Annual Report 2012

Notes to the financial statements(Expressed in millions of RMB, unless otherwise stated)4 Significant accounting policies and accounting estimates (continued)(3) Financial instruments (continued)(f)Fair value measurementIf there is an active market for financial instruments, the fair value of financial instruments is based on quoted market priceswithout any deduction for transaction costs that may occur on sales or disposals. The appropriate quoted price in an activemarket for financial assets held or liabilities to be issued is usually the current bid price and for financial assets to be acquiredor liabilities held, the asking price. A quoted price is from an active market where price information is readily and regularlyavailable from an exchange, dealer, industry group or pricing service agency and that price information represents actual andregularly occurring market transactions on an arm’s length basis.If a quoted market price is not available, the fair value of the financial instruments is estimated using valuation techniques.Valuation techniques applied include recent arm’s length market transactions between knowledgeable and willing parties,reference to the fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricingmodels. The Group selects valuation techniques that are commonly accepted by market participants for pricing the instrumentsand these techniques have been demonstrated to provide reliable estimates of prices obtained in actual market transactions.Periodically, the Group reviews the valuation techniques and tests them for validity.(g)OffsettingFinancial assets and financial liabilities are offset and the net amount is reported in the statement of financial position when theGroup has a legally enforceable right to offset the recognised amounts and the transactions are intended to be settled on a netbasis, or by realising the asset and settling the liability simultaneously.(h)SecuritisationsThe Group securitises certain loans, which generally involves the sale of these assets to SPEs, which in turn issue securitiesto investors. Interests in the securitised financial assets may be retained in the form of credit enhancement or subordinatedtranches, or other residual interests (“retained interests”). Retained interests are carried at fair value on inception date on theGroup’s statement of financial position. Gains or losses on securitisation are the difference between the carrying amount of thetransferred financial assets and the consideration received (including retained interest) which is recognised in profit or loss.(i)Financial assets held under resale agreements and financial assets sold under repurchase agreementsFinancial assets held under resale agreements are transactions where the Group acquires financial assets which will be resoldat a predetermined price at a future date under resale agreements. Financial assets sold under repurchase agreements aretransactions where the Group sells financial assets which will be repurchased at a predetermined price at a future date underrepurchase agreements.The cash advanced or received is recognised as amounts held under resale or sold under repurchase agreements in thestatement of financial position. Assets held under resale agreements are not recognised. Assets sold under repurchaseagreements continue to be recognised in the statement of financial position.The difference between the purchase and resale consideration, and that between the sale and repurchase consideration, isamortised over the period of the respective transaction using the effective interest method and is included in interest incomeand interest expenses respectively.(4) Precious metalsPrecious metals comprise gold and other precious metals. Precious metals that are acquired by the Group principally for tradingpurpose are initially recognised at fair value and re-measured at fair value less cost to sell. The changes in fair value less cost to sellare recognised in profit or loss. Precious metals that are not acquired by the Group principally for trading purpose are carried atlower of cost and net realisable value.106 China Construction Bank Corporation annual report 2012