Annual Report 2007 - The Link REIT

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90 The Link Real Estate Investment Trust Annual Report 2007 Notes to the Consolidated Financial Statements 3 Summary of significant accounting policies (continued) (m) Impairment of assets Assets 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. Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. (n) Revenue recognition (i) (ii) (iii) (iv) Rental income from retail properties Operating lease rental income is recognised on a straight-line basis over the terms of lease agreements or according to the terms of the lease agreements in respect of contingent rental income (representing income over and above base rent) such as turnover rent. Lease incentives provided, such as rent-free periods, are amortised on a straight-line basis and are recognised as a reduction of rental income over the respective term of the lease. Gross receipts from carparks Gross receipts from carparks are recognised as revenue on an accrual basis. Service fees and charges Service fees and charges such as air-conditioning income arising from the provision of services are recognised when such services are rendered. Interest income Interest income is recognised on a time proportion basis using the effective interest method. (o) Expenditure Expenditure, including property related outgoings and other expenses, are recognised on an accrual basis. (p) Employee benefits Employee benefits such as wages, salaries and bonuses are recognised as an expense when the employee has rendered the service. Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet date. Employee entitlements to sick leave and maternity leave are not recognised until the time of leave. Contributions to the Mandatory Provident Fund for employees are expensed as incurred.
Annual Report 2007 The Link Real Estate Investment Trust 91 Notes to the Consolidated Financial Statements 3 Summary of significant accounting policies (continued) (q) Derivative financial instruments and hedging activities A derivative is initially recognised at fair value on the date a derivative contract is entered into and is subsequently remeasured at its fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group uses interest rate swaps to hedge its exposure against changes in interest rates. Hedging relationships are classified as cashflow hedges when such relationships are used to hedge against exposure to variability in cashflows that are attributable to a particular risk associated with a recognised asset or liability and such variability could affect profit or loss. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in cashflows of hedged items. The changes in the fair value of the effective portion of derivatives that are designated and qualify as cash flow hedges is deferred in a hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in hedging reserve are transferred to the income statement in the periods when the hedged item affects earnings. However, when the highly probable forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in hedging reserve are transferred from hedging reserve and included in the measurement of the initial cost or carrying amount of the asset or liability. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in hedging reserve at that time remains in hedging reserve and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in hedging reserve is immediately transferred to the income statement. (r) Financial risk factors The Group’s activities expose it to a variety of financial risks: price risk, credit risk, interest rate risk, liquidity risk and insurable risks. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’sfinancial performance. (i) Price risk The Group is exposed to property price and market rental risk because investment properties are carried at fair value. Any change in fair values is recognised in the income statement.
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