Annual Report 2012

Notes to the financial statements(Expressed in millions of RMB, unless otherwise stated)4 Significant accounting policies and accounting estimates (continued)(15) Fiduciary activitiesThe Group’s fiduciary business refers to the management of assets for customers in accordance with custody agreements signed bythe Group and securities investment funds, insurance companies, annuity plans and other organisations. The Group fulfils its fiduciaryduty and receives relevant fees in accordance with these agreements, and does not take up any risks and rewards related to theassets under custody, which are recorded as off-balance sheet items.The Group conducts entrusted lending business, whereby it enters into entrusted loan agreements with customers. Under the termsof these agreements, the customers provide funding (the “entrusted funds”) to the Group, and the Group grants loans to third parties(the “entrusted loans”) according to the instructions of the customers. As the Group does not assume the risks and rewards of theentrusted loans and the corresponding entrusted funds, entrusted loans and funds are recorded as off-balance sheet items at theirprincipal amounts and no impairment assessments are made for these entrusted loans.(16) Income recognitionProvided it is probable that economic benefits will flow to the Group and the amount, if applicable, can be measured reliably, revenueis recognised in profit or loss as follows:(a)Interest incomeInterest income for interest bearing financial instruments is recognised in profit or loss based on effective interest method.Interest income includes the amortisation of any discount or premium or other differences between the initial carrying amount ofan interest-bearing instrument and its amount at maturity calculated on an effective interest basis.The effective interest method is a method of calculating the amortised cost of financial assets and liabilities and of allocatingthe interest income and interest expense over the relevant period. The effective interest rate is the rate that exactly discountsestimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorterperiod to the net carrying amount of the financial instrument. When calculating the effective interest rate, the Group estimatescash flows considering all contractual terms of the financial instrument (for example, prepayment, call and similar options) butdoes not consider future credit losses. The calculation includes all fees and points paid or received between parties to thecontract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.Interest on the impaired financial assets is recognised using the rate of interest used to discount future cash flows for thepurpose of measuring the related impairment loss.(b) Fee and commission incomeFee and commission income is recognised in profit or loss when the corresponding service is provided. Origination orcommitment fees received by the Group which result in the creation or acquisition of a financial asset are deferred andrecognised as an adjustment to the effective interest rate. If the commitment expires without the Group making a loan, the feeis recognised as commission on expiry.(c)Finance income from finance leases and hire purchase contractsFinance income implicit in finance lease and hire purchase payments is recognised as interest income over the period of theleases so as to produce an approximately constant periodic rate of return on the outstanding net investment in the leases foreach accounting period. Contingent rentals receivable are recognised as income in the accounting period in which they areearned.(d) Dividend income(17) Income taxDividend income from unlisted equity investments is recognised in profit or loss on the date when the Group’s right to receivepayment is established. Dividend income from a listed equity investment is recognised when the share price of the investmentgoes ex-dividend.Current income tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantially enactedat the end of each reporting period, and any adjustment to tax payable in respect of previous periods. Deferred tax assets andliabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts ofassets and liabilities for financial reporting purposes and their tax bases. Deferred tax also arises from unused tax losses and unusedtax credits. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against whichthe asset can be utilised.China Construction Bank Corporation annual report 2012111