41. Financial Instrumentsopen

41.1 Categories of financial instruments


2011 2010

US$’000 US$’000
The Group  
Financial assets  
Fair value through profit or loss  
Held-for-trading investments 8,288 10,732
Derivative financial instruments  
Foreign currency forward contracts 8,645 10,331
Warrants 222 552

8,867 10,883
Available-for-sale investments 1,269 1,267
Loans and receivables (including cash and cash equivalents)  
Trade and other receivables 673,457 617,988
Bills receivable 35,760 38,875
Trade receivables from associates 205 38
Bank balances, deposits and cash 459,650 512,893
Amounts due from associates 19,359 22,914

1,188,431 1,192,708
Financial liabilities  
Derivative financial instruments  
Foreign currency forward contracts 4,234 2,606
Interest rate swap 4,768 2,343

9,002 4,949
Other financial liabilities  
Trade and other payables 618,863 483,265
Bills payable 42,991 55,207
Trade payable to an associate 4,037 4,127
Obligations under finance leases 6,485 8,677
Discounted bills with recourse 518,897 411,095
Unsecured borrowings 590,902 827,413
Bank overdrafts 19,972 22,350
Convertible bonds 134,001 127,225

1,936,148 1,939,359
The Company  
Financial assets  
Fair value through profit or loss  
Held-for-trading investments 8,288 10,696
Derivative financial instruments  
Foreign currency forward contracts 2,776 5,437
Warrants 222 552

2,998 5,989
Available-for-sale investments 218 217
Loans and receivables (including cash and cash equivalents)  
Trade and other receivables 3 8,963
Bills receivable 10,620
Amounts due from associates 18,261 21,654
Bank balances, deposits and cash 27,032 171,925
Loans to/Amounts due from subsidiaries 1,350,204 1,406,041

1,395,500 1,619,203
Financial liabilities  
Derivative financial instruments  
Foreign currency forward contract 2,837 2,216
Interest rate swap 4,768 2,343

7,605 4,559
Other financial liabilities  
Trade and other payables 14,903 47,017
Bills payable 42,994
Trade payable to an associate 4,127
Amounts due to subsidiaries 338,475 152,147
Obligations under finance leases 39
Discounted bills with recourse 323,959
Unsecured borrowings 343,887 512,291
Convertible bonds 134,001 127,225

831,266 1,209,799

41.2 Financial Risk Management Objectives and Policies

The Group’s Corporate Treasury function provides risk management advice to the business units, co-ordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyse exposures by degree and magnitude of risks. These financial risks include market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk.

The Group seeks to minimise the effects of these risks by using derivative financial instruments or natural hedges to mitigate these risk exposures. The use of financial derivatives is governed by the Group’s policies approved by the board of directors, which provide written principles on foreign exchange risk, interest rate risk, credit risk, the use of financial derivatives and non-derivative financial instruments, and the investment of excess liquidity. Compliance with policies is reviewed by the internal auditors on a continuous basis. The Group does not enter into or trade derivative financial instruments for speculative purposes.

41.2.1 Foreign Currency Risk Management

Subsidiaries of the Group have foreign currency sales and purchases, which expose the Group to foreign currency risk. Approximately 24.5% (2010: 24.6%) of the Group’s sales are denominated in currencies other than the functional currency of the group entity making the sale, whilst almost 38.5% (2010: 18.6%) of costs are denominated in the group entity’s respective functional currency.

The carrying amounts of certain significant foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:


Liabilities
Assets

2011 2010 2011 2010

US$’000 US$’000 US$’000 US$’000
The Group  
 
Foreign Currency  
 
EURO 58,877 11,091 139,085 41,808

Liabilities
Assets

2011 2010 2011 2010

US$’000 US$’000 US$’000 US$’000
The Company  
 
Foreign Currency  
 
EURO 1,251 10,635 323,397 290,403
Note:
For group entities with their functional currency as the United States dollar, monetary assets and monetary liabilities denominated in Hong Kong dollars have no material foreign currency risk exposure as the Hong Kong dollar is pegged with the United States dollar.

Sensitivity analysisThe Group and the Company are mainly exposed to the effects of fluctuation in the EURO.

The following table details the Group’s sensitivity to a 5% increase and decrease in the United States dollar against the EURO without considering the foreign currency forward contracts entered at end of the reporting period. 5% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes outstanding foreign currency denominated monetary items and excludes the effect of any foreign currency forward contracts held at year end. A positive number below indicates an increase in pre-tax profit for the year where the United States dollars weakens 5% against the EURO.


The Group
The Company

2011 2010 2011 2010

US$’000 US$’000 US$’000 US$’000
Impact of EURO  
 
Profit for the year (i) 4,010 1,536 16,017 13,988
(i)
This is mainly attributable to the exposure outstanding on receivables and payables denominated in EURO at the year end.

41.2.2 Interest Rate Risk Management

The Group’s and the Company’s cash flow interest rate risk relates primarily to variable-rate borrowing (see Note 42 for details of these borrowings) and bank balances, deposits and cash. In relation to these floating-rate borrowings, the Group aims at keeping certain borrowings at fixed rates. In order to achieve this result, the Group may enter into interest rate swap contracts to hedge against part of its exposure to potential variability of cash flows arising from changes in floating rates (see Note 30 for details). The management continuously monitors interest rate fluctuations and will consider further hedging interest rate risk should the need arise.

