REG - China Pet &Chem Corp - Final Results - Part 2
RNS Number : 8503TChina Petroleum & Chemical Corp25 March 2019Click on, or paste the following link into your web browser, to view the associated PDF document.
http://www.rns-pdf.londonstockexchange.com/rns/8033T_1-2019-3-24.pdf
CONTENTS
2
Company Profile
3
Principal Financial Data and Indicators
6
Changes in Share Capital and Shareholdings
of Principal Shareholders
8
Chairman's Address
11
Business Review and Prospects
19
Management's Discussion and Analysis
31
Significant Events
42
Connected Transactions
45
Corporate Governance
52
Report of the Board of Directors
62
Report of the Board of Supervisors
64
Directors, Supervisors, Senior
Management and Employees
80
Principal Wholly-owned and
Controlled Subsidiaries
81
Financial Statements
219
Corporate Information
220
Documents for Inspection
This annual report includes forward-looking statements. All statements, other than statements of historical facts, that address activities, events or developments that the Company expects or anticipates will or may occur in the future (including but not limited to projections, targets, reserve and other estimates and business plans) are forward-looking statements. The Company's actual results or developments may differ materially from those indicated by these forward-looking statements as a result of various factors and uncertainties. The Company makes the forward-looking statements referred to herein as at 22 March 2019 and unless required by regulatory authorities, the Company undertakes no obligation to update these statements.
COMPANY PROFILE
IMPORTANT NOTICE: THE BOARD OF DIRECTORS, THE BOARD OF SUPERVISORS, DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT OF SINOPEC CORP. WARRANT THAT THERE ARE NO FALSE REPRESENTATIONS, MISLEADING STATEMENTS OR MATERIAL OMISSIONS IN THIS ANNUAL REPORT, AND JOINTLY AND SEVERALLY ACCEPT FULL RESPONSIBILITY FOR THE AUTHENTICITY, ACCURACY AND COMPLETENESS OF THE INFORMATION CONTAINED IN THIS ANNUAL REPORT. THERE IS NO OCCUPANCY OF NON-OPERATING FUNDS BY THE CONTROLLING SHAREHOLDERS OF SINOPEC CORP. MR. LI YONG, DIRECTOR, DID NOT ATTEND THE 5TH MEETING OF THE SEVENTH SESSION OF THE BOARD DUE TO OFFICIAL DUITES. MR. LI YONG AUTHORISED MR. LI YUNPENG TO VOTE ON HIS BEHALF IN RESPECT OF THE RESOLUTIONS PROPOSED AT THE MEETING. MR. DAI HOULIANG, CHAIRMAN OF THE BOARD, MR. MA YONGSHENG, PRESIDENT, MR. WANG DEHUA, CHIEF FINANCIAL OFFICER AND HEAD OF THE FINACIAL DEPARTMENT OF SINOPEC CORP. WARRANT THE AUTHENTICITY AND COMPLETENESS OF THE FINANCIAL STATEMENTS CONTAINED IN THIS ANNUAL REPORT. THE AUDIT COMMITTEE OF SINOPEC CORP. HAS REVIEWED THE FINANCIAL ANNUAL RESULTS OF SINOPEC CORP. FOR THE YEAR ENDED 31 DECEMBER 2018.
THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 OF THE COMPANY PREPARED IN ACCORDANCE WITH THE PRC ACCOUNTING STANDARDS FOR BUSINESS ENTERPRISES (CASs) AND INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) HAVE BEEN AUDITED BY PRICEWATERHOUSECOOPERS ZHONG TIAN LLP AND PRICEWATERHOUSECOOPERS RESPECTIVELY. BOTH FIRMS HAVE ISSUED STANDARD UNQUALIFIED AUDITOR'S REPORT.
AS APPROVED AT THE 5TH MEETING OF THE SEVENTH SESSION OF THE BOARD OF DIRECTORS OF SINOPEC CORP., THE BOARD PROPOSED A FINAL CASH DIVIDEND OF RMB 0.26 (TAX INCLUSIVE) PER SHARE FOR 2018, COMBINING WITH THE INTERIM CASH DIVIDEND OF RMB 0.16 (TAX INCLUSIVE) PER SHARE, THE TOTAL CASH DIVIDEND FOR 2018 WILL BE RMB 0.42 (TAX INCLUSIVE) PER SHARE. THE DIVIDEND PROPOSAL IS SUBJECT TO THE SHAREHOLDERS' APPROVAL AT THE ANNUAL GENERAL MEETING FOR THE YEAR 2018.
COMPANY PROFILE
Sinopec Corp. is one of the largest integrated energy and chemical companies in China. Its principal operations include the exploration and production, pipeline transportation and sale of petroleum and natural gas; the production, sale, storage and transportation of refinery products, petrochemical products, coal chemical products, synthetic fibre, and other chemical products; the import and export, including an import and export agency business, of petroleum, natural gas, petroleum products, petrochemical and chemical products, and other commodities and technologies; and research, development and application of technologies and information.
DEFINITIONS:
In this report, unless the context otherwise requires, the following terms shall have the meaning as set out below:
Sinopec Corp.: China Petroleum & Chemical Corporation;
Company: Sinopec Corp. and its subsidiaries;
China Petrochemical Corporation: our controlling shareholder, China Petrochemical Corporation;
Sinopec group: China Petrochemical Corporation and its subsidiaries;
NDRC: China National Development and Reform Commission
RMC: Oil and Natural Gas Reserves Management Committee of the Company;
CSRC: China Securities Regulatory Commission.
Hong Kong Stock Exchange: The Stock Exchange of Hong Kong Limited
Hong Kong Listing Rules: Listing Rules of the Hong Kong Stock Exchange
CONVERSION:
For domestic production of crude oil, 1 tonne = 7.1 barrels;
For overseas production of crude oil: 2018, 1 tonne = 7.21 barrels; 2017, 1 tonne = 7.21 barrels; 2016, 1 tonne = 7.20 barrels;
For production of natural gas, 1 cubic meter = 35.31 cubic feet;
Refinery throughput is converted at 1 tonne = 7.35 barrels.
11 INVENTORIES
The Group
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Raw materials
85,469
85,975
Work in progress
13,690
14,774
Finished goods
88,929
84,448
Spare parts and consumables
2,872
2,651
190,960
187,848
Less: Provision for diminution in value of inventories
6,376
1,155
Total
184,584
186,693
For the year ended 31 December 2018, the provision for diminution in value of inventories of the Group amounted to RMB 5,535 million mainly related to crude oil, finished goods and work in progress of refined oil products and chemical products (2017: RMB 436 million mainly related to the spare parts and consumables in refining segment and chemical segment).
12 LONG-TERM EQUITY INVESTMENTS
The Group
Investments in
joint ventures
Investments in
associates
Provision for
impairment
losses
Total
RMB million
RMB million
RMB million
RMB million
Balance at 1 January 2018
52,272
80,429
(1,614)
131,087
Additions for the year
2,900
6,413
-
9,313
Share of profits less losses under the equity method
6,723
7,251
-
13,974
Change of other comprehensive loss under the equity method
(7)
(222)
-
(229)
Other equity movements under the equity method
(2)
-
-
(2)
Dividends declared
(5,164)
(4,108)
-
(9,272)
Disposals for the year
(444)
(247)
-
(691)
Foreign currency translation differences
805
757
(78)
1,484
Other movements
51
-
-
51
Movement of provision for impairment
-
-
6
6
Balance at 31 December 2018
57,134
90,273
(1,686)
145,721
The Company
Investments in
subsidiaries
Investments in
Joint ventures
Investments in
associates
Provision for
impairment
losses
Total
RMB million
RMB million
RMB million
RMB million
RMB million
Balance at 1 January 2018
253,011
14,822
15,579
(7,855)
275,557
Additions for the year
8,351
699
5,014
-
14,064
Share of profits less losses under the equity method
-
3,047
1,212
-
4,259
Change of other comprehensive loss under the equity method
-
-
(64)
-
(64)
Other equity movements under the equity method
-
-
1
-
1
Dividends declared
-
(2,204)
(637)
-
(2,841)
Disposals for the year
(1,432)
(327)
-
-
(1,759)
Other movements
4
56
58
-
118
Movement of provision for impairment
-
-
-
(128)
(128)
Balance at 31 December 2018
259,934
16,093
21,163
(7,983)
289,207
For the year ended 31 December 2018, the Group and the Company had no individually significant long-term investment impairment.
Details of the Company's principal subsidiaries are set out in Note 54.
12 LONG-TERM EQUITY INVESTMENTS (Continued)
Principal joint ventures and associates of the Group are as follows:
(a) Principal joint ventures and associates
Name of investees
Principal
place of
business
Register
location
Legal
representative
Principal
activities
Registered
Capital RMB
million
Percentage of
equity/voting
right directly
or indirectly
held by the
Company
1.Joint ventures
Fujian Refining & Petrochemical Company
Limited ("FREP")
PRC
PRC
Gu Yuefeng
Manufacturing
refining oil
products
14,758
50.00%
BASF-YPC Company Limited ("BASF-YPC")
PRC
PRC
Wang Jingyi
Manufacturing
and distribution
of petrochemical
products
12,547
40.00%
Taihu Limited ("Taihu")
Russia
Cyprus
NA
Crude oil and natural
gas extraction
25,000 USD
49.00%
Yanbu Aramco Sinopec Refining
Company Ltd. ("YASREF")
Saudi Arabia
Saudi Arabia
NA
Petroleum refining
and processing
1,560 million
USD
37.50%
Sinopec SABIC Tianjin Petrochemical
Company Limited ("Sinopec SABIC
Tianjin")
PRC
PRC
UWAIDH AL‧
HARETHI
Manufacturing
and distribution
of petrochemical
products
9,796
50.00%
2.Associates
Sinopec Sichuan to East China Gas
Pipeline Co., Ltd. ("Pipeline Ltd")
PRC
PRC
Quan Kai
Operation of natural
gas pipelines and
auxiliary facilities
200
50.00%
Sinopec Finance Company Limited
("Sinopec Finance")
PRC
PRC
Zhao Dong
Provision of non-
banking financial
services
18,000
49.00%
PAO SIBUR Holding ("SIBUR")
Russia
Russia
NA
Processing
natural gas and
manufacturing
petrochemical
products
21,784 million
RUB
10.00%
Zhongtian Synergetic Energy
Company Limited ("Zhongtian
Synergetic Energy")
PRC
PRC
Peng Yi
Mining coal and
manufacturing
of coal-chemical
products
17,516
38.75%
Caspian Investments Resources Ltd.
("CIR")
The Republic of
Kazakhstan
British Virgin
Islands
NA
Crude oil and natural
gas extraction
10,000 USD
50.00%
Except that SIBUR is a public joint stock company, other joint ventures and associates above are limited companies.
12 LONG-TERM EQUITY INVESTMENTS (Continued)
(b) Major financial information of principal joint ventures
Summarised balance sheet and reconciliation to their carrying amounts in respect of the Group's principal joint ventures:
FREP
BASF-YPC
Taihu
YASREF
Sinopec SABIC Tianjin
At 31
December
2018
At 31
December
2017
At 31
December
2018
At 31
December
2017
At 31
December
2018
At 31
December
2017
At 31
December
2018
At 31
December
2017
At 31
December
2018
At 31
December
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Current assets
Cash and cash equivalents
7,388
5,772
1,582
1,800
3,406
2,352
930
4,916
5,110
6,524
Other current assets
9,248
11,013
5,795
5,335
3,689
2,462
10,267
10,816
4,007
2,709
Total current assets
16,636
16,785
7,377
7,135
7,095
4,814
11,197
15,732
9,117
9,233
Non-current assets
19,271
19,740
11,086
12,075
9,216
7,978
51,873
51,553
13,990
13,248
Current liabilities
Current financial liabilities
(1,200)
(1,135)
(725)
(233)
(59)
(20)
(4,806)
(5,407)
(500)
(1,236)
Other current liabilities
(4,939)
(5,049)
(1,822)
(1,982)
(2,124)
(1,914)
(12,217)
(11,864)
(2,507)
(4,546)
Total current liabilities
(6,139)
(6,184)
(2,547)
(2,215)
(2,183)
(1,934)
(17,023)
(17,271)
(3,007)
(5,782)
Non-current liabilities
Non-current financial liabilities
(12,454)
(13,654)
(218)
(955)
(72)
(72)
(32,364)
(35,619)
(3,651)
(4,101)
Other non-current liabilities
(279)
(236)
(17)
(19)
(2,271)
(2,686)
(937)
(890)
(331)
(41)
Total non-current liabilities
(12,733)
(13,890)
(235)
(974)
(2,343)
(2,758)
(33,301)
(36,509)
(3,982)
(4,142)
Net assets
17,035
16,451
15,681
16,021
11,785
8,100
12,746
13,505
16,118
12,557
Net assets attributable to owners
of the company
17,035
16,451
15,681
16,021
11,373
7,818
12,746
13,505
16,118
12,557
Net assets attributable to
minority interests
-
-
-
-
412
282
-
-
-
-
Share of net assets from joint ventures
8,518
8,226
6,272
6,409
5,573
3,831
4,780
5,064
8,059
6,279
Carrying Amounts
8,518
8,226
6,272
6,409
5,573
3,831
4,780
5,064
8,059
6,279
Summarised income statement
Year ended 31 December
FREP
BASF-YPC
Taihu
YASREF
Sinopec SABIC Tianjin
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Turnover
52,469
49,356
21,574
21,020
14,944
12,520
77,561
61,587
23,501
22,286
Interest income
157
208
41
36
141
142
101
45
169
104
Interest expense
(647)
(857)
(43)
(71)
(151)
(142)
(1,382)
(1,382)
(167)
(223)
Profit/(loss) before taxation
3,920
6,977
3,625
4,565
3,493
1,697
(1,569)
548
3,916
5,113
Tax expense
(935)
(1,699)
(897)
(1,151)
(729)
(553)
(249)
57
(993)
(1,279)
Profit/(loss) for the year
2,985
5,278
2,728
3,414
2,764
1,144
(1,818)
605
2,923
3,834
Other comprehensive income/(loss)
-
-
-
-
921
25
1,059
(554)
-
-
Total comprehensive income/(loss)
2,985
5,278
2,728
3,414
3,685
1,169
(759)
51
2,923
3,834
Dividends from joint ventures
1,200
1,250
1,226
1,109
-
-
-
-
-
1,375
Share of net profit/(loss) from
joint ventures
1,493
2,639
1,091
1,366
1,307
541
(682)
227
1,462
1,917
Share of other comprehensive
income/(loss) from joint ventures (ii)
-
-
-
-
435
12
397
(208)
-
-
The share of profit and other comprehensive loss for the year ended 31 December 2018 in all individually immaterial joint ventures accounted for using equity method in aggregate was RMB 2,052 million (2017: RMB 3,925 million) and RMB 839 million (2017: other comprehensive income RMB 994 million) respectively. As at 31 December 2018, the carrying amount of all individually immaterial joint ventures accounted for using equity method in aggregate was RMB 22,982 million (31 December 2017: RMB 21,552 million).
12 LONG-TERM EQUITY INVESTMENTS (Continued)
(c) Major financial information of principal associates
Summarised balance sheet and reconciliation to their carrying amounts in respect of the Group's principal associates:
Pipeline Ltd
Sinopec Finance
SIBUR (i)
Zhongtian Synergetic Energy
CIR
At 31
December
2018
At 31
December
2017
At 31
December
2018
At 31
December
2017
At 31
December
2018
At 31
December
2017
At 31
December
2018
At 31
December
2017
At 31
December
2018
At 31
December
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Current assets
12,498
11,317
209,837
161,187
22,502
20,719
7,477
8,232
6,712
5,612
Non-current assets
39,320
40,972
16,359
17,782
170,796
158,938
49,961
51,553
1,828
1,673
Current liabilities
(1,020)
(933)
(200,402)
(154,212)
(23,293)
(20,554)
(7,252)
(10,668)
(961)
(908)
Non-current liabilities
(3,026)
(3,176)
(332)
(6)
(58,628)
(61,771)
(31,436)
(31,494)
(673)
(170)
Net assets
47,772
48,180
25,462
24,751
111,377
97,332
18,750
17,623
6,906
6,207
Net assets attributable to owners
of the Company
47,772
48,180
25,462
24,751
110,860
96,761
18,750
17,623
6,906
6,207
Net assets attributable to
minority interests
-
-
-
-
517
571
-
-
-
-
Share of net assets from associates
23,886
24,090
12,476
12,128
11,086
9,676
7,266
6,829
3,453
3,104
Carrying Amounts
23,886
24,090
12,476
12,128
11,086
9,676
7,266
6,829
3,453
3,104
Summarised income statement
Year ended 31 December
Pipeline Ltd
Sinopec Finance
SIBUR (i)
Zhongtian Synergetic Energy
CIR
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Turnover
4,746
5,644
4,536
3,542
59,927
52,496
12,235
3,569
2,856
2,563
Profit/(loss) for the year
2,022
2,543
1,868
1,536
10,400
9,601
1,142
123
583
(610)
Other comprehensive (loss)/income
-
-
(157)
(246)
6,410
(260)
-
-
116
(334)
Total comprehensive income/(loss)
2,022
2,543
1,711
1,290
16,810
9,341
1,142
123
699
(944)
Dividends declared by associates
1,207
-
490
-
271
221
-
-
-
-
Share of profit/(loss) from associates
1,011
1,272
915
753
1,040
960
443
48
292
(305)
Share of other comprehensive
(loss)/income from associates (ii)
-
-
(77)
(121)
641
(26)
-
-
58
(167)
The share of profit and other comprehensive loss for the year ended 31 December 2018 in all individually immaterial associates accounted for using equity method in aggregate was RMB 3,550 million (2017: RMB 3,182 million) and RMB 844 million (2017 other comprehensive income: RMB 569 million) respectively. As at 31 December 2018, the carrying amount of all individually immaterial associates accounted for using equity method in aggregate was RMB 31,370 million (31 December 2017: RMB 23,899 million).
Note:
(i) Sinopec is able to exercise significant influence in SIBUR since Sinopec has a member in SIBUR's Board of Director and has a member in SIBUR's Management Board.
(ii) Including foreign currency translation differences.
13 FIXED ASSETS
The Group
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Fixed assets (a)
617,762
650,774
Fixed assets pending for disposal
50
146
Total
617,812
650,920
(a) Fixed assets
Plants
and buildings
Oil and
gas properties
Equipment,
machinery
and others
Total
RMB million
RMB million
RMB million
RMB million
Cost:
Balance at 1 January 2018
120,013
667,657
940,312
1,727,982
Additions for the year
221
1,567
3,856
5,644
Transferred from construction in progress
3,741
24,366
45,103
73,210
Reclassifications
1,634
138
(1,772)
-
Decreases for the year
(3,666)
(146)
(22,151)
(25,963)
Exchange adjustments
98
2,142
147
2,387
Balance at 31 December 2018
122,041
695,724
965,495
1,783,260
Accumulated depreciation:
Balance at 1 January 2018
48,368
456,459
498,246
1,003,073
Additions for the year
4,038
48,616
47,250
99,904
Reclassifications
494
76
(570)
-
Decreases for the year
(1,738)
(124)
(16,543)
(18,405)
Exchange adjustments
43
1,744
76
1,863
Balance at 31 December 2018
51,205
506,771
528,459
1,086,435
Provision for impairment losses:
Balance at 1 January 2018
3,832
39,358
30,945
74,135
Additions for the year
274
4,027
1,848
6,149
Decreases for the year
(177)
(1)
(1,178)
(1,356)
Exchange adjustments
-
133
2
135
Balance at 31 December 2018
3,929
43,517
31,617
79,063
Net book value:
Balance at 31 December 2018
66,907
145,436
405,419
617,762
Balance at 31 December 2017
67,813
171,840
411,121
650,774
The Company
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Fixed assets (a)
302,048
329,814
Fixed assets pending for disposal
34
-
Total
302,082
329,814
13 FIXED ASSETS (Continued)
The Company (Continued)
(a) Fixed assets
Plants
and buildings
Oil and
gas properties
Equipment,
machinery
and others
Total
RMB million
RMB million
RMB million
RMB million
Cost:
Balance at 1 January 2018
49,022
555,133
456,939
1,061,094
Additions for the year
-
1,292
347
1,639
Transferred from construction in progress
825
19,482
19,344
39,651
Reclassifications
1,092
(3)
(1,089)
-
Transferred from subsidiaries
5
132
542
679
Transferred to subsidiaries
(133)
(876)
(71)
(1,080)
Decreases for the year
(1,984)
(223)
(8,655)
(10,862)
Balance at 31 December 2018
48,827
574,937
467,357
1,091,121
Accumulated depreciation:
Balance at 1 January 2018
22,402
379,137
271,849
673,388
Additions for the year
1,624
38,728
21,391
61,743
Reclassifications
202
(2)
(200)
-
Transferred from subsidiaries
3
115
299
417
Transferred to subsidiaries
(64)
(249)
(23)
(336)
Decreases for the year
(998)
(156)
(7,278)
(8,432)
Balance at 31 December 2018
23,169
417,573
286,038
726,780
Provision for impairment losses:
Balance at 1 January 2018
1,797
34,271
21,824
57,892
Additions for the year
107
4,027
575
4,709
Reclassifications
-
-
-
-
Transferred from subsidiaries
-
-
31
31
Decreases for the year
(24)
(1)
(314)
(339)
Balance at 31 December 2018
1,880
38,297
22,116
62,293
Net book value:
Balance at 31 December 2018
23,778
119,067
159,203
302,048
Balance at 31 December 2017
24,823
141,725
163,266
329,814
The additions to oil and gas properties of the Group and the Company for the year ended 31 December 2018 included RMB 1,567 million (2017: RMB 1,627 million) (Note 30) and RMB 1,292 million (2017: RMB 982 million), respectively of the estimated dismantlement costs for site restoration.
Impairment losses on fixed assets for the year ended 31 December 2018 primarily represent impairment losses recognised in the exploration and production ("E&P") segment of RMB 4,274 million (2017: RMB 12,611 million) on fixed assets, for the chemicals segment of RMB 1,252 million (2017: RMB 4,779 million) of fixed assets and for the refining segment of RMB 353 million (2017: RMB 1,836 million) of fixed assets. The primary factor resulting in the E&P segment impairment loss was downward revision of oil and gas reserve in certain fields. The carrying values of these E&P properties were written down to recoverable amounts which were determined based on the present values of the expected future cash flows of the assets using a pre-tax discount rate 10.47% (2017: 10.47%). Further future downward revisions to the Group's oil price outlook would lead to further impairments which, in aggregate, are likely to be material. It is estimated that a general decrease of 5% in oil price, with all other variables held constant, would result in additional impairment loss in Group's fixed assets relating to oil and gas producing activities by approximately RMB 312 million (2017: RMB 3,145 million). It is estimated that a general increase of 5% in operating cost, with all other variables held constant, would result in additional impairment in Group's fixed assets relating to oil and gas producing activities by approximately RMB 315 million (2017:RMB 2,659 million). It is estimated that a general increase of 5% in discount rate, with all other variables held constant, would result in less impairment loss on the Group's properties, plant and equipment relating to oil and gas producing activities by approximately RMB 5 million (2017: additional RMB 461 million). The assets in the refining segment were written down due to the suspension of operations of certain production facilities, while the assets in the chemical segment were written down because of evidence indicates the economic performance of certain production facilities are worse than expected and due to the suspension of operations of certain production facilities.
At 31 December 2018 and 31 December 2017, the Group and the Company had no individually significant fixed assets which were pledged.
At 31 December 2018 and 31 December 2017, the Group and the Company had no individually significant fixed assets which were temporarily idle or pending for disposal.
At 31 December 2018 and 31 December 2017, the Group and the Company had no individually significant fully depreciated fixed assets which were still in use.
14 CONSTRUCTION IN PROGRESS
The Group
The Company
RMB million
RMB million
Cost:
Balance at 1 January 2018
120,425
50,459
Additions for the year
108,555
49,426
Disposals for the year
(20)
(4)
Transferred to subsidiaries
-
(378)
Dry hole costs written off
(6,921)
(6,527)
Transferred to fixed assets
(73,210)
(39,651)
Reclassification to other assets
(10,066)
(1,314)
Exchange adjustments
54
-
Balance at 31 December 2018
138,817
52,011
Provision for impairment losses:
Balance at 1 January 2018
1,780
413
Additions for the year
28
-
Decreases for the year
(1)
-
Exchange adjustments
47
-
Balance at 31 December 2018
1,854
413
Net book value:
Balance at 31 December 2018
136,963
51,598
Balance at 31 December 2017
118,645
50,046
At 31 December 2018, major construction projects of the Group are as follows:
Percentage
Accumulated
of project
interest
Balance at
Balance at
investment
capitalised at
Budgeted
1 January
Net change
31 December
to budgeted
Source of
31 December
Project name
amount
2018
for the year
2018
amount
funding
2018
RMB million
RMB million
RMB million
RMB million
RMB million
Zhongke Refine Integration Project
34,667
6,990
10,789
17,779
51%
Bank loans &
self-financing
184
Wen 23 Gas Storage Project
(First-stage)
13,865
1,329
2,099
3,428
25%
Bank loans &
self-financing
51
Tianjin LNG Project
13,639
3,154
(1,116)
2,038
86%
Bank loans &
self-financing
180
Xinjiang Coal-based Substitute
Natural Gas (SNG) Export Pipeline
Construction Project (First-stage)
11,589
1,692
3,990
5,682
49%
Bank loans &
self-financing
50
Hainan Refine Paraxylene plant and supporting project
3,680
794
1,800
2,594
70%
Bank loans &
self-financing
6
15 INTANGIBLE ASSETS
The Group
Land use
rights
Patents
Non-patent
technology
Operation
rights
Others
Total
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Cost:
Balance at 1 January 2018
75,728
5,160
3,845
48,613
4,662
138,008
Additions for the year
9,699
88
228
3,948
710
14,673
Decreases for the year
(696)
(18)
(44)
(345)
(107)
(1,210)
Balance at 31 December 2018
84,731
5,230
4,029
52,216
5,265
151,471
Accumulated amortisation:
Balance at 1 January 2018
16,978
3,168
2,774
14,206
2,870
39,996
Additions for the year
3,191
230
268
3,010
426
7,125
Decreases for the year
(183)
(1)
(45)
(79)
(96)
(404)
Balance at 31 December 2018
19,986
3,397
2,997
17,137
3,200
46,717
Provision for impairment losses:
Balance at 1 January 2018
224
482
24
139
17
886
Additions for the year
9
-
-
9
-
18
Decreases for the year
(2)
-
-
(3)
-
(5)
Balance at 31 December 2018
231
482
24
145
17
899
Net book value:
Balance at 31 December 2018
64,514
1,351
1,008
34,934
2,048
103,855
Balance at 31 December 2017
58,526
1,510
1,047
34,268
1,775
97,126
Amortisation of the intangible assets of the Group charged for the year ended 31 December 2018 is RMB 5,414 million (2017: RMB 4,468 million).
16 GOODWILL
Goodwill is allocated to the following Group's cash-generating units:
Name of investees
Principal activities
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Sinopec Beijing Yanshan Petrochemical Branch ("Sinopec Yanshan")
Manufacturing of intermediate petrochemical products and petroleum products
1,004
1,004
Sinopec Zhenhai Refining and Chemical Branch ("Sinopec Zhenhai")
Manufacturing of intermediate petrochemical products and petroleum products
4,043
4,043
Shanghai SECCO Petrochemical Company Limited
("Shanghai SECCO") (Note 51)
Production and sale of petrochemical products
2,541
2,541
Sinopec (Hong Kong) Limited
Trading of petrochemical products
921
879
Other units without individual significant goodwill
167
167
Total
8,676
8,634
Goodwill represents the excess of the cost of purchase over the fair value of the underlying assets and liabilities. The recoverable amounts of the above cash generating units are determined based on value in use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a one-year period and pre-tax discount rates primarily ranging from 11.7% to 12.3% (2017: 10.8% to 11.4%). Cash flows beyond the one-year period are maintained constant. Based on the estimated recoverable amount, no major impairment loss was recognised.
Key assumptions used for cash flow forecasts for these entities are the gross margin and sales volume. Management determined the budgeted gross margin based on the gross margin achieved in the period immediately before the budget period and management's expectation on the future trend of the prices of crude oil and petrochemical products. The sales volume was based on the production capacity and/or the sales volume in the period immediately before the budget period.
17 LONG-TERM DEFERRED EXPENSES
Long-term deferred expenses primarily represent prepaid rental expenses and catalysts expenditures.
18 DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and liabilities before the consolidated elimination adjustments are as follows:
Deferred tax assets
Deferred tax liabilities
At 31 December
At 31 December
At 31 December
At 31 December
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
Receivables and inventories
2,563
381
-
-
Payables
1,808
1,925
-
-
Cash flow hedges
1,131
165
(27)
(50)
Fixed assets
15,427
14,150
(8,666)
(9,928)
Tax value of losses carried forward
3,709
2,325
-
-
Available-for-sale securities
-
117
-
-
Other equity instrument investments
117
-
(1)
-
Intangible assets
474
227
(535)
(563)
Others
174
180
(428)
(264)
Deferred tax assets/(liabilities)
25,403
19,470
(9,657)
(10,805)
The consolidated elimination amount between deferred tax assets and liabilities are as follows:
At 31 December
2018
At 31 December
2017
RMB million
RMB million
Deferred tax assets
3,709
4,339
Deferred tax liabilities
3,709
4,339
18 DEFERRED TAX ASSETS AND LIABILITIES (Continued)
Deferred tax assets and liabilities after the consolidated elimination adjustments are as follows:
At 31 December
2018
At 31 December
2017
RMB million
RMB million
Deferred tax assets
21,694
15,131
Deferred tax liabilities
5,948
6,466
At 31 December 2018, certain subsidiaries of the Company did not recognise deferred tax of deductible loss carried forward of RMB 18,308 million (2017: RMB 20,821 million), of which RMB 2,437 million (2017: RMB 5,938 million) was incurred for the year ended 31 December 2018, because it was not probable that the related tax benefit will be realised. These deductible losses carried forward of RMB 2,373 million, RMB 3,887 million, RMB 3,673 million, RMB 5,938 million and RMB 2,437 million will expire in 2019, 2020, 2021, 2022, 2023 and after, respectively.
Periodically, management performed assessment on the probability that future taxable profit will be available over the period which the deferred tax assets can be realised or utilised. In assessing the probability, both positive and negative evidence was considered, including whether it is probable that the operations will have sufficient future taxable profits over the periods which the deferred tax assets are deductible or utilised and whether the tax losses result from identifiable causes which are unlikely to recur. During the year ended 31 December 2018, write-down of deferred tax assets amounted to RMB 188 million (2017: RMB 26 million) (Note 48).
19 OTHER NON-CURRENT ASSETS
Other non-current assets mainly represent long-term receivables, prepayments for construction projects and purchases of equipment.
20 DETAILS OF IMPAIRMENT LOSSES
At 31 December 2018, impairment losses of the Group are analysed as follows:
Note
Balance at
31 December
2017
Changes in
significant
accounting
policies
(Note 3(26))
Balance at
1 January
2018
Provision for
the year
Written back for the year
Written off
for the year
Other
increase/
(decrease)
Balance at
31 December
2018
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Allowance for doubtful accounts
Included: Bills receivable and accounts receivable
8
612
-
612
83
(77)
(19)
7
606
Prepayments
9
25
-
25
31
(2)
(1)
-
53
Other receivables
10
1,486
-
1,486
78
(69)
(18)
4
1,481
2,123
-
2,123
192
(148)
(38)
11
2,140
Inventories
11
1,155
-
1,155
5,535
(114)
(217)
17
6,376
Long-term equity investments
12
1,614
-
1,614
7
-
(13)
78
1,686
Fixed assets
13
74,135
-
74,135
6,149
-
(1,195)
(26)
79,063
Construction in progress
14
1,780
-
1,780
28
-
(1)
47
1,854
Intangible assets
15
886
-
886
-
-
(2)
15
899
Goodwill
16
7,861
-
7,861
-
-
-
-
7,861
Others
49
(16)
33
97
-
-
(28)
102
Total
89,603
(16)
89,587
12,008
(262)
(1,466)
114
99,981
The reasons for recognising impairment losses are set out in the respective notes of respective assets.
21 SHORT-TERM LOANS
The Group's short-term loans represent:
At 31 December 2018
At 31 December 2017
Original
currency
million
Exchange
rates
RMB
million
Original
currency
million
Exchange
rates
RMB
million
Short-term bank loans
17,088
31,105
-Renminbi loans
13,201
23,685
-US Dollar loans
566
6.8632
3,887
1,136
6.5342
7,420
Short-term other loans
300
299
-Renminbi loans
300
299
Short-term loans from Sinopec Group Company
and fellow subsidiaries
27,304
23,297
-Renminbi loans
3,061
1,706
-US Dollar loans
3,319
6.8632
22,780
3,010
6.5342
19,668
-HK Dollar loans
1,645
0.8762
1,441
2,277
0.8359
1,903
-Singapore Dollar loans
-
-
-
4
4.8831
20
-Euro loans
3
7.8473
22
-
7.8023
-
Total
44,692
54,701
At 31 December 2018, the Group's interest rates on short-term loans were from interest 0.80% to 5.22% (At 31December 2017: from interest 0.70% to 6.09%). The majority of the above loans are by credit.
At 31 December 2018 and 31 December 2017, the Group had no significant overdue short-term loans.
22 BILLS PAYABLE AND ACCOUNTS PAYABLE
The Group
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Bills payable (a)
6,416
6,462
Accounts payable (b)
186,341
200,073
Total
192,757
206,535
(a) Bills payable
Bills payable primarily represented bank accepted bills for the purchase of material, goods and products. Bills payable were due within one year.
At 31 December 2018 and 31 December 2017, the Group had no overdue unpaid bills.
(b) Accounts payable
At 31 December 2018 and 31 December 2017, the Group had no individually significant accounts payable aged over one year.
23 CONTRACT LIABILITIES
As at 31 December 2018, the Group's contract liabilities primarily present advances from customers. Related performance obligations are satisfied and revenue is recognised within one year.
As at 1 January 2018, the Group's contract liabilities was RMB 120,734 million, of which RMB 119,138 million was recognised as revenue in 2018.
24 EMPLOYEE BENEFITS PAYABLE
At 31 December 2018 and 31 December 2017, the Group's employee benefits payable primarily represented wages payable and social insurance payables.
25 TAXES PAYABLE
The Group
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Value-added tax payable
9,810
8,899
Consumption tax payable
59,944
39,623
Income tax payable
6,699
13,015
Mineral resources compensation fee payable
138
175
Other taxes
10,469
10,228
Total
87,060
71,940
26 OTHER PAYABLES
At 31 December 2018 and 31 December 2017, other payables of the Group over one year primarily represented payables for constructions.
27 NON-CURRENT LIABILITIES DUE WITHIN ONE YEAR
The Group's non-current liabilities due within one year represent:
At 31 December 2018
At 31 December 2017
Original
currency
million
Exchange
rates
RMB
million
Original
currency
million
Exchange
rates
RMB
million
Long-term bank loans
- Renminbi loans
12,039
1,379
- US Dollar loans
5
6.8632
35
4
6.5342
23
12,074
1,402
Long-term loans from Sinopec Group Company and
fellow subsidiaries
- Renminbi loans
4,361
2,014
4,361
2,014
Long-term loans due within one year
16,435
3,416
Debentures payable due within one year
- Renminbi debentures
-
16,000
- US Dollar debentures
-
-
-
1,000
6.5342
6,532
-
22,532
Others
1,015
733
Non-current liabilities due within one year
17,450
26,681
At 31 December 2018 and 31 December 2017, the Group had no significant overdue long-term loans.
28 LONG-TERM LOANS
The Group's long-term loans represent:
At 31 December 2018
At 31 December 2017
Interest rate and final maturity
Original
currency
million
Exchange
rates
RMB
million
Original
currency
million
Exchange
rates
RMB
million
Long-term bank loans
- Renminbi loans
Interest rates ranging from interest 1.08% to 4.66% per annum at 31 December 2018 with maturities through 2033
31,025
25,644
- US Dollar loans
Interest rates ranging from interest 1.55% to 4.29% per annum at 31 December 2018 with maturities through 2031
16
6.8632
109
29
6.5342
192
Less: Current portion
(12,074)
(1,402)
Long-term bank loans
19,060
24,434
Long-term loans from Sinopec Group Company and fellow
subsidiaries
- Renminbi loans
Interest rates ranging from interest free to 4.99% per annum at 31 December 2018 with maturities through 2030
46,877
45,334
Less: Current portion
(4,361)
(2,014)
Long-term loans from Sinopec Group Company and fellow
subsidiaries
42,516
43,320
Total
61,576
67,754
The maturity analysis of the Group's long-term loans is as follows:
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Between one and two years
40,004
16,822
Between two and five years
11,999
48,238
After five years
9,573
2,694
Total
61,576
67,754
Long-term loans are primarily unsecured, and carried at amortised costs.
29 DEBENTURES PAYABLE
The Group
At 31 December
2018
RMB million
At 31 December
2017
RMB million
Debentures payable:
- Corporate Bonds (i)
31,951
53,902
Less: Current portion
-
(22,532)
Total
31,951
31,370
Note:
(i) These corporate bonds are carried at amortised cost, including USD denominated corporate bonds of RMB 11,951 million, and RMB denominated corporate bonds of RMB 20,000 million (2017: USD denominated corporate bonds of RMB 17,902 million, and RMB denominated corporate bonds of RMB 36,000 million). At 31 December 2018, corporate bonds of RMB 11,951 million (2017: RMB 17,902 million) are guaranteed by Sinopec Group Company.
30 PROVISIONS
Provisions primarily represent provision for future dismantlement costs of oil and gas properties. The Group has established certain standardised measures for the dismantlement of its retired oil and gas properties by making reference to the industry practices and is thereafter constructively obligated to take dismantlement measures of its retired oil and gas properties. Movement of provision of the Group's obligations for the dismantlement of its retired oil and gas properties is as follows:
The Group
RMB million
Balance at 1 January 2018
39,407
Provision for the year
1,567
Accretion expenses
1,438
Utilised for the year
(598)
Exchange adjustments
193
Balance at 31 December 2018
42,007
31 OTHER NON-CURRENT LIABILITIES
Other non-current liabilities primarily represent long-term payables, special payables and deferred income.
32 SHARE CAPITAL
The Group
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Registered, issued and fully paid:
95,557,771,046 domestic listed A shares (2017: 95,557,771,046) of RMB 1.00 each
95,558
95,558
25,513,438,600 overseas listed H shares (2017: 25,513,438,600) of RMB 1.00 each
25,513
25,513
Total
121,071
121,071
The Company was established on 25 February 2000 with a registered capital of 68.8 billion domestic state-owned shares with a par value of RMB 1.00 each. Such shares were issued to Sinopec Group Company in consideration for the assets and liabilities transferred to the Company (Note 1).
Pursuant to the resolutions passed at an Extraordinary General Meeting held on 25 July 2000 and approvals from relevant government authorities, the Company is authorised to increase its share capital to a maximum of 88.3 billion shares with a par value of RMB 1.00 each and offer not more than 19.5 billion shares with a par value of RMB 1.00 each to investors outside the PRC. Sinopec Group Company is authorised to offer not more than 3.5 billion shares of its shareholdings in the Company to investors outside the PRC. The shares sold by Sinopec Group Company to investors outside the PRC would be converted into H shares.
In October 2000, the Company issued 15,102,439,000 H shares with a par value of RMB 1.00 each, representing 12,521,864,000 H shares and 25,805,750 American Depositary Shares ("ADSs", each representing 100 H shares), at prices of HKD 1.59 per H share and USD 20.645 per ADS, respectively, by way of a global initial public offering to Hong Kong and overseas investors. As part of the global initial public offering, 1,678,049,000 state-owned ordinary shares of RMB 1.00 each owned by Sinopec Group Company were converted into H shares and sold to Hong Kong and overseas investors.
In July 2001, the Company issued 2.8 billion listed A shares with a par value of RMB 1.00 each at RMB 4.22 by way of a public offering to natural persons and institutional investors in the PRC.
During the year ended 31 December 2010, the Company issued 88,774 listed A shares with a par value of RMB 1.00 each, as a result of exercise of 188,292 warrants entitled to the Bonds with Warrants.
During the year ended 31 December 2011, the Company issued 34,662 listed A shares with a par value of RMB 1.00 each, as a result of conversion by the holders of the 2011 Convertible Bonds.
During the year ended 31 December 2012, the Company issued 117,724,450 listed A shares with a par value of RMB 1.00 each, as a result of conversion by the holders of the 2011 Convertible Bonds.
On 14 February 2013, the Company issued 2,845,234,000 listed H shares ("the Placing") with a par value of RMB 1.00 each at the Placing Price of HKD 8.45 per share. The aggregate gross proceeds from the Placing amounted to approximately HKD 24,042,227,300.00 and the aggregate net proceeds (after deduction of the commissions and estimated expenses) amounted to approximately HKD 23,970,100,618.00.
In June 2013, the Company issued 21,011,962,225 listed A shares and 5,887,716,600 listed H shares as a result of bonus issues of 2 shares converted from the retained earnings, and 1 share transferred from capital reserve for every 10 existing shares.
During the year ended 31 December 2013, the Company issued 114,076 listed A shares with a par value of RMB 1.00 each, as a result of exercise of conversion by the holders of the 2011 Convertible Bonds.
During the year ended 31 December 2014, the Company issued 1,715,081,853 listed A shares with a par value of RMB 1.00 each, as a result of exercise of conversion by the holders of the 2011 Convertible Bonds.
During the year ended 31 December 2015, the Company issued 2,790,814,006 listed A shares with a par value of RMB 1.00 each, as a result of conversion by the holders of the 2011 Convertible Bonds.
All A shares and H shares rank pari passu in all material aspects.
32 SHARE CAPITAL (Continued)
Capital management
Management optimises the structure of the Group's capital, which comprises of equity and debts and bonds. In order to maintain or adjust the capital structure of the Group, management may cause the Group to issue new shares, adjust the capital expenditure plan, sell assets to reduce debt, or adjust the proportion of short-term and long-term loans and bonds. Management monitors capital on the basis of the debt-to-capital ratio, which is calculated by dividing long-term loans (excluding current portion) and debentures payable, by the total of equity attributable to owners of the Company and long-term loans (excluding current portion) and debentures payable, and liability-to-asset ratio, which is calculated by dividing total liabilities by total assets. Management's strategy is to make appropriate adjustments according to the Group's operating and investment needs and the changes of market conditions, and to maintain the debt-to-capital ratio and the liability-to-asset ratio of the Group at a range considered reasonable. As at 31 December 2018, the debt-to-capital ratio and the liability-to-asset ratio of the Group were 11.5% (2017: 12.0%) and 46.1% (2017: 46.5%), respectively.
The schedule of the contractual maturities of loans and commitments are disclosed in Notes 28 and 55, respectively.
There were no changes in the management's approach to capital management of the Group during the year. Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements.
33 CAPITAL RESERVE
The movements in capital reserve of the Group are as follows:
RMB million
Balance at 1 January 2018
119,557
Transaction with minority interests
(12)
Others
(353)
Balance at 31 December 2018
119,192
Capital reserve represents mainly: (a) the difference between the total amount of the par value of shares issued and the amount of the net assets transferred from Sinopec Group Company in connection with the Reorganisation; (b) share premiums derived from issuances of H shares and A shares by the Company and excess of cash paid by investors over their proportionate shares in share capital, the proportionate shares of unexercised portion of the Bond with Warrants at the expiration date, and the amount transferred from the proportionate liability component and the derivative component of the converted portion of the 2011 Convertible Bonds; (c) difference between consideration paid for the combination of entities under common control and the transactions with minority interests over the carrying amount of the net assets acquired.
34 OTHER COMPREHENSIVE INCOME
The Group
(a) The changes of other comprehensive income in consolidated income statement
Year ended 31 December 2018
Before-tax
amount
Tax
effect
Net-of-tax
amount
RMB million
RMB million
RMB million
Cash flow hedges:
Effective portion of changes in fair value of hedging instruments
recognised during the year
(12,500)
2,159
(10,341)
(Less)/Add: Reclassification adjustments for amounts transferred to the
consolidated income statement
(730)
130
(600)
Subtotal
(11,770)
2,029
(9,741)
Changes in fair value of other equity instrument investments
(41)
(12)
(53)
Subtotal
(41)
(12)
(53)
Other comprehensive income that can be converted into profit or loss
under the equity method
(240)
11
(229)
Subtotal
(240)
11
(229)
Foreign currency translation differencess
3,399
-
3,399
Subtotal
3,399
-
3,399
Other comprehensive income
(8,652)
2,028
(6,624)
34 OTHER COMPREHENSIVE INCOME (Continued)
The Group (Continued)
(a) The changes of other comprehensive income in consolidated income statement (Continued)
Year ended 31 December 2017
Before-tax
amount
Tax effect
Net-of-tax
amount
RMB million
RMB million
RMB million
Cash flow hedges:
Effective portion of changes in fair value of hedging instruments
recognised during the year
(1,314)
240
(1,074)
Less/(Add): Adjustments of amounts transferred to initial carrying amount of
hedged items
4
(1)
3
Reclassification adjustments for amounts transferred to the
consolidated income statement
575
(72)
503
Subtotal
(1,893)
313
(1,580)
Changes in fair value of available-for-sale financial assets recognised during the year
(57)
-
(57)
Subtotal
(57)
-
(57)
Share of other comprehensive loss in associates and joint ventures
1,053
-
1,053
Subtotal
1,053
-
1,053
Foreign currency translation differences
(3,792)
-
(3,792)
Subtotal
(3,792)
-
(3,792)
Other comprehensive income
(4,689)
313
(4,376)
(b) The change of each item in other comprehensive income
Equity Attributable to shareholders of the company
Minority
interests
Total other
comprehensive
income
Other
comprehensive
income that can
be converted
into profit or
loss under the
equity method
Changes in
fair value of
available-for-sale
financial assets
Changes in
fair value of
other equity
instrument
investments
Cash flow hedges
Foreign currency
translation
differences
Subtotal
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
31 December 2016
(4,161)
97
-
1,132
2,000
(932)
(1,888)
(2,820)
Changes in 2017
680
(40)
-
(1,642)
(2,479)
(3,481)
(895)
(4,376)
31 December 2017
(3,481)
57
-
(510)
(479)
(4,413)
(2,783)
(7,196)
Change in accounting policy
-
(57)
45
-
-
(12)
-
(12)
1 January 2018
(3,481)
-
45
(510)
(479)
(4,425)
(2,783)
(7,208)
Changes in 2018
(183)
-
(41)
(4,407)
2,282
(2,349)
994
(1,355)
31 December 2018
(3,664)
-
4
(4,917)
1,803
(6,774)
(1,789)
(8,563)
As at 31 December 2018, cash flow hedge reserve amounted to a loss of RMB 4,932 million (31 December 2017: a loss of RMB 460 million), of which a loss of RMB 4,917 million was attribute to shareholders of the Company (31 December 2017: a loss of RMB 510 million).
35 SURPLUS RESERVES
Movements in surplus reserves are as follows:
The Group
Statutory
surplus reserve
Discretionary
surplus reserves
Total
RMB million
RMB million
RMB million
Balance at 1 January 2018
82,682
117,000
199,682
Appropriation
3,996
-
3,996
Balance at 31 December 2018
86,678
117,000
203,678
The PRC Company Law and Articles of Association of the Company have set out the following profit appropriation plans:
(a) 10% of the net profit is transferred to the statutory surplus reserve. In the event that the reserve balance reaches 50% of the registered capital, no transfer is needed;
(b) After the transfer to the statutory surplus reserve, a transfer to discretionary surplus reserve can be made upon the passing of a resolution at the shareholders' meeting.
36 OPERATING INCOME AND OPERATING COSTS
The Group
The Company
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
Income from principal operations
2,825,613
2,300,470
1,022,195
824,100
Income from other operations
65,566
59,723
36,298
33,378
Total
2,891,179
2,360,193
1,058,493
857,478
Operating costs
2,401,012
1,890,398
812,355
633,114
The income from principal operations mainly represents revenue from sales of crude oil, natural gas, refined petroleum products and chemical products. The income from other operations mainly represents revenue from sale of materials, service, rental income and others. Operating costs primarily represent the products cost related to the principal operations. The Group's segmental information is set out in Note 57.
The detailed information about the Group's operating income is as follows:
2018
2017
RMB million
RMB million
Income from principal operations
2,825,613
2,300,470
Crude oil
519,910
421,585
Gasoline
711,236
600,113
Diesel
594,008
503,406
Basic chemical feedstock
250,884
205,722
Kerosene
168,823
115,739
Synthetic resin
124,618
107,633
Natural gas
43,205
34,277
Synthetic fiber monomers and polymers
77,572
61,998
Others (i)
335,357
249,997
Income from other operations
65,566
59,723
Sale of materials and others
64,503
58,930
Rental income
1,063
793
Total
2,891,179
2,360,193
(i) Others are primarily liquefied petroleum gas and other refinery and chemical by-products and joint products.
37 TAXES AND SURCHARGES
The Group
2018
2017
RMB million
RMB million
Consumption tax
201,901
192,907
City construction tax
18,237
18,274
Education surcharge
13,187
13,811
Resources tax
6,021
4,841
Others
7,152
5,459
Total
246,498
235,292
The applicable tax rate of the taxes and surcharges are set out in Note 4.
38 FINANCIAL EXPENSES
The Group
2018
2017
RMB million
RMB million
Interest expenses incurred
6,376
6,368
Less: Capitalised interest expenses
493
723
Net interest expenses
5,883
5,645
Accretion expenses (Note 30)
1,438
1,501
Interest income
(7,726)
(5,254)
Net foreign exchange gain
(596)
(332)
Total
(1,001)
1,560
The interest rates per annum at which borrowing costs were capitalised during the year ended 31 December 2018 by the Group ranged from 2.37% to 4.66% (2017: 2.37% to 4.41%).
39 CLASSIFICATION OF EXPENSES BY NATURE
The operation costs, selling and distribution expenses, general and administrative expenses, research and development expenses and exploration expenses (including dry holes) in consolidated income statement classified by nature are as follows:
2018
2017
RMB million
RMB million
Purchased crude oil, products and operating supplies and expenses
2,292,983
1,770,651
Personnel expenses
77,721
74,854
Depreciation, depletion and amortisation
109,967
115,310
Exploration expenses (including dry holes)
10,744
11,089
Other expenses
61,083
64,566
Total
2,552,498
2,036,470
40 RESEARCH AND DEVELOPMENT EXPENSES
The research and development expenditures are mainly used for the replacement of resources in upstream, optimising structure and operation upgrades in refining sector, structured adjustment of materials and products in chemical segment.
41 EXPLORATION EXPENSES
Exploration expenses include geological and geophysical expenses and written-off of unsuccessful dry hole costs.
42 IMPAIRMENT LOSSES
The Group
2018
2017
RMB million
RMB million
Receivables
-
110
Inventories
5,421
423
Long-term equity investment
7
936
Fixed assets
6,149
19,836
Construciton in Progress
28
252
Intangible assets
-
19
Others
-
215
Total
11,605
21,791
43 OTHER INCOME
Other income are mainly the government grants related to the business activities.
44 INVESTMENT INCOME
The Group
The Company
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
Income from investment of subsidiaries accounted for under
cost method
-
-
25,390
31,118
Income from investment accounted for under equity method
13,974
16,525
4,259
5,774
Investment income/(loss) from disposal of long-term
equity investments
397
(26)
(2,768)
(21)
Dividend income from holding of other equity instruments
515
-
14
-
Investment income from holding/disposal of available-for
sale financial assets
-
199
-
13
Investment (loss)/income from disposal of financial assets and
liabilities and derivative financial instruments at fair value
through profit or loss
(1,940)
(752)
692
-
(Loss)/gain from ineffective portion of cash flow hedges
(1,604)
(916)
7
(88)
Gain on remeasurement of interests in Shanghai SECCO
-
3,941
-
-
Others
86
89
742
1,262
Total
11,428
19,060
28,336
38,058
45 GAIN FROM CHANGES IN FAIR VALUE
The Group
2018
2017
RMB million
RMB million
Changes in fair value of financial assets and financial liabilities at fair value through gain/(loss), net
3,008
(157)
Unrealised (losses)/gains from ineffective portion cash flow hedges, net
(374)
103
Others
22
41
Total
2,656
(13)
46 NON-OPERATING INCOME
The Group
2018
2017
RMB million
RMB million
Government grants
788
427
Others
1,282
890
Total
2,070
1,317
47 NON-OPERATING EXPENSES
The Group
2018
2017
RMB million
RMB million
Fines, penalties and compensation
276
89
Donations
180
152
Others
2,586
1,468
Total
3,042
1,709
48 INCOME TAX EXPENSE
The Group
2018
2017
RMB million
RMB million
Provision for income tax for the year
27,176
26,668
Deferred taxation
(6,244)
(10,317)
Under-provision for income tax in respect of preceding year
(719)
(72)
Total
20,213
16,279
48 INCOME TAX EXPENSE (Continued)
The Group (Continued)
Reconciliation between actual income tax expense and accounting profit at applicable tax rates is as follows:
2018
2017
RMB million
RMB million
Profit before taxation
100,502
86,573
Expected income tax expense at a tax rate of 25%
25,126
21,643
Tax effect of non-deductible expenses
1,989
1,936
Tax effect of non-taxable income
(5,019)
(5,939)
Tax effect of preferential tax rate (i)
(1,259)
(793)
Effect of income taxes at foreign operations
77
(1,394)
Tax effect of utilisation of previously unrecognised tax losses and temporary differences
(779)
(613)
Tax effect of tax losses not recognised
609
1,485
Write-down of deferred tax assets
188
26
Adjustment for under provision for income tax in respect of preceding years
(719)
(72)
Actual income tax expense
20,213
16,279
Note:
(i) The provision for PRC current income tax is based on a statutory income tax rate of 25% of the assessable income of the Group as determined in accordance with the relevant income tax rules and regulations of the PRC, except for certain entities of the Group in western regions in the PRC are taxed at preferential income tax rate of 15% through the year 2020.
49 DIVIDENDS
(a) Dividends of ordinary shares declared after the balance sheet date
Pursuant to a resolution passed at the director's meeting on 22 March 2019, final dividends in respect of the year ended 31 December 2018 of RMB 0.26 (2017: RMB 0.40) per share totaling RMB 31,479 million (2017: RMB 48,428 million) were proposed for shareholders' approval at the Annual General Meeting. Final cash dividend proposed after the balance sheet date has not been recognised as a liability at the balance sheet date.
(b) Dividends of ordinary shares declared during the year
Pursuant to the Company's Articles of Association and a resolution passed at the Directors' meeting on 24 August 2018, the directors authorised to declare the interim dividends for the year ending 31 December 2018 of RMB 0.16 (2017: RMB 0.10) per share totaling RMB 19,371 million (2017: RMB 12,107 million).
Pursuant to the shareholders' approval at the Annual General Meeting on 15 May 2018, a final dividend of RMB 0.40 per share totaling RMB 48,428 million according to total shares of 4 June 2018 was approved. All dividends have been paid in the year ended 31 December 2018.
Pursuant to the shareholders' approval at the Annual General Meeting on 28 June 2017, a final dividend of RMB 0.17 per share totaling RMB 20,582 million according to total shares of 18 July 2017 was approved. All dividends have been paid in the year ended 31 December 2017.
50 SUPPLEMENTAL INFORMATION TO THE CASH FLOW STATEMENT
The Group
(a) Reconciliation of net profit to cash flows from operating activities:
2018
2017
RMB million
RMB million
Net profit
80,289
70,294
Add:
Impairment losses on assets
11,605
21,791
Credit impairment losses
141
-
Depreciation of fixed assets
99,462
106,149
Amortisation of intangible assets and long-term deferred expenses
10,505
9,161
Dry hole costs written off
6,921
6,876
Net loss on disposal of non-current assets
1,526
1,518
Fair value (gain)/loss
(2,656)
13
Financial expenses
(359)
676
Investment income
(11,428)
(19,060)
Increase in deferred tax assets
(5,079)
(4,707)
Decrease in deferred tax liabilities
(1,165)
(5,610)
Increase in inventories
(3,312)
(28,903)
Safety fund reserve
909
126
Increase in operating receivables
(1,043)
(31,151)
(Decrease)/increase in operating payables
(10,448)
63,762
Net cash flow from operating activities
175,868
190,935
50 SUPPLEMENTAL INFORMATION TO THE CASH FLOW STATEMENT (Continued)
The Group (Continued)
(b) Net change in cash:
2018
2017
RMB million
RMB million
Cash balance at the end of the year
111,922
113,218
Less: Cash at the beginning of the year
113,218
124,468
Net decrease of cash
(1,296)
(11,250)
(c) The analysis of cash held by the Group is as follows:
2018
2017
RMB million
RMB million
Cash at bank and on hand
- Cash on hand
82
14
- Demand deposits
111,840
113,204
Cash at the end of the year
111,922
113,218
51 BUSINESS COMBAINATION
Business combination involving entities not under common control
For the year ended 31 December 2018, significant business combination didn't occur in the Group.
On 26 October 2017, a subsidiary of the Company, Gaoqiao Petrochemical Co., Ltd., purchased 50% equity interest in Shanghai SECCO from BP Chemicals East China Investment Limited with a cash consideration of RMB 10,135 million ("the Transaction"). Before the Transaction, the Company and one of its subsidiaries held 30% and 20% equity interest in Shanghai SECCO, respectively. After the Transaction, the Company, together with its subsidiaries, hold 100% equity interest of Shanghai SECCO, which became a subsidiary of the Company.
Shanghai SECCO is principally engaged in the production and sale of petrochemical products including acrylonitrile, polystyrene, polyethylene, etc.
Share of
Basis of
Income of
the acquiree
from
acquisition
Net profits of
the acquiree
from
acquisition
Operating
cash flow of
the acquiree
from
acquisition
Net cash
flow of
the acquiree
from
acquisition
Acquiree
Time of
acquisition
Cost
of acquisition
acquired
equity
Acquisition
method
Acquisition date
determination
on acquisition date
date to
end of year
date to
end of year
date to
end of year
date to
end of year
Shanghai
26/10/2017
RMB 10,135
50%
Cash
26/10/2017
Acquirer gaining
RMB 5,222
RMB 726
RMB 1,639
RMB 7,205
SECCO
million
actual control
over acquiree
million
million
million
million
Details of combination cost and goodwill are as follows:
Shanghai SECCO
RMB million
Purchase consideration
- Cash consideration for the purchase of 50% equity interest acquired
10,135
- Acquisition-date fair value of the 50% equity interest held before the acquisition
10,135
Total purchase consideration
20,270
Less: Net assets acquired
17,729
Goodwill (Note 16)
2,541
51 BUSINESS COMBAINATION (Continued)
Business combination involving entities not under common control (Continued)
Details of the net assets acquired are as follows:
Fair value
Book value
Book value
at the
Acquisition Date
at the
Acquisition Date
At December 31
2016
Cash and cash equivalents
5,653
5,653
2,343
Bills receivable
641
641
621
Accounts and other receivables
558
558
251
Inventories
1,702
1,558
1,643
Prepayments
1,349
1,349
354
Other current assets
761
791
386
Total current assets
10,664
10,550
5,598
Fixed assets
9,587
4,860
5,665
Construction in progress
231
229
117
Intangible assets
2,937
662
613
Long-term deferred expenses
117
117
168
Deferred tax assets
11
12
19
Other non-current assets
-
7
-
Total non-current assets
12,883
5,887
6,582
Total assets
23,547
16,437
12,180
Accounts and other payables
(2,115)
(2,115)
(936)
Bills payable
-
-
(35)
Advances from customers
(383)
(383)
(376)
Employee benefits payable
(96)
(96)
(99)
Taxes payable
(1,438)
(1,438)
(538)
Total current liabilities
(4,032)
(4,032)
(1,984)
Deferred tax liabilities
(1,786)
-
-
Net assets acquired
17,729
12,405
10,196
The goodwill is attributable to the high profitability of the acquired business and synergy to be achieved post the Transaction among Shanghai SECCO and the Group's existing petrochemical operations located in eastern China.
