2012 Annual Report - ZTE

ZTE CORPORATIONNotes to Financial Statements(Prepared under Hong Kong Financial Reporting Standards)31 December 20122.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)Derivative financial instruments and hedge accounting (continued)Current versus non-current classificationDerivative instruments that are not designated as effective hedging instruments are classified as current ornon-current or separated into current and non-current portions based on an assessment of the facts andcircumstances (i.e., the underlying contracted cash flows).• Where the Group expects to hold a derivative as an economic hedge (and does not apply hedgeaccounting) for a period beyond 12 months after the end of the reporting period, the derivative isclassified as non-current (or separated into current and non-current portions) consistently with theclassification of the underlying item.• Embedded derivatives that are not closely related to the host contract are classified consistently withthe cash flows of the host contract.• Derivative instruments that are designated as, and are effective hedging instruments, are classifiedconsistently with the classification of the underlying hedged item. The derivative instruments areseparated into current portions and non-current portions only if a reliable allocation can be made.InventoriesInventories are stated at the lower of cost and net realisable value. Cost is determined on the weightedaverage basis and, in the case of finished goods, comprises direct materials, direct labour, an appropriateproportion of overheads and/or subcontracting fees. Net realisable value is based on estimated selling pricesless any estimated costs to be incurred to completion and disposal.Construction contractsContract revenue comprises the agreed contract amount and appropriate amounts from variation orders,claims and incentive payments in respect of telecommunications system contracts. Contract costs incurredcomprise direct materials, the costs of subcontracting, direct labour and an appropriate proportion of variableand fixed construction overheads.Revenue from fixed price telecommunications system contracts is recognised using the percentage ofcompletion method when the contract activities have progressed to a stage where an economic benefit canbe reasonably foreseen and is measured by reference to the proportion of costs incurred to date to theestimated total cost of the relevant contract.Provision is made for foreseeable losses as soon as they are anticipated by management.Where contract costs incurred to date plus recognised profits less recognised losses exceed progress billings,the surplus is treated as an amount due from customers for contract works.Where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses,the surplus is treated as an amount due to customers for contract works.348