The Group’s and the Company’s exposure to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note. The Group’s and the Company’s cash flow interest rate risk is mainly concentrated on the fluctuation of LIBOR arising from the Group’s and the Company’s Hong Kong dollar denominated borrowings. In relation to interest bearing bank balances and deposits, the Group considers the interest rate risk is insignificance.

The Group’s fair value interest rate risk related primarily to its fixed-rate bank borrowings (see Note 42 for details of these borrowings) and convertible bonds (see Note 43 for details of these bonds). The Company’s fair value interest rate risk related primarily to its loan to subsidiaries (see Note 22).

During the year, the Group obtained new bank borrowings in the amount of US$352 million (2010: US$590 million) which are either LIBOR or Hong Kong best lending rates based. The proceeds were used for refinancing of the Group’s borrowings including the repayment of fixed interest rate notes of US$5,625,000 and other borrowings.

Sensitivity analysisThe sensitivity analysis below has been determined based on the exposure to interest rates for non-derivative instruments. The analysis is prepared assuming the amount of liability outstanding at the end of the reporting period was outstanding for the whole year without considering the interest rate swaps entered at the end of the reporting period. A 50 basis point increase or decrease in LIBOR is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates.

If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group’s profit for the year ended December 31, 2011 would decrease/increase by US$4,831,000 (2010: decrease/increase by US$5,464,000). The Company’s profit for the year ended December 31, 2011 would decrease/increase by US$1,719,000 (2010: decrease/increase by US$4,204,000). This is mainly attributable to the Group’s and the Company’s exposure to interest rates on its variable-rate borrowings.

The Group’s and the Company’s sensitivity to interest rates has decreased during the current period mainly due to the decrease in variable rate debt instruments.

41.2.3 Other Price Risk

The Group and the Company are exposed to price risk through its held-for-trading investments and derivative financial instruments.

Sensitivity analysisThe sensitivity analysis below has been determined based on the exposure to price risks of equity investments held-for-trading measured at fair value at the reporting date.

If the prices of the respective equity instruments had been 10% higher/lower the post-tax profit for the year ended December 31, 2011 of the Group and the Company would increase/decrease by US$829,000 (2010: US$1,073,000) and US$829,000 (2010: US$1,070,000) as a result of the changes in fair value of held-for-trading investments.

No sensitivity analysis has been disclosed for exposure to the price risk for the warrants held by the Group and the Company as this would not have a material impact on post-tax profit for the year ended December 31, 2011 of the Group and the Company.

41.2.4 Credit Risk Management

As at December 31, 2011, the Group’s and the Company’s maximum exposure to credit risk which will cause a financial loss to the Group and the Company due to failure to discharge an obligation by the counterparties and financial guarantees provided by the Group and the Company is arising from:

  • the carrying amount of the respective recognised financial assets as stated in the consolidated statement of financial position; and
  • the amount of contingent liabilities in relation to financial guarantees issued by the Group and the Company as disclosed in Note 50.

In order to minimize the credit risk, the management has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group and the Company review the recoverable amount of each individual trade debt and debt investments at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s and the Company’s credit risk is significantly reduced.

The credit risk on liquid fund is limited because the counterparties are banks with good reputation.

The Group’s concentration of credit risk by geographical locations is mainly in North America, where 66.7% (2010: 69.0%) of the total trade receivables as at December 31, 2011 are located.

The Group has concentration of credit risk at 25.9% (2010: 26.4%) and 41.3% (2010: 48.6%) of the total trade receivables was due from the Group’s largest customer and the five largest customers respectively.

41.2.5 Liquidity Risk Management

Ultimate responsibility for liquidity risk management rests with the board of directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

As at December 31, 2011, the Group has available unutilised overdrafts and short and medium term bank loan facilities of approximately US$73 million (2010: US$47 million) and US$1,161 million (2010: US$666 million) respectively.

Liquidity tablesThe following tables detail the Group’s remaining contractual maturity for its non-derivative financial liabilities as well as non-derivative financial assets which are included in the maturity analysis. For non-derivative financial assets, the tables have been drawn up based on the contractual maturities of the undiscounted cash flow of the financial assets unless specified separately. For non-derivative financial liabilities, the tables reflect the undiscounted cash flow of financial liabilities based on the earliest date on which the Group can be required to pay. Specifically, bank borrowings with a repayment on demand clause are included in the earliest time band regardless of the probability of the banks choosing to exercise their rights. The table includes both interest and principal cash flows. To the extent that the interest flows are floating rate, the undiscounted amount is derived from the interest rate curve at the end of the reporting period. The inclusion of information on non-derivative financial assets is necessary in order to understand the Group’s liquidity risk management as the liquidity is managed on a net asset and liability basis.

In addition, the following table details the Group’s liquidity analysis for its derivative financial instruments. The tables have been drawn up based on the undiscounted contractual net cash (inflows) and outflows on derivative instruments that settle on a net basis, and the undiscounted gross (inflows) and outflows on those derivatives that require gross settlement. When the amount payable is not fixed, the amount disclosed has been determined by reference to the foreign currency exchange rates prevailing at the end of the reporting period. The liquidity analysis for the Group’s derivative financial instruments are prepared based on the contractual maturities as the management consider that the contractual maturities are essential for an understanding of the timing of the cash flows of derivatives.