As of Acquisition Date, a gain of RMB 3,941 million was recognised as a result of remeasuring the 50% equity interest held before the Transaction to its fair value, which is included in investment income (Note 44) in the Group's consolidated income statement for the year ended 31 December 2017.
52 RELATED PARTIES AND RELATED PARTY TRANSACTIONS
(1) Related parties having the ability to exercise control over the Group
The name of the company
:
China Petrochemical Corporation
Unified social credit identifier
:
9111000010169286X1
Registered address
:
No. 22, Chaoyangmen North Street, Chaoyang District, Beijing
Principal activities
:
Exploration, production, storage and transportation (including pipeline transportation), sales and utilisation of crude oil and natural gas; refining; wholesale and retail of gasoline, kerosene and diesel; production, sales, storage and transportation of petrochemical and other chemical products; industrial investment and investment management; exploration, construction, installation and maintenance of petroleum and petrochemical constructions and equipments; manufacturing electrical equipment; research, development, application and consulting services of information technology and alternative energy products; import & export of goods and technology.
Relationship with the Group
:
Ultimate holding company
Types of legal entity
:
State-owned
Authorised representative
:
Dai Houliang
Registered capital
:
RMB 274,900 million
Sinopec Group Company is an enterprise controlled by the PRC government. Sinopec Group Company directly and indirectly holds 68.77% shareholding of the Company.
(2) Related parties not having the ability to exercise control over the Group
Related parties under common control of a parent company with the Company:
Sinopec Finance (Note)
Sinopec Shengli Petroleum Administration Bureau
Sinopec Zhongyuan Petroleum Exploration Bureau
Sinopec Assets Management Corporation
Sinopec Engineering Incorporation
Sinopec Century Bright Capital Investment Limited
Sinopec Petroleum Storage and Reserve Limited
Associates of the Group:
Pipeline Ltd
Sinopec Finance
SIBUR
Zhongtian Synergetic Energy
CIR
Joint ventures of the Group:
FREP
BASF-YPC
Taihu
YASREF
Sinopec SABIC Tianjin
Note: Sinopec Finance is under common control of a parent company with the Company and is also the associate of the Group.
52 RELATED PARTIES AND RELATED PARTY TRANSACTIONS (Continued)
(3) The principal related party transactions with Sinopec Group Company and fellow subsidiaries, associates and joint ventures, which were carried out in the ordinary course of business, are as follows:
The Group
Note
2018
2017
RMB million
RMB million
Sales of goods
(i)
272,789
244,211
Purchases
(ii)
192,224
165,993
Transportation and storage
(iii)
7,319
7,716
Exploration and development services
(iv)
23,489
21,210
Production related services
(v)
28,472
20,824
Ancillary and social services
(vi)
6,664
6,653
Operating lease charges for land
(vii)
7,765
8,015
Operating lease charges for buildings
(vii)
521
510
Other operating lease charges
(vii)
869
626
Agency commission income
(viii)
113
127
Interest income
(ix)
848
807
Interest expense
(x)
1,110
554
Net deposits withdrawn from/(placed with) related parties
(ix)
6,457
(7,441)
Net funds obtained from related parties
(xi)
31,684
19,661
The amounts set out in the table above in respect of the year ended 31 December 2018 and 2017 represent the relevant costs and income as determined by the corresponding contracts with the related parties.
Included in the transactions disclosed above, for the year ended 31 December 2018 are: a) purchases by the Group from Sinopec Group Company and fellow subsidiaries amounting to RMB 140,570 million (2017: RMB 128,863 million) comprising purchases of products and services (i.e. procurement, transportation and storage, exploration and development services and production related services) of RMB 123,772 million (2017: RMB 112,619 million), ancillary and social services provided by Sinopec Group Company and fellow subsidiaries of RMB 6,664 million (2017: RMB 6,652 million), operating lease charges for land, buildings and others paid by the Group of RMB 7,765 million, RMB 521 million and RMB 738 million (2017: RMB 8,015 million, RMB 510 million and RMB 513 million), respectively and interest expenses of RMB 1,110 million (2017: RMB 554 million); and b) sales by the Group to Sinopec Group Company and fellow subsidiaries amounting to RMB 59,472 million (2017: RMB 60,045 million), comprising RMB 58,606 million (2017: RMB 59,213 million) for sales of goods, RMB 848 million (2017: RMB 807 million) for interest income and RMB 18 million (2017: RMB 25 million) for agency commission income.
As at 31 December 2018 and 31 December 2017 there was no guarantee given to banks by the Group in respect of banking facilities to Sinopec Group Company and fellow subsidiaries, associates and joint ventures, except for the disclosure set out in Note 56(b). Guarantees given to banks by the Group in respect of banking facilities to associates and joint ventures are disclosed in Note 56(b).
Notes:
(i) Sales of goods represent the sale of crude oil, intermediate petrochemical products, petroleum products and ancillary materials.
(ii) Purchases represent the purchase of materials and utility supplies directly related to the Group's operations such as the procurement of raw and ancillary materials and related services, supply of water, electricity and gas.
(iii) Transportation and storage represent the cost for the use of railway, road and marine transportation services, pipelines, loading, unloading and storage facilities.
(iv) Exploration and development services comprise direct costs incurred in the exploration and development such as geophysical, drilling, well testing and well measurement services.
(v) Production related services represent ancillary services rendered in relation to the Group's operations such as equipment repair and general maintenance, insurance premium, technical research, communications, firefighting, security, product quality testing and analysis, information technology, design and engineering, construction of oilfield ground facilities, refineries and chemical plants, manufacture of replacement parts and machinery, installation, project management and environmental protection, and management services.
(vi) Ancillary and social services represent expenditures for social welfare and support services such as educational facilities, media communication services, sanitation, accommodation, canteens and property maintenance.
(vii) Operating lease charges represent the rental paid to Sinopec Group Company for operating leases in respect of land, buildings and equipment.
(viii) Agency commission income represents commission earned for acting as an agent in respect of sales of products and purchase of materials for certain entities owned by Sinopec Group Company.
(ix) Interest income represents interest received from deposits placed with Sinopec Finance and Sinopec Century Bright Capital Investment Limited, finance companies controlled by Sinopec Group Company. The applicable interest rate is determined in accordance with the prevailing saving deposit rate.
(x) Interest expense represents interest charges on the loans obtained from Sinopec Group Company and fellow subsidiaries.
(xi) The Group obtained loans, discounted bills and others from to Sinopec Group Company and fellow subsidiaries.
52 RELATED PARTIES AND RELATED PARTY TRANSACTIONS (Continued)
(3) The principal related party transactions with Sinopec Group Company and fellow subsidiaries, associates and joint ventures, which were carried out in the ordinary course of business, are as follows: (Continued)
In connection with the Reorganisation, the Company and Sinopec Group Company entered into a number of agreements under which 1) Sinopec Group Company will provide goods and products and a range of ancillary, social and supporting services to the Group and 2) the Group will sell certain goods to Sinopec Group Company. These agreements impacted the operating results of the Group for the year ended 31 December 2018. The terms of these agreements are summarised as follows:
(a) The Company has entered into a non-exclusive "Agreement for Mutual Provision of Products and Ancillary Services" ("Mutual Provision Agreement") with Sinopec Group Company effective from 1 January 2000 in which Sinopec Group Company has agreed to provide the Group with certain ancillary production services, construction services, information advisory services, supply services and other services and products. While each of Sinopec Group Company and the Company is permitted to terminate the Mutual Provision Agreement upon at least six months' notice, Sinopec Group Company has agreed not to terminate the agreement if the Group is unable to obtain comparable services from a third party. The pricing policy for these services and products provided by Sinopec Group Company to the Group is as follows:
‧ the government-prescribed price;
‧ where there is no government-prescribed price, the government-guidance price;
‧ where there is neither a government-prescribed price nor a government-guidance price, the market price; or
‧ where none of the above is applicable, the price to be agreed between the parties, which shall be based on a reasonable cost incurred in providing such services plus a profit margin not exceeding 6%.
(b) The Company has entered into a non-exclusive "Agreement for Provision of Cultural and Educational, Health Care and Community Services" with Sinopec Group Company effective from 1 January 2000 in which Sinopec Group Company has agreed to provide the Group with certain cultural, educational, health care and community services on the same pricing terms and termination conditions as agreed to in the above Mutual Provision Agreement.
(c) The Company has entered into a number of lease agreements with Sinopec Group Company to lease certain lands and buildings effective on 1 January 2000. The lease term is 40 or 50 years for lands and 20 years for buildings, respectively. The Company and Sinopec Group Company can renegotiate the rental amount every three years for land. The Company and Sinopec Group Company can renegotiate the rental amount for buildings every year. However such amount cannot exceed the market price as determined by an independent third party.
(d) The Company has entered into agreements with Sinopec Group Company effective from 1 January 2000 under which the Group has been granted the right to use certain trademarks, patents, technology and computer software developed by Sinopec Group Company.
(e) The Company has entered into a service station franchise agreement with Sinopec Group Company effective from 1 January 2000 under which its service stations and retail stores would exclusively sell the refined products supplied by the Group.
(f) On the basis of a series of continuing connected transaction agreements signed in 2000, the Company and Sinopec Group Company have signed the Fifth Supplementary Agreement and the Fourth Revised Memorandum of land use rights leasing contract on August 24, 2018, which took effect on January 1, 2019 and made adjustment to "Mutual Supply Agreement", "Agreement for Provision of Cultural and Educational, Health Care and Community Services", "Buildings Leasing Contract", "Intellectual Property Contract" and "Land Use Rights Leasing Contract" etc.,. The memorandum was effective since January 1, 2019. Sinopec Group Company agreed to lease 410 million square meters of land to the Company, and to adjust the total fee of land to about RMB 14 billion, according to the newly confirmed area of leasing land and the situation of land market.
52 RELATED PARTIES AND RELATED PARTY TRANSACTIONS (Continued)
(4) Balances with Sinopec Group Company and fellow subsidiaries, associates and joint ventures
The balances with the Group's related parties at 31 December 2018 and 31 December 2017 are as follows:
The ultimate holding company
Other related companies
At 31 December
2018
At 31 December
2017
At 31 December
2018
At 31 December
2017
RMB million
RMB million
RMB million
RMB million
Cash and cash equivalents
-
-
41,057
47,514
Bills receivable and accounts receivable
11
19
7,544
13,155
Other receivables
33
33
6,901
5,411
Prepayments and other current assets
-
-
731
189
Other non-current assets
-
-
23,482
20,726
Bills payable and accounts payable
19
43
17,511
24,061
Advances from customers
-
12
-
2,763
Contract liabilities
25
-
3,248
-
Other payables
2
104
18,158
18,111
Other non-current liabilities
-
-
12,470
10,165
Short-term loans
-
-
27,304
23,297
Long-term loans (including current portion) (Note)
-
-
46,877
45,334
Note: The long-term borrowings mainly include an interest-free loan with a maturity period of 20 years amounting to RMB 35,560 million from the Sinopec Group Company through the Sinopec Finance. This borrowing is a special arrangement to reduce financing costs and improve liquidity of the Company during its initial global offering in 2000.
Amounts due from/to Sinopec Group Company and fellow subsidiaries, associates and joint ventures, other than short-term loans and long-term loans, bear no interest, are unsecured and are repayable in accordance with normal commercial terms. The terms and conditions associated with short-term loans and long-term loans payable to Sinopec Group Company and fellow subsidiaries are set out in Note 21 and Note 28.
As at and for the year ended 31 December 2018, and as at and for the year ended 31 December 2017, no individually significant impairment losses for bad and doubtful debts were recorded in respect of amounts due from Sinopec Group Company and fellow subsidiaries, associates and joint ventures.
(5) Key management personnel emoluments
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including directors and supervisors of the Group. The key management personnel compensations are as follows:
2018
2017
RMB thousand
RMB thousand
Short-term employee benefits
5,745
5,344
Retirement scheme contributions
351
424
Total
6,096
5,768
53 PRINCIPAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The Group's financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial statements. The Group bases the assumptions and estimates on historical experience and on various other assumptions that it believes to be reasonable and which form the basis for making judgements about matters that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.
The selection of critical accounting policies, the judgements and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the financial statements. The significant accounting policies are set forth in Note 3. The Group believes the following critical accounting policies involve the most significant judgements and estimates used in the preparation of the financial statements.
53 PRINCIPAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)
(a) Oil and gas properties and reserves
The accounting for the exploration and production segment's oil and gas activities is subject to accounting rules that are unique to the oil and gas industry. The Group has used the successful efforts method to account for oil and gas business activities. The successful efforts method reflects the volatility that is inherent in exploring for mineral resources in that costs of unsuccessful exploratory efforts are charged to expense. These costs primarily include dry hole costs, seismic costs and other exploratory costs.
Engineering estimates of the Group's oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgements involved in developing such information. There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as "proved". Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field. In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes. This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in related depreciation rates. Oil and gas reserves have a direct impact on the assessment of the recoverability of the carrying amounts of oil and gas properties reported in the financial statements. If proved reserves estimates are revised downwards, earnings could be affected by changes in depreciation expense or an immediate write-down of the property's carrying amount.
Future dismantlement costs for oil and gas properties are estimated with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with industry practices in the similar geographic area, including estimation of economic life of oil and gas properties, technology and price level. The present values of these estimated future dismantlement costs are capitalised as oil and gas properties with equivalent amounts recognised as provisions for dismantlement costs.
Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense, impairment expense and future dismantlement costs. Capitalised costs of proved oil and gas properties are amortised on a unit-of-production method based on volumes produced and reserves.
(b) Impairment for assets
If circumstances indicate that the net book value of a long-lived asset may not be recoverable, the asset may be considered "impaired", and an impairment loss may be recognised in accordance with "CASs 8 - Impairment of Assets". The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. For goodwill, the recoverable amount is estimated annually. The recoverable amount is the greater of the fair value less costs to sell and the present value of expected future cash flows. It is difficult to precisely estimate the fair value because quoted market prices for the Group's assets or cash-generating units are not readily available. In determining the value of expected future cash flows, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value, which requires significant judgement relating to sales volume, selling price, amount of operating costs and discount rate. The Group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sales volume, selling price, amount of operating costs and discount rate.
(c) Depreciation
Fixed assets are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. Management reviews the estimated useful lives of the assets at least annually in order to determine the amount of depreciation expense to be recorded during any reporting year. The useful lives are based on the Group's historical experience with similar assets and taking into account anticipated technological changes. The depreciation expense for future years is adjusted if there are significant changes from previous estimates.
(d) Measurement of expected credit losses
The Group measures and recognises expected credit losses, considering reasonable and supportable information about the relevant past events, current conditions and forecasts of future economic conditions. The Group regularly monitors and reviews the assumptions used for estimating expected credit losses.
(e) Allowance for diminution in value of inventories
If the costs of inventories become higher than their net realisable values, an allowance for diminution in value of inventories is recognised. Net realisable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Management bases the estimates on all available information, including the current market prices of the finished goods and raw materials, and historical operating costs. If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories would be higher than estimated.
54 PRINCIPAL SUBSIDIARIES
The Company's principal subsidiaries have been consolidated into the Group's financial statements for the year ended 31 December 2018. The following list contains the particulars of subsidiaries which principally affected the results, assets and liabilities of the Group:
Full name of enterprise
Principal activities
Registered
capital/
paid-up capital
Actual
investment
at 31
December
2018
Percentage of
equity interest/
voting right
held by the
Group
Minority
Interests
at 31
December
2018
million
million
%
RMB million
(a) Subsidiaries acquired through group restructuring:
China Petrochemical International Company Limited
Trading of petrochemical products
RMB 1,400
RMB 1,856
100.00
27
China International United Petroleum and
Chemical Company Limited
Trading of crude oil and petrochemical products
RMB 3,000
RMB 4,585
100.00
4,355
Sinopec Catalyst Company Limited
Production and sale of catalyst products
RMB 1,500
RMB 1,562
100.00
271
Sinopec Yangzi Petrochemical Company Limited
Manufacturing of intermediate petrochemical
products and petroleum products
RMB 15,651
RMB 15,651
100.00
-
Sinopec Pipeline Storage & Transportation
Company Limited
Pipeline storage and transportation of crude oil
RMB 12,000
RMB 12,000
100.00
-
Sinopec Lubricant Company Limited
Production and sale of refined petroleum products,
lubricant base oil, and petrochemical materials
RMB 3,374
RMB 3,374
100.00
65
Sinopec Yizheng Chemical Fibre Limited
Liability Company
Production and sale of polyester chips and
polyester fibres
RMB 4,000
RMB 6,713
100.00
-
Sinopec Marketing Co. Limited
("Marketing Company")
Marketing and distribution of refined
petroleum products
RMB 28,403
RMB 20,000
70.42
66,827
Sinopec Kantons Holdings Limited ("Sinopec Kantons")
Provision of crude oil jetty services and natural gas
pipeline transmission services
HKD 248
HKD 3,952
60.33
4,085
Sinopec Shanghai Petrochemical Company Limited
("Shanghai Petrochemical")
Manufacturing of synthetic fibres, resin and plastics,
intermediate petrochemical products and
petroleum products
RMB 10,824
RMB 5,820
50.44
15,168
Fujian Petrochemical Company Limited
("Fujian Petrochemical") (i)
Manufacturing of plastics, intermediate
petrochemical products and petroleum products
RMB 8,140
RMB 4,070
50.00
5,761
(b) Subsidiaries established by the Group:
Sinopec International Petroleum Exploration and
Production Limited ("SIPL")
Investment in exploration, production and
sale of petroleum and natural gas
RMB 8,000
RMB 8,000
100.00
17,952
Sinopec Overseas Investment Holding Limited ("SOIH")
Investment holding of overseas business
USD 1,662
USD 1,662
100.00
-
Sinopec Chemical Sales Company Limited
Marketing and distribution of petrochemical products
RMB 1,000
RMB 1,165
100.00
70
Sinopec Great Wall Energy & Chemical Company Limited
Coal chemical industry investment management,
production and sale of coal chemical products
RMB 22,761
RMB 22,795
100.00
(28)
Sinopec Beihai Refining and Chemical Limited Liability
Company
Import and processing of crude oil, production,
storage and sale of petroleum products and
petrochemical products
RMB 5,294
RMB 5,240
98.98
119
Sinopec Qingdao Refining and Chemical
Company Limited
Manufacturing of intermediate petrochemical
products and petroleum products
RMB 5,000
RMB 4,250
85.00
1,810
Sinopec-SK (Wuhan) Petrochemical Company Limited
("Zhonghan Wuhan")
Production, sale, research and development of
ethylene and downstream byproducts
RMB 6,270
RMB 4,076
65.00
4,560
(c) Subsidiaries acquired through business combination under common control:
Sinopec Hainan Refining and Chemical Company Limited
Manufacturing of intermediate petrochemical
products and petroleum products
RMB 3,986
RMB 2,990
75.00
2,582
Sinopec Qingdao Petrochemical Company Limited
Manufacturing of intermediate petrochemical
products and petroleum products
RMB 1,595
RMB 7,233
100.00
-
Gaoqiao Petrochemical Company Limited
Manufacturing of intermediate petrochemical
products and petroleum products
RMB 10,000
RMB 4,804
55.00
6,851
(d) Subsidiaries acquired through business combination not under common control:
Shanghai SECCO Petrochemical Company Limited
("Shanghai SECCO") (note 51)
Production and sale of petrochemical products
RMB 7,801
RMB 7,801
67.60
5,802
* The minority interests of subsidiaries which the Group holds 100% of equity interests at the end of the year are the minority interests of their subsidiaries.
Except for Sinopec Kantons and SOIH, which are incorporated in Bermuda and Hong Kong, respectively, all of the above principal subsidiaries are incorporated and operate their businesses principally in the PRC.
Note:
(i) The Group consolidated the financial statements of the entity because it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those return through its power over the entity.
54 PRINCIPAL SUBSIDIARIES (Continued)
Summarised financial information on subsidiaries with material minority interests
Set out below are the summarised financial information which the amount before inter-company eliminations for each subsidiary that has minority interests that are material to the Group.
Summarised consolidated balance sheet
Marketing Company
SIPL
Shanghai Petrochemical
Fujian Petrochemical
Sinopec Kantons
Shanghai SECCO
Zhonghan Wuhan
At 31
December
At 31
December
At 31
December
At 31
December
At 31
December
At 31
December
At 31
December
At 31
December
At 31
December
At 31
December
At 31
December
At 31
December
At 31
December
At 31
December
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Current assets
130,861
156,494
16,731
19,555
25,299
19,866
816
992
1,209
1,196
9,537
11,602
2,750
1,636
Current liabilities
(181,766)
(212,620)
(483)
(7,118)
(13,913)
(10,922)
(50)
(376)
(3,722)
(2,351)
(2,233)
(4,174)
(2,333)
(3,975)
Net current (liabilities)/assets
(50,905)
(56,126)
16,248
12,437
11,386
8,944
766
616
(2,513)
(1,155)
7,304
7,428
417
(2,339)
Non-current assets
261,062
253,455
38,020
34,769
19,241
19,743
11,444
9,925
12,895
13,089
12,301
12,797
12,612
13,598
Non-current liabilities
(2,086)
(1,774)
(31,050)
(28,523)
(140)
(146)
(688)
(681)
(132)
(2,430)
(1,698)
(1,740)
-
-
Net non-current assets
258,976
251,681
6,970
6,246
19,101
19,597
10,756
9,244
12,763
10,659
10,603
11,057
12,612
13,598
Summarised consolidated statement of comprehensive income and cash flow
Year ended 31 December
Marketing Company
SIPL
Shanghai Petrochemical
Fujian Petrochemical
Sinopec Kantons
Shanghai SECCO (ii)
Zhonghan Wuhan
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Turnover
1,443,698
1,221,530
5,037
6,136
107,765
92,014
5,261
6,068
1,398
1,498
26,320
5,222
17,134
16,139
Profit for the year
21,995
27,517
3,272
1,075
5,277
6,152
1,595
2,757
1,065
1,046
3,099
726
1,879
2,733
Total comprehensive income
22,538
26,983
4,536
396
5,270
6,152
1,595
2,757
1,067
1,146
3,099
726
1,879
2,733
Comprehensive income/
(loss) attributable to minority
interests
7,780
9,033
2,737
(38)
2,612
3,081
798
1,378
399
433
1,004
235
658
957
Dividends paid to minority
interests
3,964
9,544
-
-
1,616
1,344
600
625
104
70
1,191
-
-
-
Net cash generated from/
(used in) operating activities
24,825
51,038
3,467
2,758
6,695
7,078
38
(558)
738
968
3,766
1,639
3,308
2,976
Note:
(ii) On 26 October 2017, a subsidiary of the Company, Gaoqiao Petrochemical Co., Ltd., purchased 50% equity interest in Shanghai SECCO from BP Chemicals East China Investment Limited. Therefore summarised consolidated statement of comprehensive income and cash flow of Shanghai SECCO presents the results from the acquisition date to 31 December 2017.
55 COMMITMENTS
Operating lease commitments
The Group lease land and buildings, service stations and other equipment through non-cancellable operating leases. These operating leases do not contain provisions for contingent lease rentals. None of the rental agreements contains escalation provisions that may require higher future rental payments.
At 31 December 2018 and 31 December 2017, the future minimum lease payments of the Group under operating leases are as follows:
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Within one year
15,625
11,114
Between one and two years
14,668
11,492
Between two and three years
13,986
10,730
Between three and four years
13,734
10,552
Between four and five years
13,494
10,428
Thereafter
281,287
202,806
Total
352,794
257,122
Capital commitments
At 31 December 2018 and 31 December 2017, the capital commitments of the Group are as follows:
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Authorised and contracted for (i)
141,045
120,386
Authorised but not contracted for
54,392
57,997
Total
195,437
178,383
These capital commitments relate to oil and gas exploration and development, refining and petrochemical production capacity expansion projects, the construction of service stations and oil depots and investment commitments.
Note:
(i) The investment commitments of the Group is RMB 5,553 million (2017: RMB 3,364 million).
Commitments to joint ventures
Pursuant to certain of the joint venture agreements entered into by the Group, the Group is obliged to purchase products from the joint ventures based on market prices.
Exploration and production licenses
Exploration licenses for exploration activities are registered with the Ministry of Natural Resources. The maximum term of the Group's exploration licenses is 7 years, and may be renewed twice within 30 days prior to expiration of the original term with each renewal being for a two-year term. The Group is obligated to make progressive annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. The Ministry of Natural Resources also issues production licenses to the Group on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation is given by the State Council. The maximum term of the production licenses issued to the Group is 80 years as a special dispensation was given to the Group by the State Council. The Group's production license is renewable upon application by the Group 30 days prior to expiration.
The Group is required to make payments of exploration license fees and production right usage fees to the Ministry of Natural Resources annually and recognised in profit and loss. Expenses recognised were approximately RMB 231 million for the year ended 31 December 2018 (2017: RMB 308 million).
Estimated future annual payments of the Group are as follows:
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Within one year
380
205
Between one and two years
79
83
Between two and three years
33
32
Between three and four years
28
28
Between four and five years
28
28
Thereafter
852
882
Total
1,400
1,258
The implementation of commitments in previous year and the Group's commitments did not have material discrepancy.
56 CONTINGENT LIABILITIES
(a) The Company has been advised by its PRC lawyers that, except for liabilities constituting or arising out of or relating to the business assumed by the Company in the Reorganisation, no other liabilities were assumed by the Company, and the Company is not jointly and severally liable for other debts and obligations incurred by Sinopec Group Company prior to the Reorganisation.
(b) At 31 December 2018 and 31 December 2017, the guarantees by the Group in respect of facilities granted to the parties below are as follows:
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Joint ventures
5,033
940
Associates (i)
12,168
13,520
Others
7,197
9,732
Total
24,398
24,192
(i) The Group provided a guarantee in respect to standby credit facilities granted to Zhongtian Synergetic Energy by banks amount to RMB 17,050 million. At 31 December 2018, the amount withdrawn by Zhongtian Synergetic Energy and guaranteed by the Group was RMB 12,168 million (2017:RMB 13,520 million).
The Group monitors the conditions that are subject to the guarantees to identify whether it is probable that a loss has occurred, and recognises any such losses under guarantees when those losses are reliably estimable. At 31 December 2018 and 31 December 2017, it was not probable that the Group will be required to make payments under the guarantees. Thus no liabilities have been accrued for a loss related to the Group's obligation under these guarantee arrangements.
Environmental contingencies
Under existing legislation, management believes that there are no probable liabilities that will have a material adverse effect on the financial position or operating results of the Group. The PRC government, however, has moved, and may move further towards more rigorous enforcement of applicable laws, and towards the adoption of more stringent environmental standards. Environmental liabilities are subject to considerable uncertainties which affect the Group's ability to estimate the ultimate cost of remediation efforts. These uncertainties include (i) the exact nature and extent of the contamination at various sites including, but not limited to refineries, oil fields, service stations, terminals and land development areas, whether operating, closed or sold, (ii) the extent of required cleanup efforts, (iii) varying costs of alternative remediation strategies, (iv) changes in environmental remediation requirements, and (v) the identification of new remediation sites. The amount of such future cost is indeterminable due to such factors as the unknown magnitude of possible contamination and the unknown timing and extent of the corrective actions that may be required. Accordingly, the outcome of environmental liabilities under proposed or future environmental legislation cannot reasonably be estimated at present, and could be material.
The Group paid normal routine pollutant discharge fees of approximately RMB 7,940 million in the consolidated financial statements for the year ended 31 December 2018 (2017: RMB 7,851 million).
Legal contingencies
The Group is a defendant in certain lawsuits as well as the named party in other proceedings arising in the ordinary course of business. Management has assessed the likelihood of an unfavourable outcome of such contingencies, lawsuits or other proceedings and believes that any resulting liabilities will not have a material adverse effect on the financial position, operating results or cash flows of the Group.
57 SEGMENT REPORTING
Segment information is presented in respect of the Group's operating segments. The format is based on the Group's management and internal reporting structure.
In a manner consistent with the way in which information is reported internally to the Group's chief operating decision maker for the purposes of resource allocation and performance assessment, the Group has identified the following five reportable segments. No operating segments have been aggregated to form the following reportable segments.
(i) Exploration and production - which explores and develops oil fields, produces crude oil and natural gas and sells such products to the refining segment of the Group and external customers.
(ii) Refining - which processes and purifies crude oil, which is sourced from the exploration and production segment of the Group and external suppliers, and manufactures and sells petroleum products to the chemicals and marketing and distribution segments of the Group and external customers.
(iii) Marketing and distribution - which owns and operates oil depots and service stations in the PRC, and distributes and sells refined petroleum products (mainly gasoline and diesel) in the PRC through wholesale and retail sales networks.
(iv) Chemicals - which manufactures and sells petrochemical products, derivative petrochemical products and other chemical products to external customers.
(v) Others - which largely comprise the trading activities of the import and export companies of the Group and research and development undertaken by other subsidiaries.
The segments were determined primarily because the Group manages its exploration and production, refining, marketing and distribution, chemicals, and corporate and others businesses separately. The reportable segments are each managed separately because they manufacture and/or distribute distinct products with different production processes and due to their distinct operating and gross margin characteristics.
57 SEGMENT REPORTING (Continued)
(1) Information of reportable segmental revenues, profits or losses, assets and liabilities
The Group's chief operating decision maker evaluates the performance and allocates resources to its operating segments on an operating profit basis, without considering the effects of finance costs or investment income. Inter-segment transfer pricing is based on the market price or cost plus an appropriate margin, as specified by the Group's policy.
Assets and liabilities dedicated to a particular segment's operations are included in that segment's total assets and liabilities. Segment assets include all tangible and intangible assets, except for cash at bank and on hand, long-term equity investments, deferred tax assets and other unallocated assets. Segment liabilities exclude short-term loans, short-term debentures payable, non-current liabilities due within one year, long-term loans, debentures payable, deferred tax liabilities, other non-current liabilities and other unallocated liabilities.
Reportable information on the Group's operating segments is as follows:
2018
2017
RMB million
RMB million
Income from principal operations
Exploration and production
External sales
93,499
69,168
Inter-segment sales
95,954
77,804
189,453
146,972
Refining
External sales
148,930
132,478
Inter-segment sales
1,109,088
874,271
1,258,018
1,006,749
Marketing and distribution
External sales
1,408,989
1,191,902
Inter-segment sales
5,224
3,962
1,414,213
1,195,864
Chemicals
External sales
457,406
373,814
Inter-segment sales
73,835
49,615
531,241
423,429
Corporate and others
External sales
716,789
533,108
Inter-segment sales
650,271
440,303
1,367,060
973,411
Elimination of inter-segment sales
(1,934,372)
(1,445,955)
Consolidated income from principal operations
2,825,613
2,300,470
Income from other operations
Exploration and production
10,738
10,533
Refining
5,389
5,104
Marketing and distribution
32,424
28,333
Chemicals
15,492
14,314
Corporate and others
1,523
1,439
Consolidated income from other operations
65,566
59,723
Consolidated operating income
2,891,179
2,360,193
57 SEGMENT REPORTING (Continued)
(1) Information of reportable segmental revenues, profits or losses, assets and liabilities (Continued)
2018
2017
RMB million
RMB million
Operating (loss)/profit
By segment
Exploration and production
(11,557)
(47,399)
Refining
53,703
64,047
Marketing and distribution
24,106
32,011
Chemicals
25,970
22,796
Corporate and others
(8,151)
(3,160)
Elimination
(3,634)
(1,655)
Total segment operating profit
80,437
66,640
Investment income
Exploration and production
2,595
1,401
Refining
429
1,017
Marketing and distribution
2,676
2,951
Chemicals
6,905
13,648
Corporate and others
(1,177)
43
Total segment investment income
11,428
19,060
Less: Financial expenses
(1,001)
1,560
Add: Other income
6,694
4,356
Gain/(loss) from changes in fair value
2,656
(13)
Loss from asset disposal
(742)
(1,518)
Operating profit
101,474
86,965
Add: Non-operating income
2,070
1,317
Less: Non-operating expenses
3,042
1,709
Profit before taxation
100,502
86,573
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Assets
Segment assets
Exploration and production
321,686
343,404
Refining
271,356
273,123
Marketing and distribution
317,641
309,727
Chemicals
156,865
158,472
Corporate and others
152,799
170,045
Total segment assets
1,220,347
1,254,771
Cash at bank and on hand
167,015
165,004
Long-term equity investments
145,721
131,087
Deferred tax assets
21,694
15,131
Other unallocated assets
37,531
29,511
Total assets
1,592,308
1,595,504
Liabilities
Segment liabilities
Exploration and production
93,874
99,367
Refining
103,709
101,429
Marketing and distribution
159,028
163,680
Chemicals
37,380
35,207
Corporate and others
144,138
117,756
Total segment liabilities
538,129
517,439
Short-term loans
44,692
54,701
Non-current liabilities due within one year
17,450
26,681
Long-term loans
61,576
67,754
Debentures payable
31,951
31,370
Deferred tax liabilities
5,948
6,466
Other non-current liabilities
27,276
16,440
Other unallocated liabilities
7,627
20,583
Total liabilities
734,649
741,434
57 SEGMENT REPORTING (Continued)
(1) Information of reportable segmental revenues, profits or losses, assets and liabilities (Continued)
2018
2017
RMB million
RMB million
Capital expenditure
Exploration and production
42,155
31,344
Refining
27,908
21,075
Marketing and distribution
21,429
21,539
Chemicals
19,578
23,028
Corporate and others
6,906
2,398
117,976
99,384
Depreciation, depletion and amortisation
Exploration and production
60,331
66,843
Refining
18,164
18,408
Marketing and distribution
16,296
15,463
Chemicals
13,379
12,873
Corporate and others
1,797
1,723
109,967
115,310
Impairment losses on long-lived assets
Exploration and production
4,274
13,556
Refining
353
1,894
Marketing and distribution
264
675
Chemicals
1,374
4,922
Corporate and others
16
211
6,281
21,258
(2) Geographical information
The following tables set out information about the geographical information of the Group's external sales and the Group's non-current assets, excluding financial instruments and deferred tax assets. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers, and segment assets are based on the geographical location of the assets.
2018
2017
RMB million
RMB million
External sales
Mainland China
2,119,580
1,758,365
Singapore
395,129
269,349
Others
376,470
332,479
2,891,179
2,360,193
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Non-current assets
Mainland China
989,668
979,329
Others
50,892
48,572
1,040,560
1,027,901
58 FINANCIAL INSTRUMENTS
Overview
Financial assets of the Group include cash at bank and on hand, financial assets held for trading, derivative financial assets, bills receivable and accounts receivable, other equity instrument investments and other receivables. Financial liabilities of the Group include short-term, derivative financial liabilities, bills payable and accounts payable, debentures payable, employee benefits payable, other payables and long-term loans.
The Group has exposure to the following risks from its uses of financial instruments:
‧ credit risk;
‧ liquidity risk; and
‧ market risk.
The Board of Directors has overall responsibility for the establishment and oversight of the Group's risk management framework, and developing and monitoring the Group's risk management policies.
The Group's risk management policies are established to identify and analyse the risks faced by the Group, and set appropriate risk limits and controls to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. Internal audit department undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Group's audit committee.
Credit risk
(i) Risk management
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's deposits placed with financial institutions (including structured deposit) and receivables from customers. To limit exposure to credit risk relating to deposits, the Group primarily places cash deposits only with large financial institution in the PRC with acceptable credit ratings. The majority of the Group's accounts receivable relates to sales of petroleum and chemical products to related parties and third parties operating in the petroleum and chemical industries. No single customer accounted for greater than 10% of total accounts receivable at 31 December 2018, except for the amounts due from Sinopec Group Company and fellow subsidiaries. The Group performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral on accounts receivable. The Group maintains an impairment loss for doubtful accounts and actual losses have been within management's expectations.
The carrying amounts of cash at bank and on hand, financial assets held for trading, derivative financial assets, bills receivable and accounts receivable and other receivables, represent the Group's maximum exposure to credit risk in relation to financial assets.
(ii) Impairment of financial assets
The Group's primary type of financial assets that are subject to the expected credit loss model is trade accounts receivables and other receivables.
The Group's cash deposits are placed only with large financial institutions with acceptable credit ratings, and there is no material impairment loss identified.
For trade accounts receivables, the group applies the "No.22 Accounting Standards for Business Enterprises - Financial instruments: recognition and measurement" simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade accounts receivables.
To measure the expected credit losses, trade accounts receivables have been grouped based on shared credit risk characteristics and the days past due.
The expected loss rates are based on the payment profiles of sales over a period of 36 month before 31 December 2018 or 1 Janurary 2018, respectively, and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables.
The detailed analysis of trade accounts receivables, based on which the Group generated its payment profile is listed in note 8.
All of the entity's other receivables are considered to have low credit risk, and the loss allowance recognised during the period was therefore limited to 12 months expected losses. The Group considers "low credit risk" for other receivables when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term.
58 FINANCIAL INSTRUMENTS (Continued)
Liquidity risk
Liquidity risk is the risk that the Group encounters short fall of capital when meeting its obligation of financial liabilities. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed capital conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The Group prepares monthly cash flow budget to ensure that they will always have sufficient liquidity to meet its financial obligation as they fall due. The Group arranges and negotiates financing with financial institutions and maintains a certain level of standby credit facilities to reduce the liquidity risk.
At 31 December 2018, the Group has standby credit facilities with several PRC financial institutions which provide the Group to borrow up to RMB 387,748 million (2017: RMB 361,852 million) on an unsecured basis, at a weighted average interest rate of 3.87% (2017: 3.40 %). At 31 December 2018, the Group's outstanding borrowings under these facilities were RMB 21,236 million (2017: RMB 56,567 million) and were included in loans.
The following table sets out the remaining contractual maturities at the balance sheet date of the Group's financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on prevailing rates at the balance sheet date) and the earliest date the Group would be required to repay:
At 31 December 2018
Carrying
amount
Total
contractual
undiscounted
cash flow
Within
one year or
on demand
More than
one year but
less than
two years
More than
two years but
less than
five years
More than
five years
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Short-term loans
44,692
45,040
45,040
-
-
-
Non-current liabilities due within one year
17,450
18,053
18,053
-
-
-
Long-term loans
61,576
66,387
792
40,885
13,807
10,903
Debentures payable
31,951
38,674
1,269
14,030
17,124
6,251
Derivative financial liabilties
13,571
13,571
13,571
-
-
-
Bills payable and accounts payable
192,757
192,757
192,757
-
-
-
Other payables and employee benefits payable
84,775
84,775
84,775
-
-
-
Total
446,772
459,257
356,257
54,915
30,931
17,154
At 31 December 2017
Carrying
amount
Total
contractual
undiscounted
cash flow
Within
one year or
on demand
More than
one year but
less than
two years
More than
two years but
less than
five years
More than
five years
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Short-term loans
54,701
55,451
55,451
-
-
-
Non-current liabilities due within one year
26,681
27,261
27,261
-
-
-
Long-term loans
67,754
70,613
1,003
17,666
49,038
2,906
Debentures payable
31,370
39,122
1,250
1,250
22,285
14,337
Derivative financial liabilties
2,665
2,665
2,665
-
-
-
Bills payable and accounts payable
206,535
206,535
206,535
-
-
-
Other payables and employee benefits payable
96,190
96,190
96,190
-
-
-
Total
485,896
497,837
390,355
18,916
71,323
17,243
Management believes that the Group's current cash on hand, expected cash flows from operations and available standby credit facilities from financial institutions will be sufficient to meet the Group's short-term and long-term capital requirements.
58 FINANCIAL INSTRUMENTS (Continued)
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.
(a) Currency risk
Currency risk arises on financial instruments that are denominated in a currency other than the functional currency in which they are measured. The Group's currency risk exposure primarily relates to short-term and long-term debts denominated in US Dollars, and the Group enters into foreign exchange contracts to manage currency risk exposure.
Included in short-term and long-term debts are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:
The Group
At 31 December
At 31 December
2018
2017
million
million
Gross exposure arising from loans and borrowings
US Dollars
668
204
A 5 percent strengthening/weakening of Renminbi against the following currencies at 31 December 2018 and 31 December 2017 would have increased/decreased net profit for the year of the Group by the amounts shown below. This analysis has been determined assuming that the change in foreign exchange rates had occurred at the balance sheet date and had been applied to the foreign currency balances to which the Group has significant exposure as stated above, and that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2017.
