Financial Statements

Notes to the Financial Statements

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

1. General

The Office of the Telecommunications Authority (OFTA) Trading Fund was established on 1 June 1995 under the Legislative Council Resolution passed on 10 May 1995 pursuant to sections 3, 4 and 6 of the Trading Funds Ordinance (Cap. 430). By virtue of section 25 of the Communications Authority Ordinance (CAO) (Cap. 616) which came into operation on 1 April 2012, the OFTA Trading Fund was renamed as the Office of the Communications Authority (OFCA) Trading Fund (the Fund) on the same date. OFCA serves as the executive arm of the Communications Authority (CA), which is a statutory body set up under the CAO to administer and enforce the Broadcasting Ordinance (Cap. 562), the Broadcasting (Miscellaneous Provisions) Ordinance (Cap. 391), the CAO, the Telecommunications Ordinance (Cap. 106) and the Unsolicited Electronic Messages Ordinance (UEMO) (Cap. 593), and to perform any function under or by virtue of any Ordinance. The Fund, which is under the policy portfolio of the Commerce and Economic Development Bureau of the Government of the Hong Kong Special Administrative Region (the Government), supports the principal activities of the CA, as follows:

(a) licensing and regulating telecommunications services and broadcasting services;
(b) managing Hong Kong's radio frequency spectrum;
(c) providing advisory, planning and support services on telecommunications, broadcasting, anti-spamming matters to the Government;
(d) overseeing technical standards and representing the Government on international affairs;
(e) enforcing the UEMO; and
(f) ensuring the enforcement of fair trading practices and fair competition in relation to telecommunications and broadcasting sectors.

2. Significant accounting policies

(a) 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 HKFRSs, 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 Fund is set out below.

(b) 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 management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and 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 for 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 Fund'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.

(c)　Fixed assets

The fixed assets appropriated to the Fund on 1 June 1995 were measured initially at deemed cost equal to the value contained in the Resolution of the Legislative Council passed on 10 May 1995. Fixed assets acquired since 1 June 1995 are capitalised at the actual costs of acquisition or installation.

(i)　Property, plant and equipment

The following items of property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses (note 2(d)):

-　land classified as held under a finance lease and building held for own use situated thereon;

-　plant and equipment, including telecommunications and broadcasting equipment, computer systems, furniture, fixtures and motor vehicles.

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

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 on the date of disposal.

(ii)　Intangible assets

Intangible assets include acquired computer software licences and capitalised development costs of computer software programs. Expenditure on development of computer software programs is capitalised if the programs are technically feasible and the Fund has sufficient resources and 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(d)).

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 to 12 years.

(d)　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 any such indication exists, 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.

(e)　Financial assets and financial liabilities

(i)　Initial recognition

The Fund 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, 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 that are directly attributable to the acquisition of the financial assets or issue of the financial liabilities.

The Fund recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instrument.

(ii)　Categorisation

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 Fund has no intention of trading. This category includes debtors, amounts due from related parties, interest receivable, placement with the Exchange Fund, 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(e)(iv)).

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 receipts or payments 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 Fund estimates cash flows considering all contractual terms of the financial instruments but does not consider future credit losses. The calculation includes all fees received or paid between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Other financial liabilities

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

(iii)　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.

(iv)　Impairment of financial assets

The carrying amounts of loans and receivables are reviewed at the end of each reporting period. An impairment loss is recognised when there is objective evidence that an asset is impaired. The amount of the loss is measured 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. Any impairment loss is recognised in profit or loss and reflected in an allowance account. 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 profit or loss. When the Fund considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off.

(f)　Notional profits tax

(i) The Fund has no tax liability under the Inland Revenue Ordinance (Cap.112). However, the Government requires the Fund 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 amounts of the assets or 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 deduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available.

(g)　Revenue recognition

(i)　Licence fees received are credited to deferred income and amortised to profit and loss over the validity period of the licences. Service income is recognised when services have been provided. Interest income is recognised as it accrues using the effective interest method.

(ii)　Realised gains or losses on financial instruments are recognised in the statement of comprehensive income when the financial instruments are derecognised. Changes in fair value of trading financial instruments are recognised as revaluation gains or losses in the statement of comprehensive income in the period in which they arise.

(iii)　Other income is recognised on an accrual basis.

(h)　Employee benefits

The employees of the Fund 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, 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 the Mandatory Provident Fund Scheme are charged to the statement of comprehensive income as incurred.

(i)　Related parties

The Fund is a separate accounting entity within the Government established under the Trading Funds Ordinance. During the year, the 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.

(j)　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. All foreign currency translation differences are recognised in the statement of comprehensive income.

(k)　Cash and cash equivalents

Cash and cash equivalents include cash and bank balances, and other 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 when placed or acquired.

(l)　Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when there is a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events, are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(m)　Impact of new and revised HKFRSs

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption 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 Fund has not applied any new HKFRSs that are not yet effective for the current accounting period (note 23).