Weighted average effective interest rate Less than 1month/ on demand 1-3 months 4 months- 1 year 1-2 years 2+ years Total undiscounted cash flows Total carrying amount at December 31, 2011

% US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
The Group







2011







Non-derivative financial assets







Held-for-trading investments (note)
8,288 8,288 8,288
Available-for-sale investments (note)
1,269 1,269 1,269
Trade and other receivables
542,351 53,166 77,940 673,457 673,457
Bills receivable
14,892 5,423 15,445 35,760 35,760
Trade receivables from associates
190 15 205 205
Bank balances, deposits and cash
0.07% - 0.18% 453,087 481 6,087 459,655 459,650
Amounts due from associates (note)
19,359 19,359 19,359

  1,020,077 59,070 99,487 19,359 1,197,993 1,197,988
Non-derivative financial liabilities                
Trade and other payables
(438,766) (155,638) (24,459) (618,863) (618,863)
Bills payable
(4,308) (26,358) (12,325) (42,991) (42,991)
Trade payable to an associate
(380) (3,263) (394) (4,037) (4,037)
Obligations under finance leases
7.56% (180) (362) (1,627) (1,360) (4,599) (8,128) (6,485)
Discounted bills with recourse
1.72% (238,939) (267,007) (13,871) (519,817) (518,897)
Variable rate borrowings
1.03% - 3.80% (32,180) (1,822) (30,465) (143,323) (234,186) (441,976) (427,315)
Fixed rate borrowings
6.70% - 7.44% (31,076) (9,769) (47,824) (106,443) (195,112) (163,587)
Bank overdrafts
3.25% - 5.00% (19,972) (19,972) (19,972)
Financial guarantee contracts
(2,029) (285) (8,544) (10,858)
Convertible bonds
15.57% (156,375) (156,375) (134,001)

  (736,754) (485,811) (257,829) (192,507) (345,228) (2,018,129) (1,936,148)
The Group                
2011                
Derivatives - net settlement                
Interest rate swap
(413) (1,263) (1,592) (2,102) (5,370) (4,768)
Foreign currency forward contracts
             
- RMB
(2,086) (729) 20 36 (2,759) (2,759)
- AU$
(293) (293) (293)
- NZ$
3 3 3

  (2,086) (1,432) (1,243) (1,556) (2,102) (8,419) (7,817)
Derivatives - gross settlement                
Foreign currency forward contracts
               
- inflow
               
- RMB
25,773 46,863 143,030 215,666 215,666
- GBP
17,000 20,500 19,000 56,500 56,500
- US$
4,248 17,134 21,382 21,382

42,773 71,611 179,164 293,548 293,548
- outflow
               
- RMB
(24,978) (45,960) (141,875) (212,813) (212,813)
- GBP
(16,062) (19,414) (18,408) (53,884) (53,884)
- US$
(3,878) (15,513) (19,391) (19,391)

  (41,040) (69,252) (175,796) (286,088) (286,088)

  1,733 2,359 3,368 7,460 7,460

Weighted average effective interest rate Less than 1month/ on demand 1-3 months 4 months- 1 year 1-2 years 2+ years Total undiscounted cash flows Total carrying amount at December 31, 2010

% US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
The Group







2010







Non-derivative financial assets







Held-for-trading investments (note)
10,732 10,732 10,732
Available-for-sale investments (note)
1,267 1,267 1,267
Trade and other receivables
434,176 41,310 142,502 617,988 617,988
Bills receivable
7,217 13,591 18,067 38,875 38,875
Trade receivables from associates
23 15 38 38
Bank balances, deposits and cash
0.11% - 0.44% 429,394 83,537 512,931 512,893
Amounts due from associates (note)
22,914 22,914 22,914


882,809 138,438 160,584 22,914 1,204,745 1,204,707
Non-derivative financial liabilities







Trade and other payables
(210,807) (111,585) (160,873) (483,265) (483,265)
Bills payable
(34,763) (18,681) (1,763) (55,207) (55,207)
Trade payable to an associate
(4,127) (4,127) (4,127)
Obligations under finance leases
7.59% (293) (586) (2,639) (1,941) (5,294) (10,753) (8,677)
Discounted bills with recourse
1.78% (169,026) (190,278) (52,975) (412,279) (411,095)
Variable rate borrowings
0.87% - 4.56% (106,649) (190,241) (35,734) (117,617) (225,303) (675,544) (659,339)
Fixed rate borrowings
6.70% - 7.44% (4,620) (7,623) (41,094) (159,632) (212,969) (168,074)
Bank overdrafts
3.25% - 5.00% (22,350) (22,350) (22,350)
Financial guarantee contracts
(1,700) (2,244) (166) (5,269) (9,379)
Convertible bonds
15.57% (12,750) (156,375) (169,125) (127,225)


(549,715) (518,235) (274,523) (322,296) (390,229) (2,054,998) (1,939,359)
Derivatives - net settlement







Interest rate swap
(349) (985) (987) 294 (2,027) (2,343)
Foreign currency forward contracts








- RMB
(155) (83) (1,026) (1,264) (1,264)
- NZ$
(5) (5) (5)

  (155) (437) (2,011) (987) 294 (3,296) (3,612)
Derivatives - gross settlement







Foreign currency forward contracts








- inflow








- RMB
25,541 51,144 176,711 253,396 253,396
- GBP
9,969 17,944 13,458 41,371 41,371
- US$
4,055 37,259 78,323 119,637 119,637
- HK$
84,030 84,030 84,030

  39,565 106,347 268,492 84,030 498,434 498,434
- outflow








- RMB
(25,003) (50,005) (175,020) (250,028) (250,028)
- GBP
(9,736) (17,438) (13,055) (40,229) (40,229)
- US$
(3,967) (35,707) (75,381) (115,055) (115,055)
- HK$
(84,128) (84,128) (84,128)

  (38,706) (103,150) (263,456) (84,128) (489,440) (489,440)

  859 3,197 5,036 (98) 8,994 8,994

Weighted average effective interest rate Less than 1month/ on demand 1-3 months 4 months- 1 year 1-2 years 2+ years Total undiscounted cash flows Total carrying amount at December 31, 2011

% US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
The Company
 
 
 
 
 
 
 
 
2011
 
 
 
 
 
 
 
 
Non-derivative financial assets
 
 
 
 
 
 
 
 
Held-for-trading investments (note)
8,288
8,288
8,288
Available-for-sale investments (note)
218
218
218
Trade and other receivables
3
3
3
Bills receivable
Bank balances, deposits and cash
0.07% - 0.18%
27,032
27,032
27,032
Amounts due from associates (note)
18,261
18,261
18,261
Loan to/Amounts due from
 
 
 
 
 
 
 
 
subsidiaries (note)
5.275% - 10.15%
814,093
12
33,714
47,835
911,302
1,806,956
1,350,204

 
849,634
12
33,714
47,835
929,563
1,860,758
1,404,006
Non-derivative financial liabilities
 
 
 
 
 
 
 
 
Trade and other payables
(6,146)
(8,757)
(14,903)
(14,903)
Bills payable
Amounts due to subsidiaries
(338,475)
(338,475)
(338,475)
Amounts due to associates
Obligations under finance leases
Discounted bills with recourse
Unsecured borrowings
1.79% - 2.50%
(56,400)
(99,607)
(198,951)
(354,958)
(343,887)
Financial guarantee contracts
(274,741)
(294,723)
(34,714)
(71,354)
(164,201)
(839,733)
Convertible bonds
15.57%
(156,375)
(156,375)
(134,001)

 
(280,887)
(303,480)
(585,964)
(170,961)
(363,152)
(1,704,444)
(831,266)
Derivatives - net settlement
 
 
 
 
 
 
 
 
Interest rate swap
(413)
(1,263)
(1,592)
(2,102)
(5,370)
(4,768)
Foreign currency forward contracts
 
 
 
 
 
 
 
 
- RMB
(2,087)
(477)
475
36
(2,053)
(2,053)

 
(2,087)
(890)
(788)
(1,556)
(2,102)
(7,423)
(6,821)
Derivatives - gross settlement
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
 
 
 
 
 
 
 
- inflow
 
 
 
 
 
 
 
 
- US$
4,249
17,134
21,383
21,383

4,249
17,134
21,383
21,383
- outflow
 
 
 
 
 
 
 
 
- US$
(3,878)
(15,513)
(19,391)
(19,391)

(3,878)
(15,513)
(19,391)
(19,391)

 
371
1,621
1,992
1,992

Weighted average effective interest rate Less than 1month/ on demand 1-3 months 4 months- 1 year 1-2 years 2+ years Total undiscounted cash flows Total carrying amount at December 31, 2010

% US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
The Company







2010







Non-derivative financial assets







Held-for-trading investments (note)
10,696 10,696 10,696
Available-for-sale investments (note)
217 217 217
Trade and other receivables
5,253 917 2,793 8,963 8,963
Bills receivable
41 105 10,474 10,620 10,620
Bank balances, deposits and cash
0.11% - 0.44% 171,925 171,925 171,925
Amounts due from associates (note)
21,654 21,654 21,654
Loan to/Amounts due from








subsidiaries (note)
5.275% - 10.15% 1,076,648 389,544 1,466,192 1,406,041


1,264,780 1,022 13,267 411,198 1,690,267 1,630,116
Non-derivative financial liabilities







Trade and other payables
(17,000) (19,941) (10,076) (47,017) (47,017)
Bills payable
(30,827) (12,167) (42,994) (42,994)
Amounts due to subsidiaries
(52,636) (16,392) (83,119) (152,147) (152,147)
Amounts due to associates
(4,127) (4,127) (4,127)
Obligations under finance leases
1.89% (3) (7) (30) (40) (39)
Discounted bills with recourse
1.78% (138,245) (143,306) (43,340) (324,891) (323,959)
Unsecured borrowings
0.87% - 4.50% (130,011) (85,184) (88,287) (222,854) (526,336) (512,291)
Financial guarantee contracts
(136,522) (123,264) (11,452) (36,438) (138,523) (446,199)
Convertible bonds
15.57% (12,750) (156,375) (169,125) (127,225)


(509,371) (400,261) (160,767) (281,100) (361,377) (1,712,876) (1,209,799)
Derivatives - net settlement







Interest rate swaps
(349) (985) (987) 294 (2,027) (2,343)
Foreign currency forward contracts








- RMB
(155) (83) (1,026) (1,264) (1,264)

  (155) (432) (2,011) (987) 294 (3,291) (3,607)
Derivatives - gross settlement







Foreign currency forward contracts








- inflow








- US$
4,055 37,259 78,323 119,637 119,637
- HK$
84,030 84,030 84,030
4,055 37,259 78,323 84,030 203,667 203,667
- outflow








- US$
(3,967) (35,707) (75,381) (115,055) (115,055)
- HK$
(84,128) (84,128) (84,128)
(3,967) (35,707) (75,381) (84,128) (199,183) (199,183)

88 1,552 2,942 (98) 4,484 4,484

Note: Maturities are based on the management’s estimation of the expected realisation of these financial assets.