The Group
At 31 December
At 31 December
2018
2017
million
million
US Dollars
172
50
Other than the amounts as disclosed above, the amounts of other financial assets and liabilities of the Group are substantially denominated in the functional currency of respective entity of the Group.
(b) Interest rate risk
The Group's interest rate risk exposure arises primarily from its short-term and long-term loans. Loans carrying interest at variable interest rates and at fixed interest rates expose the Group to cash flow interest rate risk and fair value interest rate risk respectively. The interest rates and terms of repayment of short-term and long-term loans of the Group are disclosed in Note 21 and Note 28, respectively.
At 31 December 2018, it is estimated that a general increase/decrease of 100 basis points in variable interest rates, with all other variables held constant, would decrease/increase the Group's net profit for the year by approximately RMB 424 million (at 31 December 2017: decrease/increase RMB 450 million). This sensitivity analysis has been determined assuming that the change in interest rates had occurred at the balance sheet date and the change was applied to the Group's loans outstanding at that date with exposure to cash flow interest rate risk. The analysis is performed on the same basis for 2017.
(c) Commodity price risk
The Group engages in oil and gas operations and is exposed to commodity price risk related to price volatility of crude oil, refined oil products and chemical products. The fluctuations in prices of crude oil, refined oil products and chemical products could have significant impact on the Group. The Group uses derivative financial instruments, including commodity futures and swaps, to manage a portion of such risk.
At 31 December 2018, the Group had certain commodity contracts of crude oil, refined oil products and chemical products designated as qualified cash flow hedges and economic hedges. At 31 December 2018, the net fair value of such derivative hedging financial instruments is derivative financial assets of RMB 7,844 million (2017: RMB 515 million) recognised in other receivables and derivative financial liabilities of RMB 13,568 million (2017: RMB 2,624 million) recognised in other payables.
At 31 December 2018, it is estimated that a general increase/decrease of USD 10 per barrel in basic price of derivative financial instruments, with all other variables held constant, would impact the fair value of derivative financial instruments which would decrease/increase the Group's profit for the year by approximately RMB 197 million (2017: decrease/increase RMB 4,049 million), and increase/decrease the Group's other comprehensive income by approximately RMB 6,850 million (2017: decrease/increase RMB 701 million). This sensitivity analysis has been determined assuming that the change in prices had occurred at the balance sheet date and the change was applied to the Group's derivative financial instruments at that date with exposure to commodity price risk. The analysis is performed on the same basis for 2017.
58 FINANCIAL INSTRUMENTS (Continued)
Fair values
(i) Financial instruments carried at fair value
The following table presents the carrying value of financial instruments measured at fair value at the balance sheet date across the three levels of the fair value hierarchy. With the fair value of each financial instrument categorised in its entirely based on the lowest level of input that is significant to that fair value measurement. The levels are defined as follows:
‧ Level 1 (highest level): fair values measured using quoted prices (unadjusted) in active markets for identical financial instruments.
‧ Level 2: fair values measured using quoted prices in active markets for similar financial instruments, or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data.
‧ Level 3 (lowest level): fair values measured using valuation techniques in which any significant input is not based on observable market data.
At 31 December 2018
The Group
Level 1
Level 2
Level 3
Total
RMB million
RMB million
RMB million
RMB million
Assets
Financial assets held for trading
- Structured deposits
-
-
25,550
25,550
- Equity investments, listed and at quoted market price
182
-
-
182
Derivative financial assets:
- Derivative financial assets
874
7,013
-
7,887
Other equity security investments:
- Other Investments
127
-
1,323
1,450
1,183
7,013
26,873
35,069
Liabilities
Derivative financial liabilities:
- Derivative financial liabilities
5,500
8,071
-
13,571
5,500
8,071
-
13,571
At 31 December 2017
The Group
Level 1
Level 2
Level 3
Total
RMB million
RMB million
RMB million
RMB million
Assets
Financial assets held for trading
- Structured deposits
-
-
51,196
51,196
Derivative financial assets:
- Derivative financial assets
343
183
-
526
Available-for-sale financial assets:
- Listed
178
-
-
178
521
183
51,196
51,900
Liabilities
Derivative financial liabilities:
- Derivative financial liabilities
1,277
1,388
-
2,665
1,277
1,388
-
2,665
During the year ended 31 December 2018, there was no transfer between instruments in Level 1 and Level 2.
Management of the Group uses discounted cash flow model with inputted interest rate and commodity index, which were influenced by historical fluctuation and the probability of market fluctuation, to evaluate the fair value of the structured deposits classified as Level 3 financial assets.
58 FINANCIAL INSTRUMENTS (Continued)
Fair values (Continued)
(ii) Fair values of financial instruments carried at other than fair value
The fair values of the Group's financial instruments carried at other than fair value (other than long-term indebtedness and investments in unquoted equity securities) approximate their carrying amounts due to the short-term maturity of these instruments. The fair values of long-term indebtedness are estimated by discounting future cash flows using current market interest rates offered to the Group for debt with substantially the same characteristic and maturities range from 2.76% to 4.90% (2017: 1.79% to 4.90%). The following table presents the carrying amount and fair value of the Group's long-term indebtedness other than loans from Sinopec Group Company and fellow subsidiaries at 31 December 2018 and 31 December 2017:
At 31 December
At 31 December
2018
2017
RMB million
RMB million
Carrying amount
63,085
79,738
Fair value
62,656
78,040
The Group has not developed an internal valuation model necessary to make the estimate of the fair value of loans from Sinopec Group Company and fellow subsidiaries as it is not considered practicable to estimate their fair value because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive based on the Reorganisation of the Group, its existing capital structure and the terms of the borrowings.
Except for the above items, the financial assets and liabilities of the Group are carried at amounts not materially different from their fair values at 31 December 2018 and 31 December 2017.
59 EXTRAORDINARY GAINS AND LOSSES
Pursuant to "Explanatory Announcement No.1 on Information Disclosure for Companies Offering Their Securities to the Public- Extraordinary Gain and Loss" (2008), the extraordinary gains and losses of the Group are as follows:
2018
2017
RMB million
RMB million
Extraordinary (gains)/losses for the year:
Net loss on disposal of non-current assets
742
1,518
Donations
180
152
Government grants
(7,482)
(4,783)
Gain on holding and disposal of various investments
(1,023)
(148)
Gain on remeasurement of interests in the Shanghai SECCO (Note 51)
-
(3,941)
Other non-operating loss, net
1,613
690
(5,970)
(6,512)
Tax effect
2,312
976
Total
(3,658)
(5,536)
Attributable to:
Equity shareholders of the Company
(3,459)
(5,537)
Minority interests
(199)
1
60 BASIC AND DILUTED EARNINGS PER SHARE
(i) Basic earnings per share
Basic earnings per share is calculated by the net profit attributable to equity shareholders of the Company and the weighted average number of outstanding ordinary shares of the Company:
2018
2017
Net profit attributable to equity shareholders of the Company (RMB million)
63,089
51,119
Weighted average number of outstanding ordinary shares of the Company (million)
121,071
121,071
Basic earnings per share (RMB/share)
0.521
0.422
The calculation of the weighted average number of ordinary shares is as follows:
2018
2017
Weighted average number of outstanding ordinary shares of the Company at 1 January (million)
121,071
121,071
Weighted average number of outstanding ordinary shares of the Company at 31 December (million)
121,071
121,071
(ii) Diluted earnings per share
Diluted earnings per share is calculated by the net profit attributable to equity shareholders of the Company (diluted) and the weighted average number of ordinary shares of the Company (diluted):
2018
2017
Net profit attributable to equity shareholders of the Company (diluted) (RMB million)
63,089
51,117
Weighted average number of outstanding ordinary shares of the Company (diluted) (million)
121,071
121,071
Diluted earnings per share (RMB/share)
0.521
0.422
The calculation of the weighted average number of ordinary shares (diluted) is as follows:
2018
2017
Weighted average number of the ordinary shares issued at 31 December (million)
121,071
121,071
Weighted average number of the ordinary shares issued at 31 December (diluted) (million)
121,071
121,071
61 RETURN ON NET ASSETS AND EARNINGS PER SHARE
In accordance with "Regulation on the Preparation of Information Disclosures of Companies Issuing Public Shares No.9 - Calculation and Disclosure of the Return on Net Assets and Earnings Per Share" (2010 revised) issued by the CSRC and relevant accounting standards, the Group's return on net assets and earnings per share are calculated as follows:
2018
2017
Weighted
average
return on
net assets
Basic
earnings
per share
Diluted
earnings
per share
Weighted
average
return on
net assets
Basic
earnings
per share
Diluted
earnings
per share
(%)
(RMB/Share)
(RMB/Share)
(%)
(RMB/Share)
(RMB/Share)
Net profit attributable to the Company's
ordinary equity shareholders
8.67
0.521
0.521
7.14
0.422
0.422
Net profit deducted extraordinary gains and
losses attributable to the Company's ordinary
equity shareholders
8.20
0.493
0.493
6.37
0.376
0.376
Report of the INternational Auditor
Independent Auditor's Report
To the Shareholders of China Petroleum & Chemical Corporation
(incorporated in the People's Republic of China with limited liability)
Opinion
What we have audited
The consolidated financial statements of China Petroleum & Chemical Corporation (the "Company") and its subsidiaries (the "Group") set out on pages 155 to 211, which comprise:
‧ the consolidated balance sheet as at 31 December 2018;
‧ the consolidated income statement for the year then ended;
‧ the consolidated statement of comprehensive income for the year then ended;
‧ the consolidated statement of changes in equity for the year then ended;
‧ the consolidated statement of cash flows for the year then ended; and
‧ the notes to the consolidated financial statements, which include a summary of significant accounting policies.
Our opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2018, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards ("IFRSs") as issued by the International Accounting Standard Board and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance.
Basis for Opinion
We conducted our audit in accordance with Hong Kong Standards on Auditing ("HKSAs") issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Group in accordance with the HKICPA's Code of Ethics for Professional Accountants ("the Code"), and we have fulfilled our other ethical responsibilities in accordance with the Code.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matters identified in our audit are summarised as follows:
‧ Recoverability of the carrying amount of property, plant and equipment relating to oil and gas producing activities
‧ Net realisable value (NRV) of crude oil, finished goods and work in progress of refined oil products
Key Audit Matter
How our audit addressed the Key Audit Matter
Recoverability of the carrying amount of property, plant and equipment relating to oil and gas producing activities
Refer to note 8 "Other operating expense, net", note 16 "Property, plant and equipment" and note 42 "Accounting estimates and judgements" to the consolidated financial statements.
Decrease in prices of international crude oil in the fourth quarter of the year ended 31 December 2018 gave rise to possible indication that the carrying amount of property, plant and equipment relating to oil and gas producing activities as at 31 December 2018 might be impaired. The Group has adopted value in use as the respective recoverable amounts of property, plant and equipment relating to oil and gas producing activities, which involved key estimations or assumptions including:
- Future crude oil prices;
- Future production profiles;
- Future cost profiles; and
- Discount rates.
Because of the significance of the carrying amount of property, plant and equipment relating to oil and gas producing activities as at 31 December 2018, together with the use of significant estimations or assumptions in determining their respective value in use, we had placed our audit emphasis on this matter.
In auditing the respective value in use calculations of property, plant and equipment relating to oil and gas producing activities, we performed the following key procedures on the relevant discounted cash flow projections prepared by management:
‧ Evaluated and tested the key controls in respect of the preparation of the discounted cash flow projections of property, plant and equipment relating to oil and gas producing activities.
‧ Assessed the methodology adopted in, and tested mathematical accuracy of the discounted cash flow projections.
‧ Compared estimates of future crude oil prices adopted by the Group against a range of reputable published crude oil price forecasts.
‧ Compared the future production profiles against the oil and gas reserve estimation report approved by the management. Evaluated the competence, capability and objectivity of the management's experts engaged in estimating the oil and gas reserves. Assessed key estimations or assumptions used in the reserve estimation, by reference to historical data, management plans and/or reputable external data.
‧ Compared the future cost profiles against historical costs and relevant budgets of the Group.
‧ Tested selected other key data inputs, such as natural gas prices and production profiles in the projections by reference to historical data and/or relevant budgets of the Group.
‧ Independently estimated a range of relevant discount rates, and found that the discount rates adopted by management were within the range.
‧ Evaluated the sensitivity analyses prepared by the Group, and assessed the potential impacts of a range of possible outcomes.
Based on our work, we found the key assumptions and input data adopted were supported by the evidence we obtained.
Net realisable value (NRV) of crude oil, finished goods and work in progress of refined oil products
Refer to note 2(e) "Inventories", note 26 "Inventories" and note 42 "Accounting estimates and judgements" to the consolidated financial statements.
Decrease in prices of international crude oil along with its highly-correlated products, such as refined oil products, in the fourth quarter of the year ended 31 December 2018 gave rise to the risk that net realisable values of crude oil, finished goods and work in progress of refined oil products were lower than their respective book values as at 31 December 2018.
Management has determined the NRVs of crude oil, finished goods and work in progress of refined oil products based on the respective estimated selling prices less the estimated costs to completion, other necessary costs of sales and the related taxes, which involved key estimations or assumptions including:
- Estimated selling prices;
- Estimated costs to completion, other necessary costs of sales and related taxes.
Because of the significance of the book value of crude oil, finished goods and work in progress of refined oil products as at 31 December 2018, together with the use of significant estimations or assumptions in determining their respective NRVs, we had placed our audit emphasis on this matter.
In auditing the NRVs of crude oil, finished goods and work in progress of refined oil products, we performed the following key procedures on the inventory NRV models prepared by the management.
‧ Evaluated and tested the key controls relating to the preparation of the NRV models of crude oil, finished goods and work in progress of refined oil products.
‧ Assessed the methodology adopted in, and tested mathematical accuracy of the NRV models.
‧ On a sampling basis, compared the estimated selling prices of inventories used in the NRV models against the recently realised selling prices, and the prices available on domestic and international markets.
‧ On a sampling basis, compared the costs to completion, other necessary costs of sales and related taxes against historical data of the Group.
Based on the work, we found that the key assumptions and data adopted in the NRV models were supported by the evidence we obtained.
Other Information
The directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor's report thereon.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of Directors and Those Charged with Governance for the Consolidated Financial Statements
The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRSs and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group's financial reporting process.
Auditor's Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. We report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with HKSAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:
‧ Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
‧ Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control.
‧ Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
‧ Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists relating to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern.
‧ Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
‧ Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
Auditor's Responsibilities for the Audit of the Consolidated Financial Statements (cont'd)
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor's report is CHAN KWONG TAK.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong, 22 March 2019
(B) FINANCIAL STATEMENTS PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2018
(Amounts in million, except per share data)
Note
Year ended 31 December
2018
2017
RMB
RMB
Turnover and other operating revenues
Turnover
3
2,825,613
2,300,470
Other operating revenues
4
65,566
59,723
2,891,179
2,360,193
Operating expenses
Purchased crude oil, products and operating supplies and expenses
(2,292,983)
(1,770,651)
Selling, general and administrative expenses
5
(65,642)
(64,973)
Depreciation, depletion and amortisation
(109,967)
(115,310)
Exploration expenses, including dry holes
(10,744)
(11,089)
Personnel expenses
6
(77,721)
(74,854)
Taxes other than income tax
7
(246,498)
(235,292)
Other operating expense, net
8
(5,360)
(16,554)
Total operating expenses
(2,808,915)
(2,288,723)
Operating profit
82,264
71,470
Finance costs
Interest expense
9
(7,321)
(7,146)
Interest income
7,726
5,254
Foreign currency exchange gains, net
596
332
Net finance costs
1,001
(1,560)
Investment income
1,871
262
Share of profits less losses from associates and joint ventures
19, 20
13,974
16,525
Profit before taxation
99,110
86,697
Income tax expense
10
(20,213)
(16,279)
Profit for the year
78,897
70,418
Attributable to:
Shareholders of the Company
61,618
51,244
Non-controlling interests
17,279
19,174
Profit for the year
78,897
70,418
Earnings per share:
15
Basic
0.509
0.423
Diluted
0.509
0.423
The notes on pages 162 to 211 form part of these consolidated financial statements. Details of dividends payable to shareholders of the Company attributable to the profit for the year are set out in Note 13.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2018
(Amounts in million)
Note
Year ended 31 December
2018
2017
RMB
RMB
Profit for the year
78,897
70,418
Other comprehensive income:
14
Items that maynot be reclassified subsequently to profit or loss
Equity investments at fair value through other comprehensive income
(53)
-
Total items that maynot be reclassified subsequently to profit or loss
(53)
-
Items that may be reclassified subsequently to profit or loss
Share of other comprehensive (income)/loss of associates and joint ventures
(229)
1,053
Available-for-sale securities
-
(57)
Cash flow hedges
(9,741)
(1,580)
Foreign currency translation differences
3,399
(3,792)
Total items that may be reclassified subsequently to profit or loss
(6,571)
(4,376)
Total other comprehensive income
(6,624)
(4,376)
Total comprehensive income for the year
72,273
66,042
Attributable to:
Shareholders of the Company
54,000
47,763
Non-controlling interests
18,273
18,279
Total comprehensive income for the year
72,273
66,042
The notes on pages 162 to 211 form part of these consolidated financial statements.
CONSOLIDATED BALANCE SHEET
As at 31 December 2018
(Amounts in million)
Notes
31 December
31 December
2018
2017
RMB
RMB
Non-current assets
Property, plant and equipment, net
16
617,762
650,774
Construction in progress
17
136,963
118,645
Goodwill
18
8,676
8,634
Interest in associates
19
89,537
79,726
Interest in joint ventures
20
56,184
51,361
Available-for-sale financial assets
1(a)
-
1,676
Financial assets at fair value through other comprehensive income
1(a)
1,450
-
Deferred tax assets
28
21,694
15,131
Lease prepayments
21
64,514
58,526
Long-term prepayments and other assets
22
91,408
81,982
Total non-current assets
1,088,188
1,066,455
Current assets
Cash and cash equivalents
111,922
113,218
Time deposits with financial institutions
55,093
51,786
Financial assets at fair value through profit or loss
23
25,732
51,196
Derivatives financial assets
24
7,887
526
Trade accounts receivable and bills receivable
25
64,879
84,701
Inventories
26
184,584
186,693
Prepaid expenses and other current assets
27
54,023
40,929
Total current assets
504,120
529,049
Current liabilities
Short-term debts
29
29,462
55,338
Loans from Sinopec Group Company and fellow subsidiaries
29
31,665
25,311
Derivatives financial liabilities
24
13,571
2,665
Trade accounts payable and bills payable
30
192,757
206,535
Contract liabilities
31,1(a)
124,793
-
Other payables
32,1(a)
166,151
276,582
Income tax payable
6,699
13,015
Total current liabilities
565,098
579,446
Net current liabilities
60,978
50,397
Total assets less current liabilities
1,027,210
1,016,058
Non-current liabilities
Long-term debts
29
51,011
55,804
Loans from Sinopec Group Company and fellow subsidiaries
29
42,516
43,320
Deferred tax liabilities
28
5,948
6,466
Provisions
33
42,800
39,958
Other long-term liabilities
28,400
17,620
Total non-current liabilities
170,675
163,168
856,535
852,890
Equity
Share capital
34
121,071
121,071
Reserves
596,213
605,049
Total equity attributable to shareholders of the Company
717,284
726,120
Non-controlling interests
139,251
126,770
Total equity
856,535
852,890
Approved and authorised for issue by the board of directors on 22 March 2019.
