were no dilutive potential ordinary shares outstanding during the years ended 31 December 2004 and 2003. 10 Dividend per share On 13 April 2005, for every ten shares, the Board of Directors proposed a final cash dividend of RMB 3.2 Yuan (relevant tax included), amounting to a total of RMB 518,672 (2003: cash dividend: RMB 306,667, bonus share: 245,333,200 shares) for the year ended 31 December 2004. The proposed dividend distribution is subject to the shareholders’ approval in their next meeting and will be recorded in the Group’s financial statements for the year ending 31 December 2005. 11 Property, plant and equipment Buildings & Equipment & Construction Plants Machinery Motor Vehicles in progress Ot Year ended 31 December 2003 Opening net book amount 525,109 1,464,248 23,435 504,612 Acquisition of jointly controlled entity 53,907 139,439 4,581 27,908 Additions 3,240 333,944 3,290 779,145 Transfers 63,967 316,006 7,942 (402,660) Disposals (Note 35) (2,204) (88,854) (627) (7,967) Others - (3,510) - - Depreciation charge (Note 5) (21,002) (246,284) (5,053) - Impairment charge (Note 5) - - (2,164) - - Closing net book amount 623,017 1,914,989 31,404 901,038 At 31 December 2003 Cost 753,746 3,358,943 54,394 901,038 Accumulated depreciation (130,729) (1,443,954) (20,826) - Impairment charge - - (2,164) - - Net book amount 623,017 1,914,989 31,404 901,038 Year ended 31 December 2004 Opening net book amount 623,017 1,914,989 31,404 901,038 8 Acquisition of subsidiaries (Note 34) - 298 - - - Additions 140,608 94,760 12,862 1,365,027 2 Transfers 358,275 938,025 18,474 (1,444,616) 1 Disposals (Note 35) (1,575) (48,954) (3,027) (1,536) (1 Depreciation charge (Note 5) (57,395) (281,026) (8,226) - (2 Impairment charge (Note 5) - (2,931) 2,164 - - Closing net book amount 1,062,930 2,615,161 53,651 819,913 2 At 31 December 2004 Cost 1,249,362 4,298,128 78,078 819,913 2 Accumulated depreciation (186,432) (1,680,036) (24,427) - ( Impairment charge - (2,931) - - - Net book amount 1,062,930 2,615,161 53,651 819,913 2 11 Property, plant and equipment (continued) During 2004, interest expenses of RMB 4,241 (2003: RMB 1,237) arising from financing specifically entered into for the construction of property, plant and equipment were capitalised in the cost of construction in progress at the rate of 5.72% (2003: 5.76%) per annum. All of the Group’s buildings are located in the PRC. The Group is in the process of obtaining building ownership certificates for properties with an aggregate net book value of RMB 300,058 (2003: RMB 49,448). As at 31 December 2004, buildings with an aggregate net book value of RMB 12,990 (2003: RMB 20,595) have been pledged as securities for short-term loans (Note 26). The Company was established in the PRC on 31 October 1996 as a joint stock limited company as part of the restructuring of Changan Automobile Group Co. Ltd. (hereafter referred to as “CAC”), a state-owned enterprise. On the same date, the mini-automobile and engine equipment manufacturing business of CAC together with the relevant assets and liabilities were taken over by the Company. As required by relevant PRC rules and regulations a valuation of the assets and liabilities to be injected into the Company was carried out on 31 December 1995 and approved by the State-owned Assets Administration Bureau and the injected assets and liabilities were reflected in the accounts on this basis. The 1995 valuation was a one-off exercise that established the deemed cost of the property, plant and equipment injected on the formation of the Company. Subsequent revaluations have not been performed and all further additions have been recorded at cost. 12 Land use rights 2004 2003 At beginning of year 241,147 149,655 Acquisition of jointly controlled entity - 72,186 Additions 218,097 27,302 Disposals - (3,653) Amortisation charge (Note 5) (7,688) (4,343) At end of year 451,556 241,147 As at 31 December 2004, no land use right (2003: land use right with a net book value of RMB 61,620) has been pledged as securities for short-term loans (Note 26). During the year, the Group agreed to acquire land use right at a total consideration of RMB 125,775, of which the Group prepaid RMB 78,561 as at 31 December 2004. As at 31 December 2004, the Group is in the process of obtaining land use right certificates with an aggregate net book value of RMB 20,305 (2003: RMB 10,000). 13 Intangible assets Goodwill Trademark Proprietary technology So Year ended 31 December 2003 Opening net book amount - 30,437 16,898 2,3 Additions 66,344 - 11,321 2, Amortisation charge (Note 5) (1,915) (2,451) (6,836) (8 Closing net book amount 64,429 27,986 21,383 4, At 31 December 2003 Cost 66,344 33,502 38,487 5,5 Accumulated amortisation (1,915) (5,516) (17,104) (1, Net book amount 64,429 27,986 21,383 4,5 Year ended 31 December 2004 Opening net book amount 64,429 27,986 21,383 Additions 73,043 - 228 2, Amortisation charge (Note 5) (6,635) (2,451) (6,840) (1 Other transfer out (416) - - - Closing net book amount 130,421 25,535 14,771 5,9 At 31 December 2004 Cost 138,971 33,502 38,715 8, Accumulated amortisation (8,550) (7,967) (23,944) (2 Net book amount 130,421 25,535 14,771 5, Intangible assets represent goodwill arising principally from acquisition of subsidiaries and jointly controlled entity, trademark o the manufacturing of advanced model of the “Alto” mini-sedan and “Changan Star” automobile. 