China XLX Fertiliser Ltd

NOTES TO THE FINANCIAL STATEMENTS31 December 20082. Summary of significant accounting policies (cont’d)2.11 Cash and cash equivalentsCash and cash equivalents comprise unpledged bank deposits and cash and bank balances. Cash equivalentsare short-term, highly liquid investments that are readily convertible to known amounts of cash and whichare subject to an insignificant risk of changes in value.Cash and short-term deposits carried in the balance sheets are classified and accounted for as loans andreceivables. The accounting policy for this category of financial assets is stated in Note 2.10.2.12 InventoriesInventories are stated at the lower of cost and net realisable value. Costs incurred in bringing theinventories to their present location and condition are accounted for as follows:Raw materials – purchase cost on a weighted average basisFinished goods and work-in-progress – cost of direct materials and a proportion of manufacturing overheadsbased on normal operating capacity (excluding borrowing costs). These costs are assigned on a weightedaverage basis.Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs ofcompletion and the estimated costs necessary to make the sale.2.13 ProvisionsProvisions are recognised when the Group has a present obligation as a result of a past event, it is probablethat an outflow of economic resources will be required to settle the obligation and the amount of theobligation can be estimated reliably.Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. If itis no longer probable that an outflow of economic resources will be required to settle the obligation, theprovision is reversed. If the effect of the time value of money is material, provisions are discounted using acurrent pre tax rate that reflects, where appropriate, the risks specific to the liability. When discounting isused, the increase in the provision due to the passage of time is recognised as a finance cost.2.14 Government grantGovernment grant is received from the local PRC government on a discretionary basis as determined bythe government. It is recognised at its fair value where there is reasonable assurance that the grant will bereceived and all attaching conditions will be complied with. When the grant relates to an expense item, itis recognised in the income statement over the period necessary to match them on a systematic basis to thecosts that it is intended to compensate. Grants related to income may be presented as a credit in the incomestatement, either separately or under a general heading such as “Other income”. Where the grant relates toan asset, the fair value is recognised as deferred capital grant on the balance sheet and is amortised to theincome statement over the expected useful life of the relevant asset by equal annual instalments.China XLX Fertiliser Ltd.55