The amounts included above for financial guarantee contracts are the maximum amounts the Group and the Company could be required to settle under the arrangement for the full guaranteed amount if that amount is claimed by the counterparty to the guarantee. Based on expectations at the end of the reporting period, the Group and the Company considers that it is more likely than not that no amount will be payable under the arrangement. However, this estimate is subject to change depending on the probability of the counterparty claiming under guarantee which is a function of the likelihood that the financial receivables held by the counterparty which are guaranteed suffer credit losses.

The amount included above for variable interest rate instruments for non-derivative financial liabilities is subject to change if changes in variable interest rates differ to those estimates of interest rate determined at the end of the reporting period.

41.3 Fair Value

The fair value of financial assets and financial liabilities are determined as follows:

  • the fair value of foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching the maturities of the contract;
  • the fair value of the interest rate swap is measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from noted interest rate;
  • the fair value of the warrants is measured using the Black-Scholes option pricing model where the main assumptions include the volatility of the share price and the life of the warrants;
  • the fair value of financial assets with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market bid prices; and
  • the fair value of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions.

Other than the convertible bonds, the fair value of financial assets and financial liabilities carried at amortised costs approximate to their carrying amounts.

Fair value measurements recognised in the statement of financial position

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments that are measured subsequent to initial recognition at fair value:

  • Level 1: fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
  • Level 2: fair value measurements are those derived from inputs, other than quoted prices included within Level 1, that are observable for the asset or, liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
  • Level 3: fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Level 1 Level 2 Total

US$’000 US$’000 US$’000
The Group


2011      
Financial assets      
Foreign currency forward contracts 8,645 8,645
Warrants 222 222
Held-for-trading investments 8,288 8,288
Total 8,288 8,867 17,155
Financial liabilities      
Foreign currency forward contracts (4,234) (4,234)
Interest rate swap (4,768) (4,768)
Total (9,002) (9,002)
2010


Financial assets


Foreign currency forward contracts 10,331 10,331
Warrants 552 552
Held-for-trading investments 10,732 10,732
Total 10,732 10,883 21,615
Financial liabilities


Foreign currency forward contracts (2,606) (2,606)
Interest rate swap (2,343) (2,343)
Total (4,949) (4,949)
The Company


2011


Financial assets


Foreign currency forward contracts 2,776 2,776
Warrants 222 222
Held-for-trading investments 8,288 8,288
Total 8,288 2,998 11,286
Financial liabilities


Foreign currency forward contracts (2,837) (2,837)
Interest rate swap (4,768) (4,768)
Total (7,605) (7,605)
2010


Financial assets


Foreign currency forward contracts 5,437 5,437
Warrants 552 552
Held-for-trading investments 10,696 10,696
Total 10,696 5,989 16,685
Financial liabilities


Foreign currency forward contracts (2,216) (2,216)
Interest rate swap (2,343) (2,343)
Total (4,559) (4,559)

42. Unsecured Borrowingsopen

The Group The Company

2011 2010 2011 2010

US$’000 US$’000 US$’000 US$’000
Trust receipt loans 3,878 24,386 16,003
Bank advance from factored trade receivables 71,800 71,616
Bank loans 351,637 563,337 343,887 496,288
Bank borrowings 427,315 659,339 343,887 512,291
Fixed interest rate notes (Note) 163,587 168,074
Total borrowings 590,902 827,413 343,887 512,291

The borrowings of the Group and the Company are repayable as follows:


The Group The Company

2011 2010 2011 2010

US$’000 US$’000 US$’000 US$’000
Fixed rate    
Within one year 29,972
In more than one year but not more than two years 39,022 29,551
In more than two years but not more than five years 94,593 138,523
Floating rate  
 
On demand or within one year 164,053 361,055 80,793 214,816
In more than one year but not more than two years 109,131 84,586 108,963 83,776
In more than two years but not more than five years 154,131 213,698 154,131 213,699

590,902 827,413 343,887 512,291
Less: Amount due within one year shown under current liabilities (194,025) (361,055) (80,793) (214,816)
Amount due after one year 396,877 466,358 263,094 297,475

The ranges of effective interest rates (which are also equal to contracted interest rates) on the Group’s borrowings are as follows:


2011
2010
Effective interest rate:
 

Fixed-rate borrowings
6.70% to 7.44%
6.70% to 7.44%
Variable-rate borrowings
1.03% to 3.80%
0.87% to 4.56%

The Group’s borrowings that are denominated in currencies other than the functional currencies of the relevant group entities are set out below:


US$’000
As at December 31, 2011
3,861
As at December 31, 2010
155,739
Note:

In 2003, the Group issued fixed interest rate notes, through its wholly-owned subsidiary in the US, for an aggregate principal amount of US$145,000,000. The notes were issued in two fixed rate tranches, being US$120,000,000 for 10 years at 6.70% (2009: 6.70%) per annum and US$25,000,000 for 7 years at 6.09% (2009: 6.09%) per annum. The proceeds were used to refinance existing medium term debts and for general working capital purposes. During the year, the Group early repaid US$5,625,000 (2010: US$75,000,000) of first tranche and US$25,000,000 of the second tranche was fully repaid in 2010.

In 2005, the Group issued additional fixed interest rate notes, through its wholly-owned subsidiary in the US, for an aggregate principal amount of US$200,000,000. The notes were issued in two fixed rate tranches of US$150,000,000 for 10 years at 7.44% (2009: 7.44%) per annum and US$50,000,000 for 7 years at 7.17% (2009: 7.17%) per annum. The proceeds were used to finance the acquisition of subsidiaries. In 2010, the Group early repaid US$54,250,000 of the first tranche and US$20,000,000 of the second tranche.

The carrying amount of bank borrowings approximates their fair value as the weighted average interest rates approximate the contracted market rates.

43. Convertible Bondsopen

The movement of the liability component of the convertible bonds for the year is set out below:

The Group and The Company
2011 2010
US$’000 US$’000
Liability component at the beginning of the year 127,225 121,821
Effective interest expense 19,059 18,155
Interest payment (12,283) (12,751)
Liability component at the end of the year 134,001 127,225

The fair value of the liability component of the convertible bonds at December 31, 2011, determined based on the present value of the estimated future cash outflows discounted at the prevailing market rate at the end of the reporting period date, was approximately US$156,401,000 (2010: US$153,185,000).

In 2009, the Company issued two tranches of 5-year 8.5% coupon convertible bonds with an aggregate principal amount of US$150,000,000 (“Convertible Bonds 2014″) and 55,888,500 detachable warrants (“Warrants 2012″). Unless previously redeemed, converted or purchased and cancelled, the Convertible Bonds 2014 will be redeemed at their principal amount on the maturity date at April 30, 2014. The Warrants 2012 are detachable from the Convertible Bonds 2014 (see Note 44 for details of the warrants).

The holders of the Convertible Bonds 2014 have the right to convert all or any portion of the Convertible Bonds 2014 into shares of the Company at an initial conversion price of HK$5.20 (to be converted to United States dollars at the fixed exchange rate of HK$7.75 = US$1.0) per share, subject to anti-dilutive adjustment, from October 30, 2010 to April 20, 2014 (“Conversion Rights”). The conversion will result in the Company issuing a fixed number of shares of the Company in settlement of a fixed amount of cash.

At the option of the Convertible Bond 2014′s holders, on April 30, 2012, the holders may require the Group to redeem Convertible Bond 2014 at the principal amount plus accrued interest to the date of redemption. Accordingly, the Convertible Bond 2014 is classified as current liabilities as of December 31, 2011. The embedded options are closely related to the liability component of Convertible Bond 2014 and hence not separately accounted for.

The fair value of the liability component on initial recognition was estimated at the issue date using an equivalent market interest rate for a similar bond without the Conversion Rights and Warrants 2012. The residual amount was assigned as the equity component, representing the estimated fair value of the Warrants 2012 with the remaining balance is allocated to the Conversion Rights and included in shareholders’ equity.

The weighted average effective interest rate of the Convertible Bonds 2014 is 15.57%.

44. Share Capitalopen
2011 2010 2011 2010
Number of shares Number of shares US$’000 US$’000
Ordinary shares
Authorised:
Shares of HK$0.10 each
2,400,000,000 2,400,000,000 30,769 30,769
Issued and fully paid:
At the beginning of the year
1,606,625,752 1,591,252,152 20,598 20,401
Issue of shares upon exercise of warrants
14,903,600 191
Issue of shares upon exercise of share options
455,000 470,000 6 6
Repurchase of shares
(5,516,500) (71)
At the end of the year 1,601,564,252 1,606,625,752 20,533 20,598

Details of the share options are set out in Note 51.

During the year, the Company repurchased its own shares through the Stock Exchange as follows:

No. of ordinary shares at Price per share Aggregate consideration
HK$0.10 each Highest Lowest paid
Month of repurchase HK$ HK$ US$’000
September 2011 3,425,500 5.50 5.22 2,362
October 2011 2,091,000 6.33 4.62 1,455
5,516,500 3,817

The repurchased shares were cancelled and accordingly the issued share capital of the Company was reduced by the nominal value of these shares. An amount equivalent to the par value of the shares cancelled of US$71,000 was transferred to the capital redemption reserve. The consideration paid on the repurchase of the shares of approximately US$3,817,000 was charged to retained profits.

45. Reservesopen
Share premium Capital redemption reserve Convertible bonds equity reserve Warrant reserve Employee share-based compensation reserve Retained profits Total
US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
The Company
At January 1, 2010 446,078 56 8,833 13,942 6,174 372,850 847,933
Loss for the year and other comprehensive loss (12,122) (12,122)
Share issued at premium on exercised of options 516 (92) 424
Share issued at a premium on warrants exercised 13,272 (3,717) 9,555
Repurchase of warrants (10,225) (2,832) (13,057)
Recognition of equity settled share-based payments 2,205 2,205
Lapse of share options (836) 836
Final dividend - 2009 (9,266) (9,266)
Interim dividend - 2010 (7,722) (7,722)
At December 31, 2010 459,866 56 8,833 7,451 341,744 817,950
Profit for the year and other comprehensive income 187,602 187,602
Share issued at premium on exercised of options 506 (91) 415
Repurchase of shares 71 (3,817) (3,746)
Recognition of equity settled share-based payments 1,053 1,053
Lapse of share options (1,805) 1,805
Final dividend - 2010 (12,907) (12,907)
Interim dividend - 2011 (10,347) (10,347)
At December 31, 2011 460,372 127 8,833 6,608 504,080 980,020

As at December 31, 2011, the Company’s reserves available for distribution to shareholders comprised the retained profits of US$504,080,000 (2010: US$341,744,000).