14 Investments in associates 2004 2003 At beginning of year 4,500 156,150 Share of results (Note 35) - 946 Transfer to jointly controlled entity - (152,596) At end of year 4,500 4,500 Details of the associate, which is unlisted, are: Country of Attributable establishment equity Chongqing Changan Information Technology Co., Ltd. PRC 21.43% 15 Available-for-sale investments 2004 2003 South-western Securities Co., Ltd. 50,000 50,000 Chongqing International Golf Club Co., Ltd. 4,900 - Chongqing Baoteman Biotechnology Co., Ltd. 3,000 3,000 Chongqing Certification Authority Co., Ltd. 1,000 1,000 Chongqing Changan Jinling Vehicles Parts Co., Ltd. 2,900 2,900 Sub-total 61,800 56,900 Less: impairment provision (40,020) (12,102) Total 21,780 44,798 All of the Group’s available-for-sale investments represent investment in unlisted companies, which do not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are clearly unworkable. Accordingly, these investments are carried at cost less accumulated impairment losses. South-western Securities Co., Ltd. (hereafter referred to as “South-western Securities”), is a limited liability company established in the PRC as approved by the China Securities Regulatory Commission. The business of South-western Securities includes purchases and sales of securities, securities underwriting, and investment consulting. The Group holds 3.07% equity interest in South-western Securities. As at 31 December 2004, an impairment provision of RMB 40,020 has been made. Directors are of the opinion that the underlying value of the investments is not less than their carrying value as at 31 December 2004. 16 Other non-current assets 2004 2003 Deferred assets 3,982 5,239 Long-term receivable (Note 26) - 62,100 3,982 67,339 65 16 Other non-current assets (continued) Movement of deferred assets Year ended 31 December 2003 Opening net book amount 10,389 Additions 1,288 Amortisation charge (Note 5) (6,438) Closing net book amount 5,239 At 31 December 2003 Cost 21,808 Accumulated amortisation (16,569) Net book amount 5,239 Year ended 31 December 2004 Opening net book amount 5,239 Additions 1,941 Amortisation charge (Note 5) (3,131) Disposal (67) Closing net book amount 3,982 At 31 December 2004 Cost 17,525 Accumulated amortisation (13,543) Net book amount 3,982 17 Deferred tax assets Deferred income taxes are calculated in full on temporary differences under the liability method using a principal tax rate of 15% (2003: 15%). The movement on the deferred income tax account is as follows: 2004 2003 At beginning of year 100,447 97,212 Income statement (charge)/credit (Note 8) (3,037) 3,235 At end of year 97,410 100,447 Provisions Deferred tax assets and accruals Impairment loss Others Total At 1 January 2004 75,362 23,914 1,171 100,447 Income statement (charge)/credit (4,639) (824) 2,426 (3,037) At 31 December 2004 70,723 23,090 3,597 97,410 66 17 Deferred tax assets (Continued) The amounts shown in the balance sheet include the following: 2004 2003 Deferred tax assets to be recovered after more than 12 months 13,902 7,299 18 Inventories 2004 2003 Raw materials (at net realisable value) 942,554 636,759 Work in progress (at cost) 83,577 90,395 Finished goods (at net realisable value) 1,980,733 1,245,362 Consumables (at cost) 36,708 22,113 3,043,572 1,994,629 19 Receivables and prepayments 2004 2003 Trade receivables 417,689 527,461 Less : Provision for bad and doubtful debts (115,306) (146,892) Trade receivables – net 302,383 380,569 Notes receivables 1,175,940 999,797 Advances to suppliers 234,939 152,232 Other receivables 100,975 130,556 1,814,237 1,663,154 Receivables from related parties are disclosed in Note 36. 20 Trading investments As at 31 December 2004, the Group has marketable securities of RMB 219,254 (2003: nil) that were acquired principally for the purpose of generating a profit from short-term fluctuations in price. Trading investments are stated at fair value at the close of business at year end. 21 Held-to-maturity investments As at 31 December 2004, held-to-maturity investments comprise marketable securities of RMB 247,298 (2003: RMB 99,729) with fixed maturity within 12 months from the balance sheet date. As at 31 December 2004, marketable securities of RMB 74,866 (2003: RMB 99,729) are of original maturity less than three months and are included in cash and cash equivalents for the purpose of the cash flow statement (Note 24). 22 Pledged deposits 2004 2003 Pledged deposits 17,500 10,000 Corresponding bank borrowings 535,000 245,000 67 23 Term deposits with initial terms of over three months As at 31 December 2004, RMB 423,000 (2003: RMB 680,000) of the Group’s term deposits with initial terms of over three months were denominated in Renminbi and deposited with banks in the PRC. The weighted average effective interest rate on such deposits was 1.91% per annum for the year ended 31 December 2004 (2003: 1.90%). 24 Cash and cash equivalents 2004 2003 Cash at bank and in hand 3,568,367 2,406,325 As at 31 December 2004, the Company had deposits of RMB 382,077 (2003: RMB 156,961) with North Industry Group Finance Co., Ltd. The interest rate is 1.44% per annum. North Industry Group Finance Co., Ltd., a non-bank financial institution, is an associate of the ultimate parent of the Company. For the purpose of the cash flow statement, cash and cash equivalents comprise the following: 2004 2003 Cash at bank and in hand 3,568,367 2,406,325 Trading investments (Note 20) 219,254 - Held-to-maturity investments with original maturity less than three months (Note 21) 74,866 99,729 Cash and cash equivalents in the cash flow statement 3,862,487 2,506,054 25 Trade and other payables 2004 2003 Trade payables 2,875,566 2,694,073 Notes payable 976,608 131,366 Other payables 493,136 633,515 Accrued expenses 314,182 179,102 Accrued sales compensation 237,350 274,658 Accrued payroll and welfare 87,099 86,795 Advances from customers 252,847 367,175 5,236,788 4,366,684 Payables to related parties are disclosed in Note 36. 