EMSTF

Status of the Electrical and Mechanical Services Trading Fund
The Electrical and Mechanical Services Trading Fund was established on 1 August 1996 under the Legislative Council Resolution passed on 26 June 1996 pursuant to sections 3, 4 and 6 of the Trading Funds Ordinance (Cap. 430) to provide comprehensive electrical, mechanical and electronic services, vehicle services, and project and consultancy services to clients. With effect from 1 August 1999, government bureaux, departments and autonomous bodies (user departments) were allowed to be untied from using the services provided by the Electrical and Mechanical Services Trading Fund in four phases over a three-year period. All user departments have been untied since 1 August 2002. They have the freedom to retain the services of the Electrical and Mechanical Services Trading Fund or to choose alternative service providers to meet part or all of their electrical and mechanical service needs.

Accounting policies

(a)

Basis of accounting
The accounts have been prepared in accordance with accounting principles generally accepted in Hong Kong.

The Hong Kong Institute of Certified Public Accountants (HKICPA) has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards ("new HKFRSs") which are effective for accounting periods beginning on or after 1 January 2005. The Electrical and Mechanical Services Trading Fund has not early adopted these new HKFRSs in the financial statements for the year ended 31 March 2005. The Electrical and Mechanical Services Trading Fund has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position.

(b)

Fixed assets
Fixed assets appropriated to the Electrical and Mechanical Services Trading Fund on 1 August 1996 are stated at the value contained in the Legislative Council Resolution for the setting up of the Electrical and Mechanical Services Trading Fund. Fixed assets acquired since 1 August 1996 and costing more than $100,000 on an individual basis are capitalised at the actual direct expenditure of acquisition and installation with the exception of motor vehicles which are treated as fixed assets regardless of value.

Corporate Computer System under development is stated at cost. When all the activities necessary to prepare the asset for its intended use are substantially completed, it will commence to be depreciated in accordance with the depreciation policy detailed in note 2 (c).

(c)

Depreciation and amortisation
Depreciation is provided on a straight-line basis calculated to write off the cost of assets less residual value over their estimated useful lives. The annual rates of depreciation used are :

  Buildings
  Computer systems and equipment
  Plant and equipment
  Motor vehicles
  Furniture and fixtures
Land is regarded as a non-depreciating asset.

5% - 10%
10% - 25%
14%
20%
20%

(d)

Income tax

(i)

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Income tax is recognised in the profit and loss account except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

(ii)

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, 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 provided is 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 balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at the balance sheet date 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 deduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.

(iv)

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities if, and only if, the Electrical and Mechanical Services Trading Fund has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met :

-	in the case of current tax assets and liabilities, the Electrical and Mechanical Services Trading Fund intends to settle them on a net basis; or
-	in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority.

(e)

Revenue recognition
Revenue is recognised as services are provided. Interest income is recognised on an accrual basis.

(f)

Stocks and work in progress
Stocks and work in progress are stated at the lower of cost and net realisable value. The cost of stocks is assigned by using the weighted average cost formula. Work in progress represents jobs in progress as at year end date.

(g)

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 benefits and non-monetary benefits provided to the staff by the Government of the Hong Kong Special Administrative Region (the Government) are charged to the Electrical and Mechanical Services Trading Fund and recognised as an expense in the year in which the associated services are rendered.

(h)

Cash equivalents
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, with a maturity of three months or less from the date of acquisition.

(i)

Related parties
The Electrical and Mechanical Services Trading Fund is a separate accounting entity within the Government established under the Trading Funds Ordinance (Cap. 430). During the year, the Electrical and Mechanical Services Trading Fund 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.

Turnover

	2005 HK$000	2004 HK$000

Vehicle services Electrical, mechanical and electronic services Project and consultancy services Others	183,355 2,705,545 134,659 26,775	189,387 2,710,802 233,331 17,575

	3,050,334	3,151,095

Operating costs

	2005 HK$000	2004 HK$000

Staff costs Materials Contract maintenance Rental and management charges General operating and administration expenses Depreciation and amortisation Audit fees	1,513,436 250,290 732,968 20,075 162,570 24,241 530	1,675,790 258,035 691,760 20,232 173,811 26,313 500

	2,704,110	2,846,441

Other income

	2005 HK$000	2004 HK$000

Bank deposits interest	61,822	52,594

Finance cost

	2005 HK$000	2004 HK$000

Interest on Government loan repaid and repayable within one year Government loan repayable after one year	1,895 1,518	1,895 3,034


	3,413	4,929

Taxation

(i)

Notional profits tax is provided at 17.5% (2004 : 17.5%) of the estimated assessable profits for the year. A payment in lieu of profits tax calculated on the basis of the provisions of the Inland Revenue Ordinance (Cap. 112) will be made to the Government. The amount of taxation charged / (credited) to the profit and loss account represents :

	2005 HK$000	2004 HK$000

Current tax Notional profits tax Over-provision in respect of prior years	60,731 -	53,069 (62,175)

	60,731	(9,106)

Deferred tax Origination and reversal of temporary differences Effect of increase in tax rate on deferred tax	(753) -	(2,259) (154)

	(753)	(2,413)

Total tax expense / (income)	59,978	(11,519)

(ii)

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

	2005 HK$000	2004 HK$000

Profit before tax	404,633	352,319

Notional tax on profit before tax Over-provision in respect of prior years Recognition of a previously unrecognised deferred tax asset Effect on opening deferred tax balances resulting from an increase in tax rate Tax effect of non-taxable revenue	70,811 - - - (10,833)	61,656 (62,175) (1,638) (154) (9,208)

Actual tax expense / (income)	59,978	(11,519)

8.	Dividend A dividend of $172.328 million being 50% of the profit after tax and a special one-off dividend of $50 million are proposed for the year ended 31 March 2005 and are payable to the Government (2004 : $109.151 million).

Rate of return on fixed assets
This is calculated as a percentage of profit from operations and interest income after taxation to Average Net Fixed Assets (ANFA). The Electrical and Mechanical Services Trading Fund is expected to meet a target return of 13.5% per annum on ANFA as determined by the Financial Secretary.

10.	Fixed assets

	Land and Buildings HK$000	Plant and Equipment HK$000	Computer Systems and Equipment HK$000	Motor Vehicles HK$000	Furniture and Fixtures HK$000	Corporate Computer System under development HK$000	Total HK$000

Cost or Valuation At 1 April 2004 Additions Disposals	950,100 - -	24,626 - -	39,534 125 -	37,793 2,601 (1,635)	26,181 - -	- 11,828 -	1,078,234 14,554 (1,635)

At 31 March 2005	950,100	24,626	39,659	38,759	26,181	11,828	1,091,153

Aggregate Depreciation / Amortisation At 1 April 2004 Charge for the year Written back on disposals	107,323 13,993 -	23,743 391 -	38,511 1,036 -	26,393 4,094 (1,635)	16,577 4,727 -	- - -	212,547 24,241 (1,635)

At 31 March 2005	121,316	24,134	39,547	28,852	21,304	-	235,153

Net Book Value At 31 March 2005	828,784	492	112	9,907	4,877	11,828	856,000

At 31 March 2004	842,777	883	1,023	11,400	9,604	-	865,687

11.

Stocks and work in progress

	2005 HK$000	2004 HK$000

Stocks Work in progress	82,272 6,268	93,761 9,803

	88,540	103,564

12.

Short-term borrowing

	2005 HK$000	2004 HK$000

Government loan repayable within one year at 31 March (see also note 16)	30,280	30,280

13.

Customers' deposits

	2005 HK$000	2004 HK$000

Deposits received from related parties Deposits received from other customers	569,149 17,395	746,139 20,366

	586,544	766,505

14.

Deferred revenue

This represents contract fees received in advance for which services have not yet been rendered.

	2005 HK$000	2004 HK$000

Contract fees received in advance from related parties	153,305	71,800

15.

Deferred tax

Major components of deferred tax recognised in the balance sheet and the movements during the year are as follows:

	Depreciation allowances in excess of the related depreciation HK$000	Other temporary differences HK$000	Total HK$000

Balance at 1 April 2004 Charged / (credited) to profit and loss account	(2,753) (935)	340 182	(2,413) (753)

Balance at 31 March 2005	(3,688)	522	(3,166)

Balance at 1 April 2003 Charged / (credited) to profit and loss account	- (2,753)	- 340	- (2,413)

Balance at 31 March 2004	(2,753)	340	(2,413)

16.

Government loan

	2005 HK$000	2004 HK$000

Government loan repayable after one year at 31 March	30,280	60,560

A set-up loan of $302.8 million from the Capital Investment Fund was made in accordance with the resolution passed by the Legislative Council on 26 June 1996 to finance part of initial assets valued at $1,009.4 million appropriated to the Electrical and Mechanical Services Trading Fund effective from 1 August 1996. The loan is repayable in ten equal annual instalments of $30.28 million starting from 1 July 1997. The ninth instalment due to be payable on 1 July 2005 is shown under short-term borrowing. The balance of $30.28 million shown under this item represents the balance of loan after repayment of the ninth instalment.

A further loan facility of $150 million from the Capital Investment Fund was approved by the Finance Committee on 12 July 1996 to finance the initial years' working capital of the Electrical and Mechanical Services Trading Fund. The working capital loan was to operate as an overdraft facility to the Electrical and Mechanical Services Trading Fund with a credit limit of $150 million, drawn as and when necessary and repayable in full by 31 July 2006. Two drawdowns of $70 million and $35 million were made on 1 August 1996 and 2 September 1996 respectively and were subsequently fully paid off. During the year ended 31 March 2005, no drawdown from the loan was made.

Interest for the set-up loan is payable on the amount outstanding at the average of the best lending rates quoted by the continuing members of the Committee of the Hong Kong Association of Banks.

17.

Trading fund capital

This represents the Government's investment in the Electrical and Mechanical Services Trading Fund.

	2005 HK$000	2004 HK$000

Balance at 1 April Addition	706,600 -	706,600 -

Balance at 31 March	706,600	706,600

18.

Retained earnings

	2005 HK$000	2004 HK$000

Balance at 1 April Profit for the year Proposed dividend	1,626,558 344,655 (222,328)	1,371,871 363,838 (109,151)

Balance at 31 March	1,748,885	1,626,558

19.

Analysis of the balances of cash and cash equivalents at end of the year

	2005 HK$000	2004 HK$000

Cash and bank balances Placements with banks (cash equivalents portion)	51,688 990,000	126,728 1,000,000

	1,041,688	1,126,728

20.

Capital commitments

At the date of the balance sheet, the Electrical and Mechanical Services Trading Fund had capital commitments, so far as not provided for in the financial statements, as follows:

	2005 HK$000	2004 HK$000

Contracted but not provided for	31,087	-

21.

Related party transactions

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

(a)	Services provided to related parties included vehicle services; electrical, mechanical and electronic services; and project and consultancy services. The total revenue derived from these services amounted to $3,024 million (2004 : $3,122 million). This amount was included in Turnover under note 3.

(b)	Services received from related parties included maintenance, accommodation, central administration and auditing. The total cost incurred on these services amounted to $84 million (2004 : $87 million). This amount was included in Operating costs under note 4.

Services provided to related parties were priced on a cost-plus basis. Services received from related parties were charged 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 the related parties.