46. Retirement Benefits Obligationsopen

Defined Contribution Plans:The Company and its subsidiaries operating in Hong Kong have participated in the Mandatory Provident Fund Schemes (“MPF Schemes”) registered under the Mandatory Provident Fund Ordinance since December 2000.

The employees of the Group’s subsidiaries in the PRC are members of a state-managed retirement benefit scheme operated by the PRC government. The subsidiaries are required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefit scheme is to make the specified contributions.

The Group’s overseas subsidiaries operate a number of defined contribution schemes. Contributions to the defined contribution schemes applicable to each year are made at a certain percentage of the employees’ payroll.

Defined benefits Plans:The Group operates several defined benefit plans for qualifying employees of its subsidiaries in Germany and the US, of which these plans cover substantially all remaining employees that are not covered by defined contribution plans. The major defined benefit plans are as follows:

2011
2010
US$’000
US$’000
Pension plan obligations (Note i)
72,989
75,353
Post-retirement, medical and dental plan obligations (Note ii)
840
1,686
Life and medical insurance plan (Note ii)
1,940
2,150
Post-employment benefit plan obligations (Note iii)
6,648
10,898
Others
519
607
82,936
90,694
Note i:
Pension plan obligations
The pension plan obligations are provided in the German operations and includes a plan that pays retirement benefits on service and final pay. In general, the benefit plans were closed to new members at the end of 1995. Under the plan, the employees are entitled to retirement benefits varying between 10 and 20 per cent of final salary (based on the average of the last three years) on attainment of a retirement age of 65. The most recent actuarial valuations of the present value of the defined benefit obligation were carried out on October 24, 2011, by BDO Deutsche Warentreuhand Aktiengesellschaft, Germany.

Note ii:
Post-retirement, medical and dental plan obligations/ Life and medical insurance plan
Milwaukee Electric Tool Corporation, a subsidiary of the Group in the US, operates unfunded post-retirement, medical benefits, dental and life insurance plans.The most recent actuarial valuations of the present value of the obligations were carried out on December 15, 2011 by Willis North America, Inc.

Note iii:
Post-employment plan obligations
The pension plan obligations are provided by Hoover Inc. for members of IBEW (International Brotherhood of Electrical Workers) Local 1985 employed by Hoover. The most recent actuarial valuation of the present value of the obligations were carried out on December 31, 2011 by CBIZ Benefits & Insurance Services.

The main actuarial assumptions used were as follows:

Pension Post-retirement medical, and Life & Medical Post-employment
plan dental plan Insurance plan benefit plan
2011 2010 2011 2010 2011 2010 2011 2010
Discount rate 4.90% 5.00% 1.75% 3.75% 3.75% 2.50% 4.04% 5.06%
Expected rate of salary increases 2.00% 2.00% N/A N/A N/A N/A N/A N/A
Expected return on plan assets N/A N/A N/A N/A N/A N/A 0.00% 4.00%
Future pension increases 2.00% 2.00% N/A N/A N/A N/A N/A N/A
Medical cost inflation (ultimate) N/A N/A 5.00% 5.00% 5.00% 5.00% N/A N/A

The effect of an increase of one percentage point in the assumed medical cost inflation on current service cost and interest cost accumulated post-employment benefit obligations are as follows:

Pension Post-retirement medical, and Life & Medical Post-employment
plan dental plan Insurance plan benefit plan
2011 2010 2011 2010 2011 2010 2011 2010
US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Current service cost and interest cost N/A N/A 1 5 4 N/A N/A
Accumulated post-employment benefit obligation for medical costs N/A N/A 15 33 132 165 N/A N/A

Amounts recognised in profit or loss in respect of the plans are as follows:

Pension Post-retirement medical, and Life & Medical Post-employment
plan dental plan Insurance plan benefit plan
2011 2010 2011 2010 2011 2010 2011 2010
US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Current service cost 380 569
Actuarial loss (gain) 783 1,631 (480) (534) (100) 253 1,616 1,238
Expected return on plan assets 4 3
Interest cost 4,009 4,265 58 113 52 101 636 696
5,172 6,465 (422) (421) (48) 354 2,256 1,937

The charge for the year has been included in staff costs.