26 Borrowings 2004 2003 Current Bank borrowings - unsecured 415,943 183,259 - secured 33,000 94,500 448,943 277,759 Unsecured borrowings from CAC (Note 36 (4)) 75,000 - 523,943 277,759 Non-current Bank borrowings - secured 535,000 245,000 Total borrowings 1,058,943 522,759 68 26 Borrowings (continued) Current bank loans bear interest at rates ranging from 2.77% to 5.48% per annum (2003: 1.98% to 6.96%). RMB 33,000 (2003: RMB 84,000) of such loans were secured by buildings with net book value of RMB 12,990 (2003: buildings with net book value of RMB 20,595 and land use rights with net book value of RMB 61,620). Other current secured bank loans as at 31 December 2003 were guaranteed by letters of credit provided by two commercial banks. Non-current bank loans bear interest at rates ranging from 5.58% to 5.85% per annum (2003: 5.76% to 6.21%) and were guaranteed by CAC and secured by cash at bank of RMB 17,500 (2003: RMB 10,000). Maturity of non-current borrowings is as follows: 2004 2003 Between 3 and 4 years 100,000 - Between 4 and 5 years 280,000 100,000 Over 5 years 155,000 145,000 535,000 245,000 The Group has the following undrawn borrowing facilities: 2004 2003 Floating rate - expiring beyond one year 665,000 955,000 The Company has obtained a loan facility of RMB 1,200,000 for the financing of upgrading the Company’s production technology. As granted by the bank, RMB 205,000 of such bank facility can be utilised by Chongqing Tsingshan Industries Co., Ltd. (hereafter referred to as “Chongqing Tsingshan”), which will bear the related interest expense. As at 31 December 2003, an advance of RMB 62,100 was made by the Company to Chongqing Tsingshan by utilisation of the bank loan facility and the Company recognised such advance as other non-current assets. As at 31 December 2004, pursuant to an agreement between the Company and Chongqing Tsingshan, the Company settled the total advance of RMB 92,100 made to Chongqing Tsingshan by offsetting the Group’s trade payables due to Chongqing Tsingshan. 27 Provisions 2004 2003 At beginning of year 196,109 96,564 Acquisition of jointly controlled entity - 8,864 Charged for the year 262,605 258,032 Utilised during year (184,455) (167,351) At end of year 274,259 196,109 The above represents the warranty costs for repairs and maintenance, which are estimated based on present after-sale service policies and prior years’ experiences on the incurrence of such costs. 28 Retirement benefit obligations 2004 2003 At beginning of year 23,751 28,956 Interest cost 1,009 1,098 Actuarial loss/(gain) 4,106 (3,231) Payments (3,697) (3,072) At end of year 25,169 23,751 28 Retirement benefit obligations (continued) 2004 2003 69 Current (included in other payables) 3,193 3,867 Non-current 21,976 19,884 25,169 23,751 In addition to monthly contributions to various defined contribution retirement schemes managed by the PRC government, the Group provided supplementary pension subsidies to certain qualified employees. Such pension obligations were actuarially recorded using the projected unit credit method and the material actuarial assumptions used in valuing these obligations are as follows: i. Discount rate adopted: 5% for normal retiree and 3% for early retiree; ii. Mortality: 80% of average life expectancy of residents in the PRC. 29 Deferred income 2004 2003 At beginning of year - - Addition -- Purchase of property, plant and equipment and land use right by the Company (Note a) 251,809 - - Purchase of land use right by Changan Ford (Note b) 78,561 - - Tax credit arising from purchase of domestically manufactured machinery and equipment (Note c) 48,058 - Amortisation charge (Note 5) (8,815) - At end of year 369,613 - Note: a. In 2004, the Company increased its equity interest in Nanjing Changan by injecting certain of its property, plant and equipment (“PPE”) and land use right to Nanjing Changan. The Company purchased these PPE and land use right at a consideration of RMB 50,000 from the local government of Nanjing, Jiangsu Province, while their fair values are RMB 301,809. Difference of RMB 251,809 represented government grant and was recognised as deferred income during the year ended 31 December 2004. b. In 2004, Changan Ford signed an agreement to purchase certain land use right at a total consideration of RMB 251,550 from the local government of Nanjing, Jiangsu Province and has prepaid RMB 157,122 as at 31 December 2004. A government grant of RMB 157,122 was received and recognised by Changan Ford as deferred income during the year ended 31 December 2004. The Company’s proportionate interest in such deferred income of RMB 78,561 was recognised in the consolidated financial statements of the Group. As at 31 December 2004, Changan Ford has not obtained the land use right and accordingly no amortisation of this deferred income is recognised. c. In 2004, the Group obtained certain tax credit of RMB 48,058 arising from purchase of domestically manufactured machinery and equipment. Such tax credit was recognised as deferred income during the year ended 31 December 2004. 70 30 Share capital Non-tradable Tradable Number of shares Domestic Internal (in thousands) legal entity employee shares shares “A” shares “B” shares Total Year ended 31 December 2003 Balance at 31 December 2002 and 2003 708,666 21 167,979 350,000 1,226,666 Year ended 31 December 2004 Balance at 1 January 2004 708,666 21 167,979 350,000 1,226,666 Bonus shares 141,733 4 33,596 70,000 245,333 Issue of shares - 2 148,848 - 148,850 Balance at 31 December 2004 850,399 27 350,423 420,000 1,620,849 All the “A” and “B” shares are registered, issued and fully paid ordinary shares of RMB 1 Yuan each. All the “A” and “B” shares rank pari passu in all respects. Upon established as a joint stock limited company on 31 October 1996, the Company issued 506,190,000 shares to its sole sponsor CAC in exchange for the operating net assets and related assets of the mini-automobile and engine equipment manufacturing lines. In addition, the Company issued 250,000,000 “B” shares to overseas investors, resulting in an aggregate share capital of RMB 756,190 on the date of establishment. On 19 May 1997, with the approval of China Securities Regulatory Commission, the Company issued 120,000,000 “A” shares to domestic public investors, thereby increasing the total share capital to RMB 876,190. On 26 June 1998, the Company issued bonus shares on the basis of 4 shares for each 10 shares to the existing 876,190,000 shares in issue as at 31 December 1997. The bonus shares were issued as a distribution from the share premium account. As a result, RMB 350,476 was transferred from the share premium account to share capital, thereby increasing the share capital to RMB 1,226,666. On 26 May 2004, the Company issued bonus shares on the basis of 2 shares for each 10 shares to the existing 1,226,666,000 shares in issue as at 31 December 2003. The bonus shares were issued as a distribution from the retained earnings account. As a result, RMB 245,333 was transferred from the retained earning account to share capital, thereby increasing the share capital to RMB 1,471,999. On 26 August 2004, with the approval of China Securities Regulatory Commission, the Company issued 148,850,000 “A” shares of RMB 1 Yuan each to domestic public investors at RMB 7.39 Yuan per share, thereby increasing the total share capital to RMB 1,620,849 and resulting in a share premium of RMB 909,730. 71 31 Share premium Year ended 31 December 2003 Balance at 31 December 2002 and 2003 833,438 Year ended 31 December 2004 Balance at 1 January 2004 833,438 Issue of shares 909,730 Balance at 31 December 2004 1,743,168 32 Reserves Statutory Statutory common public Enterprise reserve welfare Reserve expansion fund fund fund fund Total Year ended 31 December 2003 Balance at 1 January 2003 173,482 173,463 200,940 80,070 627,955 Transfers 145,641 145,642 106,080 28,560 425,923 Balance at 31 December 2003 319,123 319,105 307,020 108,630 1,053,878 Year ended 31 December 2004 Balance at 1 January 2004 319,123 319,105 307,020 108,630 1,053,878 Transfers 135,180 134,428 100,470 27,540 397,618 Balance at 31 December 2004 454,303 453,533 407,490 136,170 1,451,496 Statutory common reserve fund According to the Articles of Association, the Company and all domestically invested subsidiaries are required to transfer 10% of profit after taxation, as determined under relevant PRC regulations, to the statutory common reserve fund until the reserve balance reaches 50% of the registered capital. The statutory common reserve fund can be used to offset previous years’ losses, if any, and may be converted into share capital by the issuance of new shares to the shareholders in proportion to their existing shareholdings. The transfer to this reserve must be made before the distribution of dividends to the shareholders. This reserve is un-distributable other than upon the liquidation of the Company. Statutory public welfare fund According to the Articles of Association, the Company and all domestically invested subsidiaries are required to transfer 5% to 10% of profit after taxation, as determined under relevant PRC regulations, to the statutory public welfare fund. The statutory public welfare fund can only be utilised on capital items for the collective benefits of the companies’ employees such as the construction of dormitories, canteens and other staff welfare facilities. The transfer to this reserve must be made before distribution of dividends to the shareholders. This reserve is non-distributable other than upon liquidation of the Company. 72 32 Reserves (continued) Reserve fund According to the resolution of the Board of Directors of Changan Suzuki for the 2004 profit appropriation, an amount of RMB 197 million was transferred to reserve fund from its distributable profits at 31 December 2004. The reserve fund can be used for working capital purposes and to make good losses incurred. The reserve fund can also be used to increase capital. The transfer to this reserve must be made before the distribution of the dividends to the investors. No cash distribution is allowed other than in the event of liquidation. Enterprise expansion fund According to the resolution of the Board of Directors of Changan Suzuki for the 2004 profit appropriation, an amount of RMB 54 million was transferred to enterprise expansion fund from its distributable profits at 31 December 2004. The enterprise expansion fund can be used for Changan Suzuki’s business development purposes and for working capital purposes. The enterprise expansion fund can also be used to increase capital of Changan Suzuki. The transfer to this reserve must be made before the distribution of the dividends to the investors of Changan Suzuki. No cash distribution is allowed other than in the event of liquidation. 