The Land Registry Annual Report 2011-12

(Amounts expressed in thousands of Hong Kong dollars,unless otherwise stated)

1. General

   The Land Registry Trading Fund ("LRTF") was established on 1 August 1993 under the Legislative Council Resolution passed on 30 June 1993 pursuant to sections 3, 4 and 6 of the Trading Funds Ordinance (Cap. 430). The Land Registry administers a land registration system by maintaining an up-to-date Land Register and provides its customers with services and facilities for searches of the Land Register and related land records. The Land Registry also processes applications for the incorporation of owners.

2. Significant accounting policies
   1. 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.

   2. 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, or other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next year.

   3. Financial assets and financial liabilities
      1. Initial recognition

         The LRTF classifies its financial assets and financial liabilities into different categories at inception, depending on the purpose for which the assets were acquired or the liabilities were incurred. The categories are : loans and receivables, held-to-maturity securities and other financial liabilities.

         Financial assets and financial liabilities are measured initially at fair value, which normally equals to the transaction prices, plus transaction costs for loans and receivables, held-to-maturity securities and other financial liabilities that are directly attributable to the acquisition of the financial asset or issue of the financial liability.

         The LRTF recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial assets are accounted for at settlement date.

      2. Categorisation
         1. Loans and receivables

            Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and which the LRTF has no intention of trading. This category includes placement with the Exchange Fund, debtors, amounts due from related parties, bank deposits, and cash and bank balances.

            Loans and receivables are carried at amortised cost using the effective interest method less impairment losses, if any (note 2.3.4).

            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.

         2. Held-to-maturity securities

            Held-to-maturity securities are non-derivative financial assets with fixed or determinable payments and fixed maturity which the LRTF has the positive intention and ability to hold to maturity, other than those that meet the definition of loans and receivables.

            Held-to-maturity securities are carried at amortised cost using the effective interest method less impairment losses, if any (note 2.3.4).

         3. Other financial liabilities

            Other financial liabilities are carried at amortised cost using the effective interest method.

      3. Derecognition

         A financial asset is derecognised when the contractual rights to receive the cash flows from the financial asset expire, or where the financial asset together with substantially all the risks and rewards of ownership have been transferred.

         A financial liability is derecognised when the obligation specified in the contract is discharged or cancelled, or when it expires.

      4. Impairment of financial assets

         The carrying amount of loans and receivables and held-to-maturity securities are reviewed at the end of each reporting period to determine whether there is objective evidence of impairment. If any impairment evidence exists, a loss is recognised in the statement of comprehensive income as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the asset's original effective interest rate. If in a subsequent period, the amount of such impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through the statement of comprehensive income.

   4. 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 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 their estimated useful lives as follows :

      • Buildings 30 years
      • Computer equipment 5 years
      • Equipment, furniture and fittings 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 statement of comprehensive income at the date of disposal.

   5. 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 direct labour and cost 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 statement of comprehensive income on a straight-line basis over the assets' estimated useful lives of 5 years.

   6. Impairment of fixed assets

      The carrying amounts of fixed assets, including property, plant and equipment and intangible assets, are reviewed at the end of each reporting period to identify any indication of impairment. If there is an indication of impairment, an impairment loss is recognised in the statement of comprehensive income whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its fair value less costs to sell and value in use.

   7. 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.

   8. Employee benefits

      The employees of LRTF comprise civil servants and contract staff. Salaries, staff gratuities, and annual leave entitlements are accrued and recognised as expenditure in the year in which the associated services are rendered by the staff. For civil servants, staff on-costs, including pensions and housing benefits provided to the staff by the Government of the Hong Kong Special Administrative Region ("the Government"), are charged as expenditure in the year in which the associated services are rendered.

      For civil servants employed on pensionable terms, their pension liabilities are discharged by reimbursement of the staff on-cost charged by the Government. For other staff, contributions to Mandatory Provident Fund Scheme are charged to the statement of comprehensive income as incurred.

   9. Notional profits tax

      (i) The LRTF has no tax liability under the Inland Revenue Ordinance (Cap. 112). However, the Government requires the LRTF to pay to the General Revenue an amount in lieu of profits tax (i.e. notional profits tax) calculated on the basis of the provisions of the Inland Revenue Ordinance. Notional profits tax expense for the year comprises current tax and movements in deferred tax assets and liabilities.

      (ii) Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years.

      (iii) Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

      All deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the assets can be utilised, are recognised.

      The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the end of the reporting period. Deferred tax assets and liabilities are not discounted.

      The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.

   10. Revenue recognition

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

   11. Foreign currency translation

       Foreign currency transactions during the year are translated into Hong Kong dollars using the spot exchange rates at the transaction dates. Monetary assets and liabilities denominated in currencies other than Hong Kong dollars are translated into Hong Kong dollars using the closing exchange rate at the end of the reporting period. Exchange gains and losses are recognised in the statement of comprehensive income.

   12. 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.

   13. Impact of new and revised HKFRSs

       The HKICPA has issued a number of new and revised HKFRSs that are effective for the current accounting period. There have been no changes to the accounting policies applied in these financial statements for the years presented as a result of these developments.

       The LRTF has not applied any new HKFRSs that are not yet effective for the current accounting period (note 24).

3. Turnover

   	2012		2011
   Registration of documents	212,097		318,737
   Search	82,166		100,918
   Copying	78,361		93,372
   Reports on title	35,833		42,043
   Owners incorporation	10,804		10,542
   Others	7,535		7,784
   Total	426,796		573,396

4. Operating costs

   	2012		2011
   Staff costs	247,968		241,152
   General operating expenses	12,617		16,904
   Computer service charges	29,170		27,454
   Rental and management charges	16,121		16,782
   Central administrative overheads	3,097		1,826
   Depreciation and amortisation	30,552		35,248
   Loss on disposal of fixed assets	-		982
   Audit fees	489		420
   Total	340,014		340,768

5. Other income

   	2012		2011
   Bank deposits interest	3,638		4,087
   Held-to-maturity securities interest	5,312		5,303
   Placement with the Exchange Fund interest	20,987		-
   Net exchange (loss)/gain	(238	)	266
   Total	29,699		9,656

6. Notional profits tax

   (i) The notional profits tax charged to the statement of comprehensive income represents:

   	2012		2011
   Current tax
   Provision for notional profits tax for the year	21,161		34,731
   Deferred tax
   Origination and reversal of temporary differences	(3,022	)	4,091
   Notional profits tax	18,139		38,822

   (ii) The reconciliation between tax expense and accounting profit at applicable tax rates is as follows:

   	2012		2011
   Profit before notional profits tax	116,481		242,284
   Tax at Hong Kong profits tax rate of 16.5% (2011: 16.5%)	19,219		39,977
   Tax effect of non-taxable revenue	(1,080	)	(1,155	)
   Actual tax expense	18,139		38,822

7. Rate of return on fixed assets

   The rate of return on fixed assets is calculated as total comprehensive income (excluding interest income and interest expenses) divided by average net fixed assets, and expressed as a percentage. Fixed assets include property, plant and equipment and intangible assets. The LRTF is expected to meet a target rate of return on fixed assets of 8.3% (2011 : 8.3%) per year as determined by the Financial Secretary.

8. Property, plant and equipment

   	Land and Buildings		Computer Equipment		Equipment, Furniture and Fittings		Total
   Cost
   At 1 April 2010	350,000		122,797		19,475		492,272
   Additions	-		23,712		577		24,289
   Disposals	-		(66	)	(1,636	)	(1,702	)
   At 31 March 2011	350,000		146,443		18,416		514,859
   At 1 April 2011	350,000		146,443		18,416		514,859
   Additions	-		3,597		199		3,796
   At 31 March 2012	350,000		150,040		18,615		518,655
   Accumulated depreciation
   At 1 April 2010	64,184		110,356		14,978		189,518
   Charge for the year	3,852		8,334		1,660		13,846
   Written back on disposals	-		(66	)	(654	)	(720	)
   At 31 March 2011	68,036		118,624		15,984		202,644
   At 1 April 2011	68,036		118,624		15,984		202,644
   Charge for the year	3,852		8,190		1,173		13,215
   At 31 March 2012	71,888		126,814		17,157		215,859
   Net book value
   At 31 March 2012	278,112		23,226		1,458		302,796
   At 31 March 2011	281,964		27,819		2,432		312,215

9. Intangible assets

   	Computer software licences and system development costs
   	2012		2011
   Cost
   At beginning of year	178,002		167,787
   Additions	3,217		30,352
   Disposals	-		(20,137	)
   At end of year	181,219		178,002
   Accumulated amortisation
   At beginning of year	112,788		111,523
   Charge for the year	17,337		21,402
   Written back on disposals	-		(20,137	)
   At end of year	130,125		112,788
   Net book value
   At end of year	51,094		65,214

10. Held-to-maturity securities

    	2012		2011
    At amortised cost
    Listed:
    - in Hong Kong	55,350		55,416
    - outside Hong Kong	15,100		15,108
    	70,450		70,524
    Unlisted	30,715		30,569
    Total	101,165		101,093

11. Placement with the Exchange Fund

    The balance of the placement with the Exchange Fund amounted to HK$415.2 million (2011 : HK$Nil), being the original placement of HK$400 million plus HK$15.2 million interest paid but not yet withdrawn at the end of the reporting period. The term of the placement is six years from the date of placement, during which the amount of original placement cannot be withdrawn.

    Interest on the placement is payable at a fixed rate determined every January. The rate is the average annual investment return of the Exchange Fund's Investment Portfolio for the past six years or the average annual yield of three-year Exchange Fund Notes for the previous year subject to a minimum of zero percent, whichever is the higher. The interest rate has been fixed at 5.6% per annum for the year 2012 and at 6.0% per annum for the year 2011.

12. Deferred revenue

    This represents outstanding search tickets and subscription fees/other service charges received in advance of which services have not yet been rendered.

    	2012		2011
    Search tickets	369		369
    Subscription fees/other service charges	10,675		13,246
    Total	11,044		13,615

13. Customers' deposits

    	2012		2011
    Online services subscribers	26,497		25,776
    Government departments	984		984
    Total	27,481		26,760

14. Provision for employee benefits

    This represents the estimated liability for employees' annual leave and obligations on contract-end gratuities payable to contract staff for services rendered up to the end of the reporting period.

15. Deferred tax

    Major components of deferred tax recognised in the statement of financial position and the movements during the year are as follows :

    	Depreciation allowances in excess of the related depreciation and amortisation		Other temporary differences		Total
    Balance at 1 April 2010	10,789		(78	)	10,711
    Charged to the statement of comprehensive income	4,091		-		4,091
    Balance at 31 March 2011	14,880		(78	)	14,802
    Balance at 1 April 2011	14,880		(78	)	14,802
    Credited to the statement of comprehensive income	(3,010	)	(12	)	(3,022	)
    Balance at 31 March 2012	11,870		(90	)	11,780

16. Trading fund capital

    This represents the Government's investment in the LRTF.

17. Retained earnings

    	2012		2011
    Balance at beginning of year	762,680		660,949
    Total comprehensive income for the year	98,342		203,462
    Proposed dividend	(49,171	)	(101,731	)
    Balance at end of year	811,851		762,680

18. Proposed Dividend

    The proposed dividend to the Government is based on the total comprehensive income for the year and the target dividend payout ratio of 50% (2011 : 50%) stated in the annual business plan approved by the Secretary for Financial Services and the Treasury.

19. Cash and cash equivalents

    	2012		2011
    Cash and bank balances	48,292		53,623
    Bank deposits	170,000		580,000
    Subtotal	218,292		633,623
    Less: Bank deposits with original maturity over three months	-		(40,000	)
    Cash and cash equivalents	218,292		593,623

20. Related party transactions

    Apart from those separately disclosed in the financial statements, the other material related party transactions for the year are summarised as follows :

    (i) Services provided to related parties included registration of land documents, search of land registers and records, supply of copies of land records and reports on title. The total revenue derived from these services amounted to HK$73 million (2011 : HK$81 million). This amount is included in turnover under note 3.

    (ii) Services received from related parties included computer services, accommodation, central administration and auditing. The total cost incurred on these services amounted to HK$25 million (2011 : HK$26 million). This amount is included in operating costs under note 4.

    (iii) Acquisition of fixed assets from related parties included fitting out projects. The total cost of these assets amounted to HK$0.2 million (2011 : HK$1 million).

    Charging for services rendered to or received from related parties was on the same basis, that is, at the rates payable by the general public for services which were also available to the public or on a full cost recovery basis for services which were available only to related parties.

21. Financial risk management

    (i) Investment policy

    The LRTF maintains a conservative approach on investments in financial assets including placement with the Exchange Fund, debt securities and bank deposits. 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 Government or quasi-government bodies in Hong Kong with sound credit ratings and are in general held to maturity.

    (ii) 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.

    The maximum exposure to credit risk at the end of the reporting period without taking account of any collateral held or other credit enhancements is shown below :

    	2012		2011
    Held-to-maturity securities	101,165		101,093
    Placement with the Exchange Fund	415,205		-
    Debtors	16,050		11,979
    Amounts due from related parties	6,796		11,968
    Bank deposits	170,000		580,000
    Bank balances	48,253		53,585
    Total	757,469		758,625

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

    The LRTF's credit risk is primarily attributable to debtors, placement with the Exchange Fund 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 the LRTF's online services subscribers.

    For the placement with the Exchange Fund, the credit risk is considered to be low.

    For investments in debt securities, only those classified under the investment grade by Moody's or Standard & Poor's are considered. At the end of the reporting period, 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 :

    	2012		2011
    Held-to-maturity securities by credit rating Aa1 to Aa3/AA+ to AA-	101,165		101,093

    (iii) 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 Financial Secretary. 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.

    (iv) 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 bank deposits bear interest at fixed rates, their fair values will fall when market interest rates increase. However, as all these financial assets 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 end of the reporting period and categorised by the earlier of contractual repricing dates or 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		Total
    2012
    Held-to-maturity securities	-		-		101,165		101,165
    Bank deposits	170,000		-		-		170,000
    Total	170,000		-		101,165		271,165
    2011
    Held-to-maturity securities	-		-		101,093		101,093
    Bank deposits	580,000		-		-		580,000
    Total	580,000		-		101,093		681,093

    (v) 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 end of the reporting period, financial assets totalling HK$102 million (2011 : HK$102 million) were denominated in United States dollars. The remaining financial assets and all financial liabilities were denominated in Hong Kong dollars.

    (vi) Other financial risk

    The LRTF is exposed to financial risk arising from changes in the interest rate on the placement with the Exchange Fund which is determined every January (Note 11). It was estimated that, as at 31 March 2012, a 50 basis point increase/decrease in the interest rates for 2011 and 2012, with all other variables held constant, would increase/decrease the profit for the year and reserves by HK$1.8 million.

    (vii) Fair values

    The fair value of financial instruments traded in active markets is based on quoted market prices at the end of the reporting period. 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 end of the reporting period.

    The fair values of held-to-maturity securities at the end of the reporting period were as follows :

    	Carrying value				Fair value
    	2012		2011		2012		2011
    Held-to-maturity securities	101,165		101,093		107,954		109,842

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

22. Capital commitments

    At 31 March 2012, the LRTF had capital commitments, so far as not provided for in the financial statements, as follows :

    	2012		2011
    Authorised and contracted for	1,920		3,095
    Authorised but not yet contracted for	85,515		75,880
    Total	87,435		78,975

23. Operating lease commitments

    At 31 March 2012, the total future minimum lease payments under non-cancellable operating leases for land and buildings were payable as follows :

    	2012		2011
    Not later than one year	3,646		2,819
    Later than one year but not later than five years	2,434		726
    Total	6,080		3,545

24. Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended 31 March 2012

    Up to the date of issue of these financial statements, the HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended 31 March 2012 and which have not been early adopted in these financial statements.

    The LRTF is in the process of making an assessment of what the impact of these amendments, new standards and interpretations is expected to be in the period of initial adoption. So far it has concluded that the adoption of them is unlikely to have a significant impact on the LRTF's results of operations and financial position.

    The following developments may result in new or amended disclosures in future financial statements :

    	Effective for accounting periods beginning on or after
    Amendments to HKAS 1 (Revised), Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income	1 July 2012
    HKAS 19 (2011), Employee Benefits	1 January 2013
    Amendments to HKAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities	1 January 2014
    Amendments to HKFRS 7, Financial Instruments: Disclosures
    - Disclosures - Transfer of Financial Assets	1 July 2011
    - Disclosures - Offsetting Financial Assets and Financial Liabilities	1 January 2013
    HKFRS 9, Financial Instruments	1 January 2015
    HKFRS 13, Fair Value Measurement	1 January 2013