The amount included in the consolidated statement of financial position arising from the Group’s obligation in respect of the plans is as follows:

Pension Post-retirement medical, and Life & Medical Post-employment
plan dental plan Insurance plan benefit plan
2011 2010 2011 2010 2011 2010 2011 2010
US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Present value of funded obligations 14,049 13,214
Present value of plan assets (7,401) (2,316)
6,648 10,898
Present value of unfunded obligations 72,989 75,353 840 1,686 1,940 2,150
72,989 75,353 840 1,686 1,940 2,150 6,648 10,898

Movements in the present value of the defined benefit obligations in the current year were as follows:

Pension Post-retirement medical, and Life & Medical Post-employment
plan dental plan Insurance plan benefit plan
2011 2010 2011 2010 2011 2010 2011 2010
US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
At January 1 75,353 79,276 1,686 3,078 2,150 2,024 13,214 13,196
Exchange differences (2,903) (5,607)
Current service cost 380 569
Actuarial loss (gain) 783 1,631 (480) (534) (100) 253 1,616 1,238
Interest cost 4,009 4,265 58 113 52 101 636 696
Benefit paid (4,633) (4,781) (424) (971) (162) (228) (1,417) (1,916)
At December 31 72,989 75,353 840 1,686 1,940 2,150 14,049 13,214

Movements in the fair value of the plan assets in the current year were as follows:

Pension Post-retirement medical, and Life & Medical Post-employment
plan dental plan Insurance plan benefit plan
2011 2010 2011 2010 2011 2010 2011 2010
US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
At January 1 N/A N/A N/A N/A N/A N/A 2,316 3,748
Exchange differences N/A N/A N/A N/A N/A N/A
Returns from plan assets N/A N/A N/A N/A N/A N/A (4) (3)
Contribution from employer N/A N/A N/A N/A N/A N/A 6,506 487
Benefit paid N/A N/A N/A N/A N/A N/A (1,417) (1,916)
At December 31 N/A N/A N/A N/A N/A N/A 7,401 2,316

The plan assets of the post-employment benefit plan are cash in a Federated Money Market Fund with an expected return of 0% (2010: 4%).

The Group expects to make a contribution of nil (2010: US$2,988,000) to the defined benefit plans during the next financial year.

47. Deferred Tax Assets (Liabilities)open

The following are the major deferred tax assets and liabilities recognised and movements thereon during the current and prior year:

Accelerated tax depreciation Warranty provision Convertible bonds equity reserve Employee related provision Tax losses Inventory provision and LIFO Others Total
US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
The Group
At January 1, 2010 (14,525) 4,551 (4,828) 17,260 63,454 (5,548) (34,297) 26,067
Currency realignment (67) 51 70 (610) 17 305 (234)
Credit (charge) to profit or loss 4,752 (1,278) 892 (4,597) 1,168 4,167 15,030 20,134
Acquisition of subsidiaries / business (382) (382)
At December 31, 2010 (9,840) 3,324 (3,936) 12,733 64,012 (1,364) (19,344) 45,585
Currency realignment (23) (2) 29 (134) 3 606 479
Credit (charge) to profit or loss 3,053 (282) 1,019 (1,505) (6,783) (35) 4,129 (404)
At December 31, 2011 (6,810) 3,040 (2,917) 11,257 57,095 (1,396) (14,609) 45,660
Tax loss Accelerated tax depreciation Convertible bonds equity reserve Total
US$’000 US$’000 US$’000 US$’000
The Company
At January 1, 2010 (204) (4,828) (5,032)
Credit (charge) to profit or loss 2,013 (667) 892 2,238
At December 31, 2010 2,013 (871) (3,936) (2,794)
Credit to profit or loss 754 397 1,019 2,170
At December 31, 2011 2,767 (474) (2,917) (624)
Note:
Included in Others are the deferred tax impact of the restructuring provision, intellectual properties and other temporary differences.

For the purpose of presentation in the consolidated statement of financial position, certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances for financial reporting purposes:

The Group The Company
2011 2010 2011 2010
US$’000 US$’000 US$’000 US$’000
Deferred tax assets 73,633 68,527
Deferred tax liabilities (27,973) (22,942) (624) (2,794)
45,660 45,585 (624) (2,794)

At the end of the reporting period, the Group has unused tax losses of US$460 million (2010: US$412 million) available for the offset against future taxable profits that carry forward for at least fifteen years. No deferred tax asset has been recognised in respect of tax losses of US$251 million (2010: US$192 million) due to the lack of probable future taxable profits against which those losses can be specifically used.

48. Major Non-Cash Transactionsopen

During the year ended December 31, 2011, the Group entered into finance lease arrangements in respect of assets with a total capital value at the inception of the finance leases of US$870,000 (2010: US$291,000).

49. Lease Commitmentsopen

At the end of the reporting period, the Group and the Company had outstanding commitments under non-cancellable operating leases, which fall due as follows:

The Group The Company
2011 2010 2011 2010
US$’000 US$’000 US$’000 US$’000
Within one year 29,734 22,108 704 1,022
In the second to fifth year inclusive 61,922 60,266 603
After five years 25,582 25,729
117,238 108,103 704 1,625

Operating lease payments represent rentals payable by the Group and the Company for certain of its plant and machinery, motor vehicles, office properties and other assets. Leases are negotiated for a term ranging from 1 year to 10 years.

50. Contingent Liabilitiesopen
The Group The Company
2011 2010 2011 2010
US$’000 US$’000 US$’000 US$’000
Guarantees given to banks in respect of credit facilities utilised by associates 10,858 9,379 10,858 9,379

In addition, the Company has given guarantees to banks and independent third parties in respect of general facilities granted to its subsidiaries. The extent of such facilities utilised by the subsidiaries as at December 31, 2011 amounted to US$828,876,000 (2010: US$436,820,000).