33 Minority interests 2004 2003 At beginning of year 947,461 829,079 Newly incorporated subsidiaries 50,000 2,650 Share of net profits of subsidiaries 123,036 102,864 Dividends paid (18,130) (286) Additional share of net assets by minority shareholders due to additional injection by the Company 35,137 11,071 Increase in net assets due to additional injection from minority shareholders 6,900 - Others (186) 2,083 At end of year 1,144,218 947,461 73 34 Business combinations According to the contract between the Group and CAC, the Group acquired 10 sales offices from CAC. The acquisition was made on 31 August 2004 at a consideration of RMB 2,470. After the acquisition, the Group has 100% equity interests in these 10 sales offices. Details of net assets acquired and goodwill are as follows: i. Purchase consideration: Cash paid 2,258 Cash to be paid 212 Less: Fair value of net assets acquired (3,280) Negative goodwill (810) ii. The assets and liabilities at the date of acquisition are as follows: Cash and cash equivalents 250 Property, plant and equipment 298 Inventories 32,540 Receivables 10,045 Payables (39,853) Fair value of net assets acquired 3,280 Negative goodwill (810) Total purchase consideration paid 2,470 Less: Cash to be paid (212) Total cash paid for acquisition 2,258 Less: Cash and cash equivalents in subsidiaries acquired (250) Cash outflow on acquisition 2,008 74 35 Cash generated from operations 2004 2003 Profit before tax 1,468,239 1,796,976 (Reversal of)/Impairment charge for bad and doubtful debts (Note 5) (11,512) 32,609 Provision for/(reversal of) slow moving and obsolete inventories (Note 5) 5,323 (38,688) Impairment charge for property, plant and equipment (Note 11) 767 2,164 Impairment charge for/(reversal of) available-for-sale investments (Note 15) 27,918 (678) Depreciation of property, plant and equipment (Note 11) 373,104 287,086 Amortisation of land use rights (Note 12) 7,688 4,343 Amortisation of intangible assets (Note 13) 17,081 12,013 Amortisation of deferred assets (Note 16) 3,131 6,438 Loss on disposal of property, plant and equipment (Note 5) 9,753 98,118 Loss on disposal of land use rights (Note 5) - 1,873 Loss on disposal of other non-current assets (Note 5) 67 - Interest expense (Note 6) 25,366 15,115 Income from securities investment (Note 5) (9,275) (958) Share of results of associates (Note 14) - (946) Amortisation of deferred income (Note 5) (8,815) - Recognition of negative goodwill (810) - Changes in working capital: Increase in inventories (1,021,727) (49,055) Increase in operating receivables (44,240) (530,048) Increase in operating payables 845,422 246,550 Cash generated from operations 1,687,480 1,882,912 In the cash flow statement, proceeds from sale of property, plant and equipment comprise: 2004 2003 Net book amount of property, plant and equipment disposed (Note 11) 55,093 100,238 Less: Loss on disposal of property, plant and equipment (Note 5) (9,753) (98,118) (Increase)/decrease of receivables (28,085) 493 Proceeds from sale of property, plant and equipment 17,255 2,613 75 36 Related party transactions The Company is controlled by CAC (incorporated in the PRC), which owns 52.47% of the Company’s shares. The remaining 47.53% of the shares are widely held. The ultimate parent of the Company is China South Industries Group Corp. (hereafter referred to as “CSIG”, also a company incorporated in the PRC). Related parties, other than subsidiaries, and their relationship with the Company are as follows: Related parties’ name Relationship Chongqing Changan Automobile Manufacturing Factory Subsidiary of CAC Chongqing Changan Transportation Company Subsidiary of CAC Changqing Changan Trading Company Subsidiary of CAC Chongqing Changan Construction Co., Ltd. Subsidiary of CAC Chongqing Jiangli Machinery Factory Subsidiary of CAC Chongqing Jiangchuan Machinery Factory Subsidiary of CAC Chongqing Jiangchao Engine Industry Co., Ltd. Subsidiary of CAC Chongqing Changan Minsheng Logistics Co., Ltd. Subsidiary of CAC Changan Shengli Automobile Company Subsidiary of CAC Chongqing Changan Design Academy Subsidiary of CAC Chongqing Changan Support Services Co., Ltd. Subsidiary of CAC Chongqing Guohao Automobile Sales Co. Ltd. Subsidiary of CAC Chongqing Shanrui Automobile Parts Co. Ltd Subsidiary of CAC Chongqing Changan Lingyun Automobile Parts Co. Ltd. Subsidiary of CAC Chongqing Jinhai Standard Parts Co. Ltd. Subsidiary of CAC Chongqing Haitai Property Management Co. Ltd. Subsidiary of CAC Chongqing Changan Jinling Vehicles Parts Co., Ltd Subsidiary of CAC Chongqing Automobile Air-conditioner Co., Ltd. Subsidiary of CAC Chongqing Changan Information Technology Co., Ltd. Associate of the Company Changan Ford Automobile Co., Ltd. Jointly controlled entity of the Company Chengdu Wanyou Economic Technological Development Co., Ltd. Subsidiary of CSIG Chongqing Wanyou Economic Development Co., Ltd. Subsidiary of CSIG Southwest Industries Corporation Subsidiary of CSIG Chongqing Tsingshan Industries Co., Ltd. Subsidiary of CSIG Chongqing Hongyu Precision Industries Co., Ltd. Subsidiary of CSIG Sichuan Jianan North Automobile Bridge Co., Ltd. Subsidiary of CSIG Chongqing Jianshe Automobile Air-conditioner Co., Ltd. Subsidiary of CSIG Sichuan Ningjiang Precision Industries Co., Ltd. Subsidiary of CSIG Chongqing Changjiang Electrics (Group) Co., Ltd. Subsidiary of CSIG Longchang Shanchuan Shock-absorbing Works Industries Co., Ltd. Subsidiary of CSIG Yunnan Xiyi Industries Co., Ltd. Subsidiary of CSIG Hubei Xiaogan Huazhong Automobile Light Co., Ltd. Subsidiary of CSIG