Dai Houliang
Ma Yongsheng
Wang Dehua
Chairman
President
Chief Financial Officer
(Legal representative)
The notes on pages 162 to 211 form part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2017
(Amounts in million)
Share
capital
Capital
reserve
Share
premium
Statutory
surplus
reserve
Discretionary
surplus
reserve
Other
reserves
Retained
earnings
Total equity
attributable
to
shareholders
of the
Company
Non-
controlling
interests
Total equity
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Balance at 1 January 2017
121,071
26,290
55,850
79,640
117,000
424
310,719
710,994
120,241
831,235
Profit for the year
-
-
-
-
-
-
51,244
51,244
19,174
70,418
Other comprehensive income (Note 14)
-
-
-
-
-
(3,481)
-
(3,481)
(895)
(4,376)
Total comprehensive income for the year
-
-
-
-
-
(3,481)
51,244
47,763
18,279
66,042
Transactions with owners, recorded directly in equity:
Contributions by and distributions to owners:
Final dividend for 2016 (Note 13)
-
-
-
-
-
-
(20,582)
(20,582)
-
(20,582)
Interim dividend for 2017 (Note 13)
-
-
-
-
-
-
(12,107)
(12,107)
-
(12,107)
Appropriation (Note (a))
-
-
-
3,042
-
-
(3,042)
-
-
-
Distributions to non-controlling interests
-
-
-
-
-
-
-
-
(12,501)
(12,501)
Total contributions by and distributions to owners
-
-
-
3,042
-
-
(35,731)
(32,689)
(12,501)
(45,190)
Transaction with non-controlling interests
-
(13)
-
-
-
-
-
(13)
724
711
Total transactions with owners
-
(13)
-
3,042
-
-
(35,731)
(32,702)
(11,777)
(44,479)
Others
-
49
-
-
-
123
(107)
65
27
92
Balance at 31 December 2017
121,071
26,326
55,850
82,682
117,000
(2,934)
326,125
726,120
126,770
852,890
The notes on pages 162 to 211 form part of these consolidated financial statements.
Share
capital
Capital
reserve
Share
premium
Statutory
surplus
reserve
Discretionary
surplus
reserve
Other
reserves
Retained
earnings
Total equity
attributable
to
shareholders
of the
Company
Non-
controlling
interests
Total
equity
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Balance at 31 December 2017
121,071
26,326
55,850
82,682
117,000
(2,934)
326,125
726,120
126,770
852,890
Change in accounting policy (Note 1(a))
-
-
-
-
-
(12)
12
-
-
-
Balance at 1 January 2018
121,071
26,326
55,850
82,682
117,000
(2,946)
326,137
726,120
126,770
852,890
Profit for the year
-
-
-
-
-
-
61,618
61,618
17,279
78,897
Other comprehensive income (Note 14)
-
-
-
-
-
(7,618)
-
(7,618)
994
(6,624)
Total comprehensive income for the year
-
-
-
-
-
(7,618)
61,618
54,000
18,273
72,273
Amounts transferred to cash flow hedge
reserves initially recognised by hedged items
-
-
-
-
-
5,269
-
5,269
-
5,269
Transactions with owners, recorded directly in equity:
Contributions by and distributions to owners:
Final dividend for 2017 (Note 13)
-
-
-
-
-
-
(48,428)
(48,428)
-
(48,428)
Interim dividend for 2018 (Note 13)
-
-
-
-
-
-
(19,371)
(19,371)
-
(19,371)
Appropriation (Note (a))
-
-
-
3,996
-
-
(3,996)
-
-
-
Distributions to non-controlling interests
-
-
-
-
-
-
-
-
(7,476)
(7,476)
Contributions to subsidiaries from
non-controlling interests
-
-
-
-
-
-
-
-
2,060
2,060
Total contributions by and distributions to owners
-
-
-
3,996
-
-
(71,795)
(67,799)
(5,416)
(73,215)
Transaction with non-controlling interests
-
(12)
-
-
-
-
-
(12)
(299)
(311)
Total transactions with owners
-
(12)
-
3,996
-
-
(71,795)
(67,811)
(5,715)
(73,526)
Others
-
(261)
-
-
-
818
(851)
(294)
(77)
(371)
Balance at 31 December 2018
121,071
26,053
55,850
86,678
117,000
(4,477)
315,109
717,284
139,251
856,535
Note:
(a) According to the PRC Company Law and the Articles of Association of the Company, the Company is required to transfer 10% of its net profit determined in accordance with the accounting policies complying with Accounting Standards for Business Enterprises ("CASs"), adopted by the Group to statutory surplus reserve. In the event that the reserve balance reaches 50% of the registered capital, no transfer is required. The transfer to this reserve must be made before distribution of a dividend to shareholders. Statutory surplus reserve can be used to make good previous years' losses, if any, and may be converted into share capital by issuing of new shares to shareholders in proportion to their existing shareholdings or by increasing the par value of the shares currently held by them, provided that the balance after such issue is not less than 25% of the registered capital.
During the year ended 31 December 2018, the Company transferred RMB 3,996 million (2017: RMB 3,042 million) to the statutory surplus reserve, being 10% of the current year's net profit determined in accordance with the accounting policies complying with CASs to this reserve.
(b) The usage of the discretionary surplus reserve is similar to that of statutory surplus reserve.
(c) As at 31 December 2018, the amount of retained earnings available for distribution was RMB 143,148 million (2017: RMB 177,049 million), being the amount determined in accordance with CASs. According to the Articles of Association of the Company, the amount of retained earnings available for distribution to shareholders of the Company is lower of the amount determined in accordance with the accounting policies complying with CASs and the amount determined in accordance with the accounting policies complying with International Financial Reporting Standards ("IFRS").
(d) The capital reserve represents (i) the difference between the total amount of the par value of shares issued and the amount of the net assets transferred from Sinopec Group Company in connection with the Reorganisation (Note1); and (ii) the difference between the considerations paid over or received the amount of the net assets of entities and related operations acquired from or sold to Sinopec Group Company and non-controlling interests.
(e) The application of the share premium account is governed by Sections 167 and 168 of the PRC Company Law.
The notes on pages 162 to 211 form part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 31 December 2018
(Amounts in million)
Note
Year ended 31 December
2018
2017
RMB
RMB
Net cash generated from operating activities
(a)
175,868
190,935
Investing activities
Capital expenditure
(94,753)
(63,541)
Exploratory wells expenditure
(8,261)
(7,407)
Purchase of investments, investments in associates and investments in joint ventures
(10,116)
(6,431)
Payment for financial assets at fair value through profit or loss
(29,550)
(51,196)
Proceeds from sale of financial assets at fair value through profit or loss
55,000
-
Payment for acquisition of subsidiary, net of cash acquired
(3,188)
(1,288)
Proceeds from disposal of investments and investments in associates
1,557
4,809
Proceeds from disposal of property, plant, equipment and other
non-current assets
9,666
1,313
Increase in time deposits with maturities over three months
(81,708)
(82,577)
Decrease in time deposits with maturities over three months
78,401
48,820
Interest received
5,810
3,669
Investment and dividend income received
10,720
8,506
Net cash used in investing activities
(66,422)
(145,323)
Financing activities
Proceeds from bank and other loans
746,655
524,843
Repayments of bank and other loans
(772,072)
(536,380)
Contributions to subsidiaries from non-controlling interests
1,886
946
Dividends paid by the Company
(67,799)
(32,689)
Distributions by subsidiaries to non-controlling interests
(13,700)
(7,539)
Interest paid
(5,984)
(5,535)
Payments made to acquire non-controlling interests
(160)
-
Finance lease payment
(86)
(155)
Net cash used in financing activities
(111,260)
(56,509)
Net decrease in cash and cash equivalents
(1,814)
(10,897)
Cash and cash equivalents at 1 January
113,218
124,468
Effect of foreign currency exchange rate changes
518
(353)
Cash and cash equivalents at 31 December
111,922
113,218
The notes on pages 162 to 211 form part of these consolidated financial statements.
NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 31 December 2018
(Amounts in million)
(a) Reconciliation from profit before taxation to net cash generated from operating activities
Year ended 31 December
2018
2017
RMB
RMB
Operating activities
Profit before taxation
99,110
86,697
Adjustments for:
Depreciation, depletion and amortisation
109,967
115,310
Dry hole costs written off
6,921
6,876
Share of profits from associates and joint ventures
(13,974)
(16,525)
Investment income
(1,871)
(262)
Gain on remeasurement of interests in the Shanghai SECCO (Note 36)
-
(3,941)
Interest income
(7,726)
(5,254)
Interest expense
7,321
7,146
Gain on foreign currency exchange rate changes and derivative financial instruments
(1,835)
(1,547)
Loss on disposal of property, plant, equipment and other non-currents assets, net
1,526
1,518
Impairment losses on assets
11,605
21,791
Credit impairment losses
141
-
211,185
211,809
Net changes from:
Accounts receivable and other current assets
(1,043)
(31,151)
Inventories
(3,312)
(28,903)
Accounts payable and other current liabilities
2,111
59,210
208,941
210,965
Income tax paid
(33,073)
(20,030)
Net cash generated from operating activities
175,868
190,935
The notes on pages 162 to 211 form part of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2018
1 PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PREPARATION
Principal activities
China Petroleum & Chemical Corporation (the "Company") is an energy and chemical company that, through its subsidiaries (hereinafter collectively referred to as the "Group"), engages in oil and gas and chemical operations in the People's Republic of China (the "PRC"). Oil and gas operations consist of exploring for, developing and producing crude oil and natural gas; transporting crude oil and natural gas by pipelines; refining crude oil into finished petroleum products; and marketing crude oil, natural gas and refined petroleum products. Chemical operations include the manufacture and marketing of a wide range of chemicals for industrial uses.
Organisation
The Company was established in the PRC on 25 February 2000 as a joint stock limited company as part of the reorganisation (the "Reorganisation") of China Petrochemical Corporation ("Sinopec Group Company"), the ultimate holding company of the Group and a ministry-level enterprise under the direct supervision of the State Council of the PRC. Prior to the incorporation of the Company, the oil and gas and chemical operations of the Group were carried on by oil administration bureaux, petrochemical and refining production enterprises and sales and marketing companies of Sinopec Group Company.
As part of the Reorganisation, certain of Sinopec Group Company's core oil and gas and chemical operations and businesses together with the related assets and liabilities were transferred to the Company. On 25 February 2000, in consideration for Sinopec Group Company transferring such oil and gas and chemical operations and businesses and the related assets and liabilities to the Company, the Company issued 68.8 billion domestic state-owned ordinary shares with a par value of RMB 1.00 each to Sinopec Group Company. The shares issued to Sinopec Group Company on 25 February 2000 represented the entire registered and issued share capital of the Company on that date. The oil and gas and chemical operations and businesses transferred to the Company were related to (i) the exploration, development and production of crude oil and natural gas, (ii) the refining, transportation, storage and marketing of crude oil and petroleum products, and (iii) the production and sales of chemicals.
Basis of preparation
The accompanying consolidated financial statements have been prepared in accordance with all applicable IFRS as issued by the International Accounting Standards Board ("IASB"). IFRS includes International Accounting Standards ("IAS") and related interpretations ("IFRIC"). These consolidated financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. A summary of the significant accounting policies adopted by the Group are set out in Note 2.
The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of new and amended standards as set out below.
(a) New and amended standards and interpretations adopted by the Group
A number of new or amended standards became applicable for the current reporting period and the Group had to change its accounting policies as a result of adopting the following standards:
‧ IFRS 9 'Financial Instruments', and
‧ IFRS 15 'Revenue from Contracts with Customers'
IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers'- Impact of adoption
The adoption of IFRS 9 'Financial Instruments' ('IFRS 9') and IFRS 15 'Revenue from Contracts with Customers' ('IFRS 15') from 1 January 2018 by the Group resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements.
Transition options of IFRS 9 'Financial Instruments'
Classification and measurement
The Group has elected to apply the limited exemption in IFRS 9 relating to transition for classification and measurement and impairment, and accordingly has not restated comparative periods in the year of initial application:
(a) any adjustments to carrying amounts of financial assets or liabilities are recognised at the beginning of the current reporting period, with the difference recognised in opening retained earnings
(b) financial assets are not reclassified in the balance sheet for the comparative period
(c) provisions for impairment have not been restated in the comparative period
Impairment
The Group has adopted the simplified expected credit loss model for its trade receivables and contract assets, as required by IFRS 9, and the general expected credit loss model for receivables and contract assets carried at amortised. The Group assessed the loss allowance for receivables under the expected credit loss model on 1 January 2018, no significant difference compared with the loss allowance under accounting policies applied until 31 December 2017.
1 PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PREPARATION (Continued)
Basis of preparation (Continued)
(a) New and amended standards and interpretations adopted by the Group (Continued)
Hedging
The Group has applied the hedging accounting prospectively to the derivatives held for hedging purpose.
Financial instruments accounting policy applied until 31 December 2017 is disclosed in Note 2 (k) (iv).
Transition options of IFRS 15 'Revenue from Contracts with Customers'
The Group has elected to apply the simplified transition method, retrospectively with the cumulative effect of initially applying IFRS 15 as an adjustment to the balance on 1 January 2018.
Presentation and description of contract assets and contract liabilities
The Group has decided to reclassify contract assets and contract liabilities and present them as a separate line item in the balance sheet based on the significance of the item.
The adjustments arising from the new accounting policies are therefore recognised in the opening balance sheet on 1 January 2018, comparative figures have not been restated. The new accounting policies are disclosed in Note 2. The adoption of IFRS 9 and IFRS 15 has no significant impact on the Group's financial statements.
The following tables show the adjustments recognised for each individual line item. Line items that were not affected by the changes have not been included. As a result, the sub-totals and totals disclosed cannot be recalculated from the numbers provided.
Consolidated balance sheet (extract)
31 December
2017
Adjustment
from Adoption
of IFRS 9
Adjustment
from Adoption
of IFRS 15
1 January
2018
RMB million
RMB million
RMB million
RMB million
Non-current assets
Financial assets at fair value through
other comprehensive income
-
1,676
-
1,676
Available-for-sale financial assets
1,676
(1,676)
-
-
Total non-current assets
1,066,455
-
-
1,066,455
Current assets
Total current assets
529,049
-
-
529,049
Current liabilities
Contract liabilities(i)
-
-
120,734
120,734
Other payables(i)
276,582
-
(120,734)
155,848
Total current liabilities
579,446
-
-
579,446
Non-current liabilities
Total non-current liabilities
163,168
-
-
163,168
852,890
-
-
852,890
Equity
Other reserves
(2,934)
(12)
-
(2,946)
Retained earnings
326,125
12
-
326,137
Total equity
852,890
-
-
852,890
(i) Advances from customers were reclassified as contract liabilities by implementation of IFRS 15 'Revenue from Contracts with Customers'.
(b) New and amended standards and interpretations not yet adopted by the Group
IFRS 16, 'Leases', was issued in January 2016. It will result in almost all leases being recognised on the balance sheet by lessees, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. Leases to explore for or use oil and natural gas are not applied to IFRS 16.
The Group will apply the standard from its mandatory adoption date of 1 January 2019. The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. All right-of-use assets will be measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).
In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:
‧ the use of a single discount rate to a portfolio of leases with reasonably similar characteristics
‧ the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases
The Group has set up a project team which has reviewed all of the Group's leasing arrangements over the last year in light of the new lease accounting rules in IFRS 16. The standard will affect primarily the accounting for the Group's operating leases.
The Group expects to recognise right-of-use assets of approximately RMB 207.5 billion on 1 January 2019, lease liabilities of RMB 198.6 billion (after adjustments for prepayments and accrued lease payments recognised as at 31 December 2018).
1 PRINCIPAL ACTIVITIES, ORGANISATION AND BASIS OF PREPARATION (Continued)
Basis of preparation (Continued)
(b) New and amended standards and interpretations not yet adopted by the Group (Continued)
The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. 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 the judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those 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.
Key assumptions and estimation made by management in the application of IFRS that have significant effect on the consolidated financial statements and the major sources of estimation uncertainty are disclosed in Note 42.
2 SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of consolidation
The consolidated financial statements comprise the Company and its subsidiaries, and interest in associates and joint ventures.
(i) Subsidiaries and non-controlling interests
Subsidiaries are those entities controlled by the Group. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases.
Non-controlling interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet and consolidated statement of changes in equity within equity, separately from equity attributable to the shareholders of the Company. Non-controlling interests in the results of the Group are presented on the face of the consolidated income statement and the consolidated statement of comprehensive income as an allocation of the total profit or loss and total comprehensive income for the year between non-controlling interests and the shareholders of the Company.
Changes in the Group's interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within consolidated equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognised.
If a business combination involving entities not under common control is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognised in the consolidated income statement.
When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (Note 2(k)) or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture (Note 2(a) (ii)).
In the Company's balance sheet, investments in subsidiaries are stated at cost less impairment losses (Note 2(o)).
The particulars of the Group's principal subsidiaries are set out in Note 40.
(ii) Associates and joint ventures
An associate is an entity, not being a subsidiary, in which the Group exercises significant influence over its management. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
The investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations each investor has rather than the legal structure of the joint arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
Investments in associates and joint ventures are accounted for in the consolidated and separate financial statements using the equity method from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. Under the equity method, the investment is initially recorded at cost and adjusted thereafter for the post acquisition change in the Group's share of the investee's net assets and any impairment loss relating to the investment (Note 2(j) and (o)).
The Group's share of the post-acquisition, post-tax results of the investees and any impairment losses for the year are recognised in the consolidated income statement, whereas the Group's share of the post-acquisition, post-tax items of the investees' other comprehensive income is recognised in the consolidated statement of comprehensive income.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(a) Basis of consolidation (Continued)
(ii) Associates and joint ventures (Continued)
When the Group ceases to have significant influence over an associate or joint control over a joint venture, it is accounted for as a disposal of the entire interest in that investee, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former investee at the date when significant influence or joint control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset (see Note 2(k)) or, when appropriate, the cost on initial recognition of an investment in an associate (see Note 2(a) (ii)).
(iii) Transactions eliminated on consolidation
Inter-company balances and transactions and any unrealised gains arising from inter-company transactions are eliminated on consolidation. Unrealised gains arising from transactions with associates and joint ventures are eliminated to the extent of the Group's interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
(iv) Merger accounting for common control combination
The consolidated financial statements incorporate the financial statements of the combining entities or businesses in which the common control combination occurs as if they had been combined from the date when the combining entities or businesses first came under the control of the controlling party. The net assets of the combining entities or businesses are combined using the existing book values from the controlling parties' perspective. No amount is recognised as consideration for goodwill or excess of acquirers' interest in the net fair value of acquiree's identifiable assets, liabilities and contingent liabilities over cost at the time of common control combination, to the extent of the continuation of the controlling party's interest.
The consolidated income statement includes the results of each of the combining entities or businesses from the earliest date presented or since the date when the combining entities or businesses first came under the common control, where there is a shorter period, regardless of the date of the common control combination. The comparative amounts in the consolidated financial statements are presented as if the entities or businesses had been combined at the previous balance sheet date or when they first came under common control, whichever is shorter.
A uniform set of accounting policies is adopted by those entities. All intra-group transactions, balances and unrealised gains on transactions between combining entities or businesses are eliminated on consolidation. Transaction costs, including professional fees, registration fees, costs of furnishing information to shareholders, costs or losses incurred in combining operations of the previously separate businesses, etc., incurred in relation to the common control combination that is to be accounted for by using merger accounting is recognised as an expense in the period in which it is incurred.
(b) Translation of foreign currencies
The presentation currency of the Group is Renminbi. Foreign currency transactions during the year are translated into Renminbi at the applicable rates of exchange quoted by the People's Bank of China (''PBOC'') prevailing on the transaction dates. Foreign currency monetary assets and liabilities are translated into Renminbi at the PBOC's rates at the balance sheet date.
Exchange differences, other than those capitalised as construction in progress, are recognised as income or expense in the "finance costs" section of the consolidated income statement.
The results of foreign operations are translated into Renminbi at the applicable rates quoted by the PBOC prevailing on the transaction dates. Balance sheet items, including goodwill arising on consolidation of foreign operations are translated into Renminbi at the closing foreign exchange rates at the balance sheet date. The income and expenses of foreign operation are translated into Renminbi at the spot exchange rates or an exchange rate that approximates the spot exchange rates on the transaction dates. The resulting exchange differences are recognised in other comprehensive income and accumulated in equity in the other reserves.
On disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation is reclassified from equity to the consolidated income statement when the profit or loss on disposal is recognised.
(c) Cash and cash equivalents
Cash equivalents consist of time deposits with financial institutions with an initial term of less than three months when purchased. Cash equivalents are stated at cost, which approximates fair value.
