2012 Annual Report - ZTE

ANNUAL REPORT 2012Notes to Financial Statements(Prepared under Hong Kong Financial Reporting Standards)31 December 20122.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)Financial liabilities (continued)Bonds cum warrantsThe component of bonds cum warrants that exhibits characteristics of a liability is recognised as a liabilityin the statement of financial position, net of transaction costs. On issuance of bonds cum warrants, thefair value of the liability component is determined using a market rate for an equivalent bond without thedetachable share purchase warrants; and this amount is carried as a long term liability on the amortisedcost basis until extinguished on conversion or redemption. The remainder of the proceeds is allocated tothe detachable share purchase warrants that is recognised and included in shareholders’ equity, net oftransaction costs. The carrying amount of the detachable share purchase warrants is not remeasured insubsequent years. Transaction costs are apportioned between the liability and equity components of thebonds cum warrants based on the allocation of proceeds to the liability and equity components when theinstruments are first recognised.Derecognition of financial liabilitiesA financial liability is derecognised when the obligation under the liability is discharged or cancelled, orexpires.When an existing financial liability is replaced by another from the same lender on substantially differentterms, or the terms of an existing liability are substantially modified, such an exchange or modification istreated as a derecognition of the original liability and a recognition of a new liability, and the differencebetween the respective carrying amounts is recognised in profit or loss.Offsetting of financial instrumentsFinancial assets and financial liabilities are offset and the net amount is reported in the statement of financialposition if, there is a currently enforceable legal right to offset the recognised amounts and there is anintention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.Fair value of financial instrumentsThe fair value of financial instruments that are traded in active markets is determined by reference to quotedmarket prices or dealer price quotations (bid price for long positions and ask price for short positions),without any deduction for transaction costs. For financial instruments where there is no active market, thefair value is determined using appropriate valuation techniques. Such techniques include using recent arm’slength market transactions; reference to the current market value of another instrument which is substantiallythe same; a discounted cash flow analysis; and option pricing models.345