Chongqing Yihong Engineering Plastic Products Co., Ltd. Subsidiary of CSIG Sichuan Huaqing Machinery Co., Ltd. Subsidiary of CSIG Chengdu Lingchuan Machinery Factory Subsidiary of CSIG Chongqing Changfeng Machinery Co., Ltd. Subsidiary of CSIG Sichuan Hongguang Machinery and Electrics Co., Ltd. Subsidiary of CSIG China Yanxing Northwest Co. Subsidiary of CSIG 76 36 Related party transactions (continued) The following transactions are entered into at terms agreed with corresponding related parties in the ordinary course of business with reference to those entered into with other independent third parties, where applicable. (1) Sales of goods and services 2004 2003 Sales of goods (excluding VAT): CAC and its related companies 81,602 140,251 Chongqing Changan Support Services Co., Ltd. 32,673 26,982 Chengdu Wanyou Economic Technological Development Co., Ltd. 325,807 488,928 Chongqing Wanyou Economic Development Co.,Ltd. 341,279 222,853 Chengdu Lingchuan Machinery Factory 59,657 68,175 Chongqing Changan Jinling Vehicles Parts Co., Ltd. 59,929 33,924 China Yanxing Northwest Co. 38,383 76,943 Changan Ford Automobile Co., Ltd. (Note a) 33,758 18,850 Chongqing Changan Automobile Manufacturing Factory 8,029 3,837 Chongqing Jiangchao Engine Industry Co., Ltd. 3,629 4,465 Chongqing Jiangli Machinery Factory 6,493 7,430 Sichuan Hongguang Machinery and Electrics Co., Ltd. 31,837 36,897 Chongqing Jiangchuan Machinery Factory 1,297 1,574 Chongqing Guohao Automobile Sales Co. Ltd. 26,318 9,796 Chongqing Shanrui Automobile Parts Co. Ltd 3,407 - Chongqing Changan Lingyun Automobile Parts Co. Ltd. 2,853 - Chongqing Tsingshan Industries Co., Ltd 1,310 2,342 Chongqing Hongyu Precision Industries Co., Ltd. 4,500 565 Sichuan Jianan North Automobile Bridge Co., Ltd. 1,282 1,407 Chongqing Jianshe Automobile Air-conditioner Co., Ltd. 319 406 Sichuan Ningjiang Precision Industries Co., Ltd. 1,062 1,256 Longchang Shanchuan Shock-absorbing Works Industries Co., Ltd. 1,119 1,345 Interest income: CAC and its related companies - 882 Rental income: CAC 4,347 4,347 Note a: The transactions with Changan Ford shown above are after elimination of the Company’s proportionate interests in Changan Ford. 77 36 Related party transactions (continued) (2) Purchases of goods and services 2004 2003 Purchases of goods (excluding VAT): Chongqing Changan Jinling Vehicles Parts Co., Ltd. 521,098 413,219 Chongqing Changan Automobile Manufacturing Factory 52,809 34,011 CAC 87,548 169,238 Chongqing Jiangli Machinery Factory 82,554 75,537 Chongqing Wanyou Economic Development Co.,Ltd. 94,538 63,019 Sichuan Jianan North Automobile Bridge Co., Ltd. 123,354 109,106 Sichuan Ningjiang Precision Industries Co., Ltd. 50,784 51,970 Chongqing Hongyu Precision Industries Co., Ltd. 287,945 248,195 Hubei Xiaogan Huazhong Automobile Light Co., Ltd. 26,820 22,002 Chongqing Jiangchuan Machinery Factory 68,983 61,251 Chongqing Changjiang Electrics (Group) Co., Ltd. 40,837 32,895 Chongqing Jiangchao Engine Industry Co., Ltd. 16,057 18,524 Chongqing Jianshe Automobile Air-conditioner Co., Ltd. 150,668 200,974 Sichuan Hongguang Machinery and Electrics Co., Ltd. 61,155 54,911 Longchang Shanchuan Shock-absorbing Works Industries Co., Ltd. 56,910 61,975 Chongqing Tsingshan Industries Co., Ltd. 353,271 312,928 Yunnan Xiyi Industries Co., Ltd. 27,842 23,911 Changan Shengli Automobile Company 49,991 19,543 Chengdu Lingchuan Machinery Factory 143,232 131,839 Changan Ford Automobile Co., Ltd. (Note a) 142,960 103,403 Chongqing Automobile Air-conditioner Co. Ltd. 4,173 - Chongqing Shanrui Automobile Parts Co. Ltd 10,503 - Chongqing Changan Lingyun Automobile Parts Co. Ltd. 708 515 Chongqing Jinhai Standard Parts Co. Ltd. 11,240 - Chongqing Yihong Engineering Plastic Products Co., Ltd. 20,241 15,437 Sichuan Huaqing Machinery Co., Ltd. 17,637 17,689 Chongqing Changfeng Machinery Co., Ltd. 7,174 676 Note a: The transactions with Changan Ford shown above are after elimination of the Company’s proportionate interests in Changan Ford. 78 36 Related party transactions (continued) (2) Purchases of goods and services (continued) 2004 2003 Purchases of services: CAC --Construction fee 3,230 13,779 --Trademark fee 13,035 13,028 --Lease of land use right 4,052 4,052 --Building rental fee 16,618 16,618 --Water and electricity fee 108,366 97,701 --Welfare 32,876 28,796 --Telephone charges 1,829 1,930 --Education fee 7,211 7,804 --Security and fire fighting fee 9,473 8,500 --Labours’ union fee 4,813 4,645 --Others 7,662 7,604 Chongqing Changan Minsheng Logistics Co., Ltd. --Transportation fee 608,554 395,369 Chongqing Changan Information Technology Co., Ltd. --Construction fee 15,586 21,191 --Technology service fee 31,690 28,269 Chongqing Changan Construction Co., Ltd. --Construction fee 205,265 156,935 Chongqing Changan Design Academy --Construction fee 50,601 16,685 Chongqing Changan Transportation Company --Transportation fee 11,164 1,313 Changan Shengli Automobile Company --Comprehensive services 598 - 79 36 Related party transactions (continued) (3) Other transactions 2004 2003 CAC --Loan interest expense 2,035 1,539 --Purchase of properties, plant and equipment 1,252 - --Purchase of land use right 12,627 - --Acquisition of jointly controlled entity - 196,138 --Acquisition of subsidiaries 2,470 - Chongqing Changan Jinling Vehicles Parts Co., Ltd --Sales of properties, plant and equipment 3,936 - Southwest Industries Corporation --Sales of properties, plant and equipment 524 - Chongqing Haitai Property Management Co. Ltd. --Property management fee 7,430 1,557 