3. Turnover

	2016	2015
Telecommunications licence fees
Licences – Private	41,258	40,961
Licences – Public	336,343	327,907
Broadcasting licence fees	52,624	47,105
Services provided to related parties(note 21(a))	25,127	25,010
Miscellaneous revenue	333	567
	455,685	441,550

4. Operating costs

	2016	2015
Staff costs	332,974	315,068
Accommodation costs	19,247	18,421
Operating expenses	29,064	28,725
Administrative expenses	18,023	19,447
Consultancy fees	5,791	2,790
Depreciation of property, plant and equipment	12,632	12,348
Amortisation of intangible assets	1,091	825
Impairment loss on debtors	5,097	-
Audit fees	549	495
	424,468	398,119

5. Other income

	2016	2015
Interest income from financial assets not at fair value
Placement with the Exchange Fund	41,561	32,972
Bank deposits	3,058	4,218
Bank balances	1	2
	44,620	37,192
Sundry income	769	5,832
	45,389	43,024

6. Notional profits tax

(a)  The notional profits tax charged to the statement of comprehensive income is arrived at as follows:

	2016	2015
Current tax
Provision for notional profits tax for the year	12,823	14,689
Deferred tax
Origination and reversal of temporary differences	19	(416)
Notional profits tax	12,842	14,273

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

	2016	2015
Profit before notional profits tax	76,606	86,455
Tax at Hong Kong profits tax rate of 16.5% (2015: 16.5%)	12,640	14,265
One-off tax reduction	(20)	(20)
Tax effect of non-deductible expenses	727	726
Tax effect of non-taxable revenue	(505)	(698)
Notional tax expense	12,842	14,273

7. Rate of return on fixed assets

The rate of return on fixed assets is calculated as total comprehensive income (excluding interest income, notional profits tax on interest income from placement with the Exchange Fund 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 Fund is expected to meet a target rate of return on fixed assets of 6.7% per year (2015: 6.7%) as determined by the Financial Secretary.

8. Property, plant and equipment

	Land and buildings	Equipment	Computer systems	Furniture and fixtures	Motor vehicles	Total
Cost
At 1 April 2014	220,243	53,520	40,235	46,789	4,921	365,708
Additions	-	439	2,323	-	-	2,762
Disposals	-	(25)	(1,625)	(74)	-	(1,724)
At 31 March 2015	220,243	53,934	40,933	46,715	4,921	366,746
At 1 April 2015	220,243	53,934	40,933	46,715	4,921	366,746
Additions	-	1,100	3,361	2,106	-	6,567
Disposals	-	(245)	(1,629)	(54)	-	(1,928)
At 31 March 2016	220,243	54,789	42,665	48,767	4,921	371,385
Accumulated depreciation
At 1 April 2014	79,373	49,493	33,950	31,142	2,753	196,711
Charge for the year	4,849	882	1,833	4,094	690	12,348
Written back on disposal	-	(22)	(1,620)	(72)	-	(1,714)
At 31 March 2015	84,222	50,353	34,163	35,164	3,443	207,345
At 1 April 2015	84,222	50,353	34,163	35,164	3,443	207,345
Charge for the year	4,849	894	2,152	4,138	599	12,632
Written back on disposal	-	(245)	(1,626)	(44)	-	(1,915)
At 31 March 2016	89,071	51,002	34,689	39,258	4,042	218,062
Net book value
At 31 March 2016	131,172	3,787	7,976	9,509	879	153,323
At 31 March 2015	136,021	3,581	6,770	11,551	1,478	159,401

9. Intangible assets

Computer software licences and system development costs
	2016	2015
Cost
At beginning of year	12,031	11,311
Additions	1,545	861
Disposals	(26)	(141)
At end of year	13,550	12,031
Accumulated amortisation
At beginning of year	9,001	8,317
Charge for the year	1,091	825
Written back on disposal	(20)	(141)
At end of year	10,072	9,001
Net book value
At end of year	3,478	3,030

10. Placement with the Exchange Fund

The balance of the placement with the Exchange Fund amounted to HK$875,281,000 (2015: HK$829,651,000), being the original placement of HK$700,000,000 plus interest paid of HK$175,281,000 (2015: HK$129,651,000) 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 (three-year Government Bond with effect from 1 January 2016) for the previous year subject to a minimum of zero percent, whichever is the higher. The interest rate has been fixed at 3.3% per annum for the year 2016 and at 5.5% per annum for the year 2015.

11. Debtors, deposits and advance payments

	2016	2015
Debtors	7,177	307
Less: allowance for impairment loss	(5,097)	-
	2,080	307
Deposits and advance payments	644	2,326
	2,724	2,633

The movement in the allowance for impairment loss during the year is as follows:

	2016	2015
At beginning of year	-	-
Impairment loss recognised	5,097	-
At end of year	5,097	-

Impairment loss was recognised on an amount due from a company in financial difficulties.

