Statement of compliance

These financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong and all applicable Hong Kong Financial Reporting Standards ("HKFRSs"), a collective term which includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards ("HKASs") and Interpretations issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA"). A summary of the significant accounting policies adopted by the LRTF is set out below.

The HKICPA has issued a number of new and revised HKFRSs that are first effective for the current accounting period. Adoption of these HKFRSs has no significant impact on the LRTF's results of operations and financial position, while expanded disclosure has been made in the financial statements in accordance with the new HKFRS 7, "Financial Instruments : Disclosures" (see note 19).

Basis of preparation of the financial statements

The measurement basis used in the preparation of the financial statements is historical cost.

The preparation of financial statements in conformity with HKFRSs requires the management of LRTF to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

There are no critical accounting judgements involved in the application of the LRTF's accounting policies. There are also no key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next year.

Property, plant and equipment

Property, plant and equipment appropriated to the LRTF on 1 August 1993 were measured initially at deemed cost equal to the value contained in the Legislative Council Resolution for the setting up of the LRTF. Property, plant and equipment acquired since 1 August 1993 are capitalised at their costs of acquisition.

The following property, plant and equipment are stated in the balance sheet at cost less accumulated depreciation and any impairment losses (note 2.6) :

-	buildings held for own use appropriated to the LRTF on 1 August 1993; and
-	plant and equipment, including computer equipment, furniture and fittings and other equipment.

Depreciation is calculated to write off the cost of property, plant and equipment, less their estimated residual value, on a straight-line basis over the estimated useful lives as follows :

-	Buildings	30 years
-	Plant and equipment	5 years
-	The land on which the LRTF's buildings are situated as appropriated to the LRTF on 1 August 1993 is regarded as a non-depreciating asset.

Gains or losses arising from the disposal of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognised in the profit and loss account at the date of disposal.

Intangible assets

Intangible assets include acquired computer software licences and capitalised development costs of computer software programmes. Expenditure on development of computer software programmes is capitalised if the programmes are technically feasible and the LRTF has sufficient resources and the intention to complete development. The expenditure capitalised includes the direct labour and costs of materials. Intangible assets are stated at cost less accumulated amortisation and any impairment losses (note 2.6).

Amortisation of intangible assets is charged to the profit and loss account on a straight-line basis over the assets' estimated useful lives of 5 years.

Impairment of fixed assets

The carrying amounts of fixed assets, including property, plant and equipment and intangible assets, are reviewed at each balance sheet date to identify any indication of impairment. If there is an indication of impairment, an impairment loss is recognised in the profit and loss account whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its net selling price and value in use.

Cash equivalents

Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition.

Employee benefits

Salaries and annual leave are accrued and recognised as an expense in the year in which the associated services are rendered by the staff. Staff oncosts including pensions, housing and non-monetary benefits provided to the staff by the Government of the Hong Kong Special Administrative Region ("the Government") are charged to the LRTF and recognised as an expense in the year in which the associated services are rendered.

Revenue recognition

Revenue is recognised as services are provided. Interest income is recognised as it accrues using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the LRTF estimates cash flows considering all contractual terms of the financial instruments but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Foreign currency translation

Foreign currency transactions during the year are translated into Hong Kong dollars at the exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into Hong Kong dollars at the exchange rates ruling at the balance sheet date. Exchange gains and losses are recognised in the profit and loss account.

Related parties

The LRTF is a separate accounting entity within the Government established under the Trading Funds Ordinance. During the year, the LRTF has entered into transactions with various related parties, including government bureaux and departments, trading funds and financially autonomous bodies controlled or significantly influenced by the Government, in the ordinary course of its business.