Changan Shengli Automobile Company --Purchase of properties, plant and equipment 1,086 - (4) Year-end balances arising from sales/purchases of goods/services 2004 2003 Receivables from related parties: CAC and its related companies 21,572 24,308 Chongqing Changan Support Services Co., Ltd. 1,122 1,180 Chengdu Wanyou Economic Technological Development Co.,Ltd. 51,860 98,000 Chongqing Changan Jinling Vehicles Parts Co., Ltd 150 - Chongqing Guohao Automobile Sales Co. Ltd. 9,179 - Chongqing Changan Lingyun Automobile Parts Co. Ltd. 3,338 - Changan Ford Automobile Co., Ltd. (Note a) 1,000 11,855 Chengdu Lingchuan Machinery Factory 1,911 1,911 90,132 137,254 2004 2003 Prepayments to related parties: Changan Shengli Automobile Company 15,133 9,720 Note a: The balance with Changan Ford shown above is after elimination of the Company’s proportionate interests in Changan Ford. 80 36 Related party transactions (continued) (4) Year-end balances arising from sales/purchases of goods/services (continued) 2004 2003 Payables to related parties: Chongqing Changan Minsheng Logistics Co. Ltd. 135,899 58,703 Chongqing Jiangli Machinery Factory 11,225 11,028 Chongqing Jiangchuan Machinery Factory 7,308 9,622 Chongqing Jiangchao Engine Industry Corporation 4,031 5,232 Chongqing Changan Jinling Vehicles Parts Co., Ltd 3,393 2,300 CAC 6,657 - Chongqing Changan Information Technology Co., Ltd. 5,588 3,180 Chongqing Changan Design Academy 466 4,757 Changan Ford Automobile Co., Ltd. (Note a) 2,860 - Chongqing Wanyou Economic Development Co.,Ltd 23,809 24,412 Changan Shengli Automobile Company 1,372 1,147 Chongqing Shanrui Automobile Parts Co. Ltd. 3,893 - Chongqing Jinhai Standard Parts Co. Ltd. 4,421 - Sichuan Hongguang Machinery and Electrics Co., Ltd. 10,832 7,869 Chongqing Tsingshan Industries Co., Ltd. 3,735 96,986 Chongqing Hongyu Precision Industries Co., Ltd. 45,203 42,425 Sichuan Jianan North Automobile Bridge Co., Ltd. 10,353 13,111 Chongqing Changfeng Machinery Co., Ltd. 1,171 670 Chongqing Jianshe Automobile Air-conditioner Co., Ltd. 19,130 65,810 Sichuan Ningjiang Precision Industries Co., Ltd. 7,512 10,676 Chongqing Changjiang Electrics (Group) Co., Ltd. 10,281 8,435 Longchang Shanchuan Shock-absorbing Works Industries Co., Ltd. 16,937 19,500 Yunnan Xiyi Industries Co., Ltd. 5,100 9,128 Hubei Xiaogan Huazhong Automobile Light Co., Ltd. 8,337 10,587 Chongqing Yihong Engineering Plastic Products Co., Ltd. 5,130 3,007 Sichuan Huaqing Machinery Co., Ltd. 2,272 3,015 Chengdu Lingchuan Machinery Factory 12,457 8,680 Chengdu Wanyou Economic Technological Development Co., Ltd. 27,160 6,458 Chongqing Guohao Automobile Sales Co. Ltd. 276 - Chongqing Changan Transportation Company 3,409 1,151 Chongqing Changan Construction Co., Ltd. 10,113 - Chongqing Changan Lingyun Automobile Parts Co. Ltd. 247 88 Chongqing Changan Automobile Manufacturing Factory 75 836 Chongqing Haitai Property Management Co. Ltd. 100 - 410,752 428,813 Note a: The balance with Changan Ford shown above is after elimination of the Company’s proportionate interests in Changan Ford. 81 36 Related party transactions (continued) (4) Year-end balances arising from sales/purchases of goods/services (continued) 2004 2003 Current loans from CAC, parent company: At beginning of year - - Addition during the year 95,000 95,000 Repaid during the year (20,000) (95,000) At end of year 75,000 - The above loans are unsecured and bear interest rate at 5.04% (2003: 5.04%) per annum. (5) Directors’ remuneration In 2004, the total remuneration of the directors was RMB 800 (2003: RMB 649). (6) Others a. CAC has provided a guarantee for the Company to obtain bank borrowings of RMB 535,000 (2003: RMB 245,000). b. The Company has provided a guarantee for a bank loan facility of RMB 31,200 granted to Changan Ford. The period of the guarantee is from 15 April 2002 to 15 May 2005. CAC has also provided a counter-guarantee to the Company on behalf of Changan Ford. As at 31 December 2004, Changan Ford has not drawn any borrowing from such loan facility. 82 37 Principal subsidiaries Entity Country of Principal activities incorporation Chongqing Changan Automobile Import PRC Import and export, sale of and Export Co., Ltd. (“Changan Import and automobiles and spare parts Export”) (95%) Chongqing Changan Automobile Sales Co., PRC Sale of automobiles, engines and Ltd. (“Changan Sales”) (100%) spare parts Chongqing Changan Suzuki Automobile PRC Manufacture and sale of Co., Ltd. (51%) automobiles and spare parts Nanjing Changan Automobile Co., Ltd. PRC Manufacture and sale of mini auto- (“Nanjing Changan”) (71.05%) mobiles and spare parts Hebei Changan Automobile Co., Ltd. PRC Manufacture and sale of auto- (“Hebei Changan”) (66.51%) mobiles and spare parts Chongqing Anfu Automobile Co., Ltd. PRC Sale of automobiles and spare parts (“Chongqing Anfu”) (50%) 189 Sales Offices (80%-100%) PRC Sale of automobiles and spare parts Chongqing Changan Special Automobile PRC Sale of special automobiles and Co., Ltd. (“Changan Special”) (50%) spare parts, automobile repair Chongqing Changan Service Co., Ltd. PRC Sale of automobiles and spare parts (99%) Jiangxi Jiangling Holding Co., Ltd. PRC Investment, foreign trading (“Jiangling Holding”) (50%) In 2004, the Company’s equity interest in Nanjing Changan increased from 41.92% to 71.05%. The Company is deemed to have effective control over Chongqing Anfu and Changan Special as the Company has the power to control their strategic operating, investing and financing policies. In 2004, the Company and Jiangling Automobile Group Co., Ltd. (hereafter referred to as “Jiangling Group”) jointly established Jiangling Holding. According to the Articles of Association, the Company has the power to govern the financial and operating policies of Jiangling Holding, and thereby Jiangling Holding is considered a subsidiary of the Company. 