12. Deferred tax

Deferred tax recognised in the statement of financial position arises from depreciation allowances in excess of the related depreciation and amortisation. The movements during the year are as follows:

	2016	2015
Balance at beginning of year	1,357	1,773
Charged / (credited) to statement of comprehensive income	19	(416)
Balance at end of year	1,376	1,357

13. 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 end of the reporting period (also see note 2(h)).

14. Deferred income

This represents the balance of licence fee income to be amortised over the remaining validity period of the licences.

15. Trading fund capital

This represents the Government's investment in the Fund.

16. Development reserve

This is a reserve serving as a regulating mechanism to meet the target return.

	2016	2015
Balance at beginning and end of year	690,165	690,165

17. Retained earnings

	2016	2015
Balance at beginning of year	-	-
Total comprehensive income for the year	63,764	72,182
Proposed dividend	(63,764)	(72,182)
Balance at end of year	-	-

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 100% (2015: 100%) stated in the annual business plan approved by the Secretary for Financial Services and the Treasury.

	2016	2015
Balance at beginning of year	72,182	79,417
Dividend paid	(72,182)	(79,417)
Dividend proposed	63,764	72,182
Balance at end of year	63,764	72,182

19. Cash and cash equivalents

	2016	2015
Cash and bank balances	9,819	9,137
Bank deposits	234,500	287,000
	244,319	296,137
Less: Bank deposits with original maturity beyond three months	(227,900)	(279,800)
Cash and cash equivalents	16,419	16,337

20. Capital commitments and other commitments

At 31 March 2016, the Fund had capital commitments, so far as not provided for in the financial statements, as stated below:

	2016	2015
Authorised and contracted for	493	101
Authorised but not contracted for	60	1,435
	553	1,536

To help resolve billing disputes in deadlock between telecommunications service providers and their customers outside the judicial system, a voluntary Customer Complaint Settlement Scheme (the scheme) was set up in November 2012 by the Communications Association of Hong Kong, the industry association. By a Memorandum of Understanding signed on 30 April 2015, the Fund will provide recurrent funding for the long term operation of the scheme in the amount not exceeding HK$2,000,000 per annum. During the year, the Fund had contributed HK$1,876,000 to the scheme (2015: HK$1,401,000).

21. 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:

(a)  fees income for services provided to related parties included advisory and project services amounting to HK$11,407,000 (2015: HK$11,436,000) and frequency assignment and protection services amounting to HK$13,720,000 (2015: HK$13,574,000);

(b)  expenses for services received from related parties included accommodation, repairs and maintenance, legal advice, central administration and auditing. In total, the Fund incurred HK$22,900,000 on these services (2015: HK$20,304,000); and

(c)  fixed assets acquired from related parties included furniture and fixtures. The total amount for these assets amounted to HK$983,000 (2015: nil).

Services provided by or to related parties were charged at the rates payable by the general public where such services were also available to members of the public, or on a full cost recovery basis where such services were only available to related parties. Fixed assets supplied by related parties were charged at full cost.

Balances with related parties as at 31 March 2016 are set out in the statement of financial position.

22. Financial risk management

(a)　Investment policy

To provide an ancillary source of income, surplus cash is invested in a portfolio of financial instruments. The portfolio includes fixed deposits and placement with the Exchange Fund. It is the Fund's policy that all investments in financial instruments should be principal-protected.

(b)　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 currency exchange rates.

The Fund does not have significant exposure to currency risk as substantially all of its financial instruments are denominated in Hong Kong dollars.

(c)　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 Fund's credit risk is primarily attributable to debtors, bank deposits, bank balances and placement with the Exchange Fund.

The credit risk of debtors is closely monitored by the Fund. Recoverability of debt items are assessed on an individual basis and impairment losses are recognised when considered necessary.

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

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

The maximum exposure to credit risk of the financial assets of the Fund is equal to their carrying amounts at the end of the reporting period.

(d)　Liquidity risk

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

The Fund manages liquidity risk by forecasting the amount of cash required and monitoring the working capital of the Fund to ensure that all liabilities due and known funding requirements could be met. As the Fund has a strong liquidity position, it has a very low level of liquidity risk.

(e)　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 all of the Fund's bank deposits bear interest at fixed rates, their fair values will fall when market interest rates increase. However, as they are all stated at amortised cost, changes in market interest rates will not affect their carrying amounts and the Fund'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 Fund's exposure to cash flow interest rate risk is small as it has no major floating-rate investments.

(f)　Other financial risk

The Fund 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 10). It was estimated that, as at 31 March 2016, a 50 basis point (2015: 50 basis point) increase / decrease in the interest rates for 2015 and 2016, with all other variables held constant, would increase / decrease the profit for the year and reserves by HK$3,654,000 (2015: HK$3,464,000).

(g)　Fair values

The fair values of financial instruments quoted in active markets are based on their quoted 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.

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

23. Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended 31 March 2016

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 2016 and which have not been early adopted in these financial statements. These include the following which may be relevant to the Fund: