2012 Annual Report - ZTE

ANNUAL REPORT 2012Notes to Financial Statements (continued)(Prepared in accordance with PRC ASBEs)(All amounts in RMB’000 unless otherwise stated)(English translation for reference only)II.PRINCIPAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES (continued)8. Foreign currency translation (continued)The Group translates the functional currencies of foreign operations into Renminbi when preparing thefinancial statements. Asset and liability items in the balance sheet are translated at the spot exchangerate prevailing at the balance sheet date. Shareholders’ equity items, except for retained profits,are translated at the spot exchange rates at the date when such items arose. Income and expenseitems in the income statement are translated using the average exchange rate for the periods whentransactions occur. Translation differences arising from the above translation are presented as a separateline item under shareholders’ equity in the balance sheet. When foreign operations are disposed, othercomprehensive income relating to the foreign operation is transferred to current profit or loss. Partialdisposal shall be recognized on a pro-rata basis.Cash flows denominated in foreign currencies and foreign subsidiaries’ cash flows are translated usingthe average exchange rate for the period when cash flows occur. The impact on cash by the fluctuationof exchange rates is presented as a separate line item of reconciliation in the cash flow statement.9. Financial instrumentsFinancial instruments refer to the contracts which give rise to a financial asset in one entity and afinancial liability or equity instrument in another entity.Recognition and derecognition of financial instrumentsThe Group recognizes a financial asset or a financial liability when it becomes a party to the contractualprovisions of the financial instrument.A financial asset (or part of it, or a part of a group of similar financial asset) is derecognized whenone of the following criteria is met:(1) The right of receiving the cash flow generated from the financial asset has expired;(2) The right of receiving cash flow generated by the financial assets is transferred, or an obligationof paying the full amount of cash flow received to third parties in a timely manner has beenundertaken under “pass-through” agreements, where (a) substantially all risks and rewards of theownership of such financial assets have been transferred, or (b) control over such financial assetshas not been retained even though substantially all risks and rewards of the ownership of suchfinancial assets have been neither transferred nor retained.If the obligation of financial liability has been fulfilled, cancelled or expired, the financial liability isderecognized. If the present financial liability is substituted by the same debtor with another liabilitydiffering in substance, or the terms of the present liability have been substantially modified, thissubstitution or modification is treated as derecognition of a present liability and recognition of a newliability with any arising differences recognized in profit or loss.167