(d) Trade, bills and other receivables
Trade, bills and other receivables are initially recognised at fair value and thereafter stated at amortised cost using the effective interest method, less impairment losses for bad and doubtful debts (Note 2(o)). Trade, bills and other receivables are derecognised if the Group's contractual rights to the cash flows from these financial assets expire or if the Group transfers these financial assets to another party without retaining control or substantially all risks and rewards of the assets.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Inventories
Inventories are stated at the lower of cost and net realisable value. Cost includes the cost of purchase computed using the weighted average method and, in the case of work in progress and finished goods, direct labour and an appropriate proportion of production overheads. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.
(f) Property, plant and equipment
An item of property, plant and equipment is initially recorded at cost, less accumulated depreciation and impairment losses (Note 2(o)). The cost of an asset comprises its purchase price, any directly attributable costs of bringing the asset to working condition and location for its intended use. The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred, when it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other expenditure is recognised as an expense in the consolidated income statement in the year in which it is incurred.
Gains or losses arising from the retirement or disposal of an item of property, plant and equipment, other than oil and gas properties, are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised as income or expense in the consolidated income statement on the date of retirement or disposal.
Depreciation is provided to write off the cost amount of items of property, plant and equipment, other than oil and gas properties, over its estimated useful life on a straight-line basis, after taking into account its estimated residual value, as follows:
Estimated
usage period
Estimated
residuals rate
Buildings
12 to 50 years
3%
Equipment, machinery and others
4 to 30 years
3%
Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reassessed annually.
(g) Oil and gas properties
The Group uses the successful efforts method of accounting for its oil and gas producing activities. Under this method, costs of development wells, the related supporting equipment and proved mineral interests in properties are capitalised. The cost of exploratory wells is initially capitalised as construction in progress pending determination of whether the well has found proved reserves. The impairment of exploratory well costs occurs upon the determination that the well has not found proved reserves. The exploratory well costs are usually not carried as an asset for more than one year following completion of drilling, unless (i) the well has found a sufficient quantity of reserves to justify its completion as a producing well if the required capital expenditure is made; (ii) drilling of the additional exploratory wells is under way or firmly planned for the near future; or (iii) other activities are being undertaken to sufficiently progress the assessing of the reserves and the economic and operating viability of the project. All other exploration costs, including geological and geophysical costs, other dry hole costs and annual lease rentals to explore for or use oil and natural gas, are expensed as incurred. Capitalised costs of proved oil and gas properties are amortised on a unit-of-production method based on volumes produced and reserves.
Management estimates future dismantlement costs for oil and gas properties with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with the industry practices and the future cash flows are adjusted to reflect such risks specific to the liability, as appropriate. These estimated future dismantlement costs are discounted at pre-tax risk-free rate and are capitalised as oil and gas properties, which are subsequently amortised as part of the costs of the oil and gas properties.
(h) Lease prepayments
Lease prepayments represent land use rights paid to the relevant government authorities. Land use rights are carried at cost less accumulated amount charged to expense and impairment losses (Note 2(o)). The cost of lease prepayments is charged to expense on a straight-line basis over the respective periods of the rights.
(i) Construction in progress
Construction in progress represents buildings, oil and gas properties, various plant and equipment under construction and pending installation, and is stated at cost less impairment losses (Note 2(o)). Cost comprises direct costs of construction as well as interest charges, and foreign exchange differences on related borrowed funds to the extent that they are regarded as an adjustment to interest charges, during the periods of construction.
Construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use.
No depreciation is provided in respect of construction in progress.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Goodwill
Goodwill represents amounts arising on acquisition of subsidiaries, associates or joint ventures. Goodwill represents the difference between the cost of acquisition and the fair value of the net identifiable assets acquired.
Prior to 1 January 2008, the acquisition of the non-controlling interests of a consolidated subsidiary was accounted for using the acquisition method whereby the difference between the cost of acquisition and the fair value of the net identifiable assets acquired (on a proportionate share) was recognised as goodwill. From 1 January 2008, any difference between the amount by which the non-controlling interest is adjusted (such as through an acquisition of the non-controlling interests) and the cash or other considerations paid is recognised in equity.
Goodwill is stated at cost less accumulated impairment losses. Goodwill arising on a business combination is allocated to each cash-generating unit, or groups of cash-generating units, that is expected to benefit the synergies of the combination and is tested annually for impairment (Note 2(o)). In respect of associates or joint ventures, the carrying amount of goodwill is included in the carrying amount of the interest in the associate or joint venture and the investment as a whole is tested for impairment whenever there is objective evidence of impairment (Note 2(o)).
(k) Financial assets
(i) Classification and measurement
The Group classifies financial assets into different categories depending on the business model for managing the financial assets and the contractual terms of cash flows of the financial assets: a) financial assets measured at amortised cost, b) financial assets measured at fair value through other comprehensive income, c) financial assets measured at fair value through profit or loss. A contractual cash flow characteristic which could have only a de minimis effect, or could have an effect that is more than de minimis but is not genuine, does not affect the classification of the financial asset.
Financial assets are initially recognised at fair value. For financial assets measured at fair value through profit or loss, the relevant transaction costs are recognised in profit or loss. The transaction costs for other financial assets are included in the initially recognised amount. Trade accounts receivable and bills receivable arising from sale of goods or rendering services, without significant financing component, are initially recognised based on the transaction price expected to be entitled by the Group.
Debt instruments
Debt instruments held by the Group mainly includes cash and cash equivalents, time deposits with financial institutions, receivables. These financial assets are measured at amortised cost.
The business model for managing such financial assets by the Group are held for collection of contractual cash flows. The contractual cash flow characteristics are to give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount out-standing. Interest income from these financial assets is recognised using the effective interest rate method.
Equity instruments
Equity instruments that the Group has no power to control, jointly control or exercise significant influence over, are measured at fair value through profit or loss and presented in financial assets at fair value through profit or loss.
In addition, the Group designates some equity instruments that are not held for trading as financial assets at fair value through other comprehensive income, are presented in financial assets at fair value through other comprehensive income. The relevant dividends of these financial assets are recognised in profit or loss. When derecognised, the cumulative gain or loss previously recognised in other comprehensive income is transferred to retained earnings.
(ii) Impairment
The Group recognises a loss allowance for expected credit losses on a financial asset that is measured at amortised cost.
The Group measures and recognises expected credit losses, considering reasonable and supportable information about the relevant past events, current conditions and forecasts of future economic conditions.
The Group measures the expected credit losses of financial instruments on different stages at each balance sheet date. For financial instruments that have no significant increase in credit risk since the initial recognition, on first stage, the Group measures the loss allowance at an amount equal to 12-month expected credit losses. If there has been a significant increase in credit risk since the initial recognition of a financial instrument but credit impairment has not occurred, on second stage, the Group recognises a loss allowance at an amount equal to lifetime expected credit losses. If credit impairment has occurred since the initial recognition of a financial instrument, on third stage, the Group recognises a loss allowance at an amount equal to lifetime expected credit losses.
For financial instruments that have low credit risk at the balance sheet date, the Group assumes that there is no significant increase in credit risk since the initial recognition, and measures the loss allowance at an amount equal to 12-month expected credit losses.
For financial instruments on the first stage and the second stage, and that have low credit risk, the Group calculates interest income according to carrying amount without deducting the impairment allowance and effective interest rate. For financial instruments on the third stage, interest income is calculated according to the carrying amount minus amortised cost after the provision of impairment allowance and effective interest rate.
For receivables related to revenue, the Group measures the loss allowance at an amount equal to lifetime expected credit losses.
The Group recognises the loss allowance accrued or written back in profit or loss.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Financial assets (Continued)
(iii) Derecognition
The Group derecognises a financial asset when: a) the contractual right to receive cash flows from the financial asset expires; b) the Group transfers the financial asset and substantially all the risks and rewards of ownership of the financial asset; c) the financial asset has been transferred and the Group neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, but the Group has not retained control.
On derecognition of financial assets at fair value through other comprehensive income, the difference between the carrying amounts and the sum of the consideration received and any accumulated gain or loss previously recognised in other comprehensive income, is recognised in retained earnings. While on derecognition of other financial assets, this difference is recognised in profit or loss.
(iv) Accounting policy applied until 31 December 2017
Classification
Until 31 December 2017, the group classified its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets.
The classification depended on the purpose for which the investments were acquired. Management determined the classification of its investments at initial recognition.
Subsequent measurement
The measurement at initial recognition did not change on adoption of IFRS 9.
Subsequent to the initial recognition, loans and receivables and held-to-maturity investments were carried at amortised cost using the effective interest method.
Available-for-sale financial assets and financial assets at fair value through profit or loss were subsequently carried at fair value. Gains or losses arising from changes in the fair value were recognised as follows: for financial assets at fair value through profit or loss - in profit or loss within other gains/(losses), for available-for-sale financial assets - in other comprehensive income.
When securities classified as available-for-sale were derecognised or impaired, the accumulated gains or losses recognised in other comprehensive income were reclassified to the consolidated income statement.
Impairment
Trade accounts receivables, other receivables and investment in equity securities that do not have a quoted market price in an active market are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, an impairment loss is determined and recognised.
The impairment loss is measured as the difference between the asset's carrying amount and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material, and is recognised as an expense in the consolidated income statement. Impairment losses for trade and other receivables are reversed through the consolidated income statement if in a subsequent period the amount of the impairment losses decreases. Impairment losses for equity securities carried at cost are not reversed.
(l) Financial liabilities
The Group, at initial recognition, classifies financial liabilities as either financial liabilities subsequently measured at amortised cost or financial liabilities at fair value through profit or loss.
The Group's financial liabilities are mainly financial liabilities measured at amortised cost, including bills payable, trade accounts payable, other payables, and loans, etc. These financial liabilities are initially measured at the amount of their fair value after deducting transaction costs and use the effective interest rate method for subsequent measurement.
Where the present obligations of financial liabilities are completely or partially discharged, the Group derecognises these financial liabilities or discharged parts of obligations. The differences between the carrying amounts and the consideration received are recognised in profit or loss.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(m) Determination of fair value for financial instruments
If there is an active market for financial instruments, the quoted price in the active market is used to measure fair values of the financial instruments. If no active market exists for financial instruments, valuation techniques are used to measure fair values. In valuation, the Group adopts valuation techniques that are applicable in the current situation and have sufficient available data and other information to support it, and selects input values that are consistent with the asset or liability characteristics considered by market participants in the transaction of relevant assets or liabilities, and gives priority to relevant observable input values. Use of unobservable input values where relevant observable input values cannot be obtained or are not practicable.
(n) Derivative financial instruments and hedge accounting
Derivative financial instruments are recognised initially at fair value. At each balance sheet date, the fair value is remeasured. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss, except where the derivatives qualify for hedge accounting.
Hedge accounting is a method which recognises the offsetting effects on profit or loss (or other comprehensive income) of changes in the fair values of the hedging instrument and the hedged item in the same accounting period, to represent the effect of risk management activities.
Hedged items are the items that expose the Group to risks of changes in future cash flows and that are designated as being hedged and that must be reliably measurable. The Group's hedged items include a forecast transaction that is settled with an undetermined future market price and exposes the Group to risk of variability in cash flows, etc.
A hedging instrument is a designated derivative whose changes in cash flows are expected to offset changes in cash flows of the hedged item.
The hedging relationship meets all of the following hedge effectiveness requirements:
(i) There is an economic relationship between the hedged item and the hedging instrument, which shares a risk and that gives rise to opposite changes in fair value that tend to offset each other.
(ii) The effect of credit risk does not dominate the value changes that result from that economic relationship.
(iii) The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item. However, that designation does not reflect an imbalance between the weightings of the hedged item and the hedging instrument.
Cash flow hedges
Cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss. Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument.
As long as a cash flow hedge meets the qualifying criteria for hedge accounting, the separate component of equity associated with the hedged item (cash flow hedge reserve) is adjusted to the lower of the following (in absolute amounts):
(i) The cumulative gain or loss on the hedging instrument from inception of the hedge; and
(ii) The cumulative change in fair value (present value) of the hedged item (i.e. the present value of the cumulative change in the hedged expected future cash flows) from inception of the hedge.
The gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income.
The portion of the gain or loss on the hedging instrument that is determined to be an ineffective hedge is recognised in profit or loss.
If a hedged forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or a hedged forecast transaction for a non-financial asset or a nonfinancial liability becomes a firm commitment for which fair value hedge accounting is applied, the entity removes that amount from the cash flow hedge reserve and include it directly in the initial cost or other carrying amount of the asset or the liability. This is not a reclassification adjustment and hence it does not affect other comprehensive income.
For cash flow hedges, other than those covered by the preceding policy statements, that amount is reclassified from the cash flow hedge reserve to profit or loss as a reclassification adjustment in the same period or periods during which the hedged expected future cash flows affect profit or loss.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(n) Derivative financial instruments and hedge accounting (Continued)
Cash flow hedges (Continued)
If the amount that has been accumulated in the cash flow hedge reserve is a loss and the Group expects that all or a portion of that loss will not be recovered in one or more future periods, the Group immediately reclassifies the amount that is not expected to be recovered into profit or loss.
When the hedging relationship no longer meets the risk management objective on the basis of which it qualified for hedge accounting (ie the entity no longer pursues that risk management objective), or when a hedging instrument expires or is sold, terminated, exercised, or there is no longer an economic relationship between the hedged item and the hedging instrument or the effect of credit risk starts to dominate the value changes that result from that economic relationship or no longer meets the criteria for hedge accounting, the Group discontinues prospectively the hedge accounting treatments. If the hedged future cash flows are still expected to occur, that amount remains in the cash flow hedge reserve and is accounted for as cash flow hedges. If the hedged future cash flows are no longer expected to occur, that amount is immediately reclassified from the cash flow hedge reserve to profit or loss as a reclassification adjustment. A hedged future cash flow that is no longer highly probable to occur may still be expected to occur, if the hedged future cash flows are still expected to occur, that amount remains in the cash flow hedge reserve and is accounted for as cash flow hedges.
(o) Impairment of assets
The carrying amounts of assets, including property, plant and equipment, construction in progress, lease prepayments and other assets, are reviewed at each balance sheet date to identify indicators that the assets may be impaired. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. For goodwill, the recoverable amount is estimated at each balance sheet date.
The recoverable amount is the greater of the fair value less costs to disposal and the value in use. In determining the value in use, expected future cash flows generated by the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).
The amount of the reduction is recognised as an expense in the consolidated income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to disposal, or value in use, if determinable.
Management assesses at each balance sheet date whether there is any indication that an impairment loss recognised for an asset, except in the case of goodwill, in prior years may no longer exist. An impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. A subsequent increase in the recoverable amount of an asset, when the circumstances and events that led to the write-down or write-off cease to exist, is recognised as an income. The reversal is reduced by the amount that would have been recognised as depreciation had the write-down or write-off not occurred. An impairment loss in respect of goodwill is not reversed.
(p) Trade, bills and other payables
Trade, bills and other payables are initially recognised at fair value and thereafter stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.
(q) Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the consolidated income statement over the period of borrowings using the effective interest method.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(r) Provisions and contingent liability
A provision is recognised for liability of uncertain timing or amount when the Group has a legal or constructive obligation arising as a result of a past event, when it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made.
When 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.
Provisions for future dismantlement costs are initially recognised based on the present value of the future costs expected to be incurred in respect of the Group's expected dismantlement and abandonment costs at the end of related oil and gas exploration and development activities. Any subsequent change in the present value of the estimated costs, other than the change due to passage of time which is regarded as interest cost, is reflected as an adjustment to the provision and oil and gas properties.
(s) Revenue recognition
Revenue arises in the course of the Group's ordinary activities, and increases in economic benefits in the form of inflows that result in an increase in equity, other than those relating to contributions from equity participants.
The Group sells crude oil, natural gas, petroleum and chemical products, etc. Revenue is recogniesd according to the expected consideration amount, when a customer obtains control over the relevant goods or services. To determine whether a customer obtains control of a promised asset, the Group shall consider indicators of the transfer of control, which include, but are not limited to, the Group has a present right to payment for the asset; the Group has transferred physical possession of the asset to the customer; the customer has the significant risks and rewards of ownership of the asset; the customer has accepted the asset.
(i) Sales of goods
Sales are recognised when control of the goods have transferred, being when the products are delivered to the customer. Advance from customers but goods not yet delivered is recorded as contract liabilities and is recognised as revenues when a customer obtains control over the relevant goods.
(ii) Accounting policy applied until 31 December 2017
The Group has applied IFRS 15 retrospectively, but has elected not to restate comparative information. As a result, the comparative information provided continues to be accounted for in accordance with the Group's previous accounting policy.
Revenues associated with the sale of crude oil, natural gas, petroleum and chemical products and ancillary materials are recorded when the customer accepts the goods and the significant risks and rewards of ownership and title have been transferred to the buyer. Revenue from the rendering of services is recognised in the consolidated income statement upon performance of the services. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.
(t) Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the group will comply with all attached conditions.
Government grants relating to costs are deferred and recognised in the profit or loss over the period necessary to match them with the costs that they are intended to compensate.
Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to profit or loss on a straight-line basis over the expected lives of the related assets.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(u) Borrowing costs
Borrowing costs are expensed in the consolidated income statement in the period in which they are incurred, except to the extent that they are capitalised as being attributable to the construction of an asset which necessarily takes a period of time to get ready for its intended use.
(v) Repairs and maintenance expenditure
Repairs and maintenance expenditure is expensed as incurred.
(w) Environmental expenditures
Environmental expenditures that relate to current ongoing operations or to conditions caused by past operations are expensed as incurred.
Liabilities related to future remediation costs are recorded when environmental assessments and/or cleanups are probable and the costs can be reliably estimated. As facts concerning environmental contingencies become known to the Group, the Group reassesses its position both with respect to accrued liabilities and other potential exposures.
(x) Research and development expense
Research and development expenditures that cannot be capitalised are expensed in the period in which they are incurred. Research and development expense amounted to RMB 7,956 million for the year ended 31 December 2018 (2017: RMB 6,423 million).
(y) Operating leases
Operating lease payments are charged to the consolidated income statement on a straight-line basis over the period of the respective leases.
(z) Employee benefits
The contributions payable under the Group's retirement plans are recognised as an expense in the consolidated income statement as incurred and according to the contribution determined by the plans. Further information is set out in Note 38.
Termination benefits, such as employee reduction expenses, are recognised when, and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.
(aa) Income tax
Income tax comprises current and deferred tax. Current tax is calculated on taxable income by applying the applicable tax rates. Deferred tax is provided using the balance sheet liability method on all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes only to the extent that it is probable that future taxable income will be available against which the assets can be utilised. Deferred tax is calculated on the basis of the enacted tax rates or substantially enacted tax rates that are expected to apply in the period when the asset is realised or the liability is settled. The effect on deferred tax of any changes in tax rates is charged or credited to the consolidated income statement, except for the effect of a change in tax rate on the carrying amount of deferred tax assets and liabilities which were previously charged or credited to other comprehensive income or directly in equity.
The tax value of losses expected to be available for utilisation against future taxable income is set off against the deferred tax liability within the same legal tax unit and jurisdiction to the extent appropriate, and is not available for set off against the taxable profit of another legal tax unit. The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that the related tax benefit will be realised.
(bb) Dividends
Dividends and distributions of profits proposed in the profit appropriation plan which will be authorized and declared after the balance sheet date, are not recognised as a liability at the balance sheet date and are separately disclosed in the notes to the financial statements. Dividends are recognised as a liability in the period in which they are declared.
(cc) Segment reporting
Operating segments, and the amounts of each segment item reported in the consolidated financial statements, are identified from the financial information provided regularly to the Group's chief operating decision maker for the purposes of allocating resources to, and assessing the performance of the Group's various lines of business.
3 TURNOVER
Turnover primarily represents revenue from the sales of crude oil, refined petroleum products, chemical products and natural gas.
2018
2017
RMB million
RMB million
Crude oil
519,910
421,585
Gasoline
711,236
600,113
Diesel
594,008
503,406
Basic chemical feedstock
250,884
205,722
Kerosene
168,823
115,739
Synthetic resin
124,618
107,633
Natural gas
43,205
34,277
Synthetic fiber monomers and polymers
77,572
61,998
Others(i)
335,357
249,997
2,825,613
2,300,470
(i) Others are primarily liquefied petroleum gas and other refinery and chemical by-products and joint products.
4 OTHER OPERATING REVENUES
2018
