A N N U A L R E P O R T 2 0 0 7 - the grande holdings limited

notes to financial statements31 December 20074. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OFESTIMATION UNCERTAINTY (continued)(d) Impairment loss for bad and doubtful debts:The Group maintains an impairment loss for bad and doubtful debts for estimatedlosses resulting from the inability of the debtors to make required payments.The Group bases the estimates of future cash flows on the ageing of thetrade receivables balance, debtors’ credit-worthiness, and historical write-offexperience. If the financial condition of the debtors were to deteriorate, actualwrite-offs could be higher than estimated.(e)(f)(g)Write down of inventories:The Group performs regular review of the carrying amounts of inventories withreference to aged inventories analysis, expected future sales and managementjudgement. Based on this review, write down of inventories will be made when thecarrying amount of inventories declines below the estimated net realisable value.However, actual sales may be different from estimation and profit or loss could beaffected by differences in this estimation.Estimated impairment of goodwill, brands and trademarks:Determining whether goodwill, brands and trademarks are impaired requires anestimation of the value in use of the cash-generating units to which goodwill,brands and trademarks have been allocated. The value in use calculation requiresthe Group to estimate the future cash flows expected to arise from the cashgeneratingunit and a suitable discount rate in order to calculate the present value.Where the actual future cash flows are less than expected, a material impairmentloss may arise. As at 31 December 2007, the carrying amount of goodwill, brandsand trademarks are HK$660 million and HK$1,785 million, respectively. Particularsof the impairment test are disclosed in note 22.Income taxes:As at 31 December 2007, a deferred tax asset of HK$98 million in relation tounused tax losses has been recognised in the Group’s balance sheet. Thereleasability of the deferred tax asset mainly depends on whether sufficient futureprofits or taxable temporary differences will be available in the future. In caseswhere the actual future profits generated are less than expected, a materialreversal of deferred tax assets may arise, which would be recognised in theincome statement for the period in which such a reversal takes place.5. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIESThe Group’s major financial instruments include equity and debt investments,borrowings, trade receivables, trade payables, convertible debenture and exchangeablebonds. Details of these financial instruments are disclosed in respective notes. The risksassociated with these financial instruments and the policies on how to mitigate theserisks are set out below. The management manages and monitors these exposures toensure appropriate measures are implemented on a timely and effective manner.(a)Currency risk:Several subsidiaries of the Company have foreign currency sales and purchases,which expose the Group to foreign currency risk. In order to mitigate the foreigncurrency risk, foreign currency forward contracts (note 26) are entered into inrespect of highly probable foreign currency forecast sales and purchases inaccordance with the Group’s risk management policies.50 The Grande Holdings Limited Annual Report 2007