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)XI.OTHER SIGNIFICANT MATTERS (continued)4. Financial instruments and risk analysis (continued)Fair valueThe fair values of the financial instruments of the Group did not differ significantly from their book values.Fair value refers to the amount at which assets are exchanged and debts settled between two informedand willing parties in an arm’s length transaction. Methods and assumptions adopted in the estimationof fair values are explained as follows.The fair values of cash, bills receivable, trade receivables, bills payable and trade payables approximatetheir carrying values given relatively short outstanding periods.The fair values of long-term receivables, long/short-term loans, bonds payable are determined on thebasis of discounted future cash flow. The discount rate adopted is the rate of market yield for otherfinancial instruments with substantially identical contract terms and characteristics.The fair values of listed financial instruments are determined on the basis of market value.The Group has entered into derivative financial instruments with a number of counterparties (who aremainly financial institutions with sound credit rating). Derivative financial instruments include interestrate swaps and forward exchange contracts. The fair value of interest rate swaps is measured usingthe short-term interest rate pricing model after taking into consideration the terms of the relevantreciprocal agreement. Principal input of the model include the expected volatility rate of short-terminterest rates and the interest rate curve of forward LIBOR rates. The data of these two parametersmay be directly observed or implied in market prices. Forward exchange contracts are measured usingvaluation techniques similar to those adopted for forward pricing. The valuation model covers a numberof inputs observable in the market, such as the credit quality of the counterparty, spot and forwardexchange rates and interest rate curves. The carrying value of an interest rate swap and a forwardexchange contract is identical with its fair value. As at 31 December 2012, the fair value of derivativefinancial assets represented the net value after offsetting credit valuation adjustments attributable tothe risk of counterparty default.The Group’s measurement of fair value is distinguished into the following levels:The first level is the measurement of fair value as prices of identical assets or liabilities quoted in anactive market on the date of measurement, where such prices are available; the second level is themeasurement of fair value as prices of similar assets or liabilities quoted in an active market or pricesof identical or similar assets or liabilities quoted in an inactive market on the date of measurement,after necessary adjustment, where such prices are available; the third level is the measurement offair value on the basis of other parameters that reflect market participants’ valuation of the assets orliabilities concerned, if no comparable traded market prices for identical or similar assets are available.293