38 Interest in a jointly controlled entity Changan Ford is considered a jointly controlled entity for IFRS reporting purposes because its strategic operating, investing and financing activities are jointly controlled by the Company and the jointly controlled entity partners. The Company’s profit and loss sharing from the jointly controlled entity correspond to its equity interest percentage. The following amounts represent the Group’s 50% share of the assets and liabilities and sales and results of the jointly controlled entity which are included in the consolidated balance sheet and income statement: 2004 2003 Assets: Property, plant and equipment 528,892 303,251 Land use right 161,129 71,660 Deferred tax assets 3,598 1,171 Current assets 1,279,685 456,101 1,973,304 832,183 38 Interest in a jointly controlled entity (continued) 2004 2003 83 Liabilities: Deferred income (78,561) - Short term borrowings (372,443) (157,259) Provisions (54,055) (15,493) Other current liabilities (758,577) (326,322) (1,263,636) (499,074) Net assets 709,668 333,109 Sales 3,633,418 521,108 Profit/(loss) from operations 375,324 (2,288) Profit/(loss) after income tax 376,558 (248) Proportionate interest in jointly controlled entity’s commitments as at 31 December 2004 120,670 76,029 There are no contingent liabilities relating to the Group’s interest in the jointly controlled entity. The average number of employees in the jointly controlled entity in 2004 was 2,093 (2003: 1,506). 39 Commitments (1) Capital commitments Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows: 2004 2003 Property, plant and equipment 819,402 571,435 Land use right 49,082 - 868,484 571,435 (2) Operating commitments The future aggregate minimum amount contracted for at the balance sheet date but not recognised in the financial statements is as follows: Lease of buildings 2004 2003 Not later than 1 year 19,855 18,338 Later than 1 year and not later than 5 years 74,097 77,937 Later than 5 years 36,006 52,623 129,958 148,898 Lease of land use rights Not later than 1 year 4,438 4,757 Later than 1 year and not later than 5 years 17,750 20,694 Later than 5 years 13,795 12,830 35,983 38,281 84 39 Commitments (continued) (3) Others The future aggregate minimum amount contracted for at the balance sheet date but not recognised in the financial statements is as follows: 2004 2003 Production technology development Not later than 1 year 177,345 205,477 Later than 1 year and not later than 5 years 8,657 35,848 186,002 241,325 ERP project contract Not later than 1 year 4,593 4,012 40 Subsequent events Apart from dividend distribution as disclosed in Note 10, the following events occurred subsequent to 31 December 2004: a. As stated in Note 37, in November 2004, the Company and Jiangling Group jointly established Jiangling Holding. According to a further capital injection agreement entered by the Company, Jiangling Group and Jiangling Holding on 6 December 2004, the Company will inject RMB 450 million cash into Jiangling Holding, while Jiangling Group will increase its interests in Jiangling Holding by way of transferring its 354,176,000 shares in Jiangling Automobile Co., Ltd. (representing 41.03% of total ordinary shares of Jiangling Automobile Co., Ltd.) and related liabilities. After the completion of the capital injection, the Company and Jiangling Group will each own 50% interests of Jiangling Holding and Jiangling Holding will become a major shareholder of Jiangling Automobile Co., Ltd. As at the date of this report, the transfer of shares in Jiangling Automobile Co., Ltd. has not been finalised and is subject to obtaining approval from relevant government authorities. b. On 13 April 2005, the Board of Directors proposed to provide 3% of the Company’s consolidated net profit for the year ended 31 December 2004 as a special bonus to certain employees of the Company, which is subject to shareholders’ approval in their next meeting. 85 Impact of IFRS adjustments on the consolidated profit after taxation and shareholders’ fund Net assets Net profit As reported in the accounts of the Group under PRC accounting regulations 6,977,455 1,317,300 1. Staff and workers’ bonus and welfare fund charged to income statement - (9,690) 2. Reversal of revaluation made in 1995 (15,456) 8,735 3. Deferred tax assets 90,553 (5,231) 4. Government grants relating to purchase of assets (251,392) (73,049) 5. Tax credit arising from purchase of domestically manufactured machinery and equipment (41,660) (41,660) 6. Others - 810 As restated in conformity with IFRS 6,759,500 1,197,215 86 XXI. Documents for inspection 1. Financial statements with signatures and stamps of the legal representative, the head of the accounting and the head of accounting departments. 2. The original copy of audit report with the stamp of the CPA firm and the signature and stamp of the Certified Public Accountant. 3. All the original documents and manuscripts of the Company which has been disclosed in the reporting period in the newspapers designated by China Securities Regulatory Commission. 4. Annual reports published in other securities markets. Chairman of the Board of Directors: Mr. Yin Jiaxu General Manager: Mr. Zhao Luchuan Chongqing Changan Automobile Company Limited 15 April 2005 87