Taxation charged to the profit and loss account represents :

		2008			2007
Current tax
Provision for notional profits tax for the year		34,442			24,259
Deferred tax
Origination and reversal of temporary differences		(3,165	)		(4,657	)
Total tax expense		31,277			19,602

Reconciliation between tax expense and accounting profit at applicable tax rates :

		2008			2007
Profit before tax		207,289			137,114
Tax at Hong Kong profits tax rate of 17.5% (2007 : 17.5%)		36,275			23,995
One-off tax reduction in 2007/08		(25	)		-
Tax effect of non-taxable revenue		(4,973	)		(4,393	)
Actual tax expense		31,277			19,602

Investment policy

The LRTF maintains a conservative approach on investments in financial assets including debt securities and placements with banks. Investment decisions are made according to the guidelines from the Secretary for Financial Services and the Treasury, Hong Kong Monetary Authority and other relevant regulations. Invested debt securities are issued by the Hong Kong SAR Government or quasi-government bodies in Hong Kong with sound credit ratings and are in general held to maturity.

Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.

At the balance sheet date, the LRTF does not have significant concentrations of credit risk. The maximum exposure to credit risk at the balance sheet date without taking account of any collateral held or other credit enhancements is shown below :

		2008		2007
Held-to-maturity securities		100,216		100,380
Debtors		13,926		15,902
Amounts due from related parties		6,419		5,366
Placements with banks		653,000		503,500
Bank balances		31,869		9,917
Total		805,430		635,065

To minimise credit risks, all fixed deposits are placed with licenced banks in Hong Kong.

The LRTF's credit risk is primarily attributable to debtors and investments in debt securities. The LRTF has a credit policy in place and the exposure to these credit risks is monitored on an ongoing basis.

In respect of debtors, deposits are required from our online services subscribers.

For investments in debt securities, only those classified under the investment grade by Moody's or Standard & Poor's are considered. At the balance sheet date, the credit quality of investments in debt securities, analysed by the lower of ratings designated by Moody's or Standard & Poor's, is as follows :

		2008		2007
Held-to-maturity securities by credit rating
Aa1 to Aa3/AA+ to AA-		100,216		100,380

Liquidity risk

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

Under the Trading Funds Ordinance, the LRTF is responsible for its own cash management, including short term and long term investment of cash surpluses, subject to approval by the Secretary for Financial Services and the Treasury. The LRTF's policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash to meet its liquidity requirements in the short and longer term. As the LRTF has a strong liquidity position, it has a very low level of liquidity risk.

Interest rate risk

Interest rate risk refers to the risk of loss arising from changes in market interest rates. This can be further classified into fair value interest rate risk and cash flow interest rate risk.

Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. Since the LRTF's held-to-maturity securities and placements with banks bear interest at fixed rates, their fair values will fall when market interest rates increase. However, as all the held-to-maturity securities and placements with banks are stated at amortised cost, changes in market interest rates will not affect their carrying amounts and the LRTF's profit and reserves.

Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The LRTF is not exposed to material cash flow interest rate risk because it has no major financial instruments bearing interest at a floating rate.

The table below sets out the LRTF's exposure to interest rate risk, based on the major interest bearing assets stated at carrying amounts at the balance sheet date and categorised by maturity dates.

		3 months or less		More than 3 months but not more than 1 year		More than 1 year but not more than 5 years		More than 5 years but not more than 10 years		Total
2008
Held-to-maturity securities		-		-		-		100,216		100,216
Placements with banks		409,000		244,000		-		-		653,000
		409,000		244,000		-		100,216		753,216
2007
Held-to-maturity securities		-		-		-		100,380		100,380
Placements with banks		404,500		99,000		-		-		503,500
		404,500		99,000		-		100,380		603,880

Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

The LRTF's normal business transactions are denominated in Hong Kong dollars and therefore do not give rise to currency risk.

In respect of investments denominated in United States dollars, owing to the linked exchange rate of the Hong Kong dollar to the United States dollar, the LRTF has a very low level of currency risk.

At the balance sheet date, financial assets totalling $101 million (2007 : $101 million) were denominated in United States dollars. The remaining financial assets and all financial liabilities were denominated in Hong Kong dollars.

Fair values

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. In the absence of such quoted market prices, fair values are estimated using present value or other valuation techniques, using inputs based on market conditions existing at the balance sheet date.

The fair values of held-to-maturity securities at the balance sheet date are as follows :

	Carrying value		Fair value
	2008	2007	2008	2007
Held-to-maturity securities	100,216	100,380	105,886	101,154

All other financial instruments are stated in the balance sheet at amounts equal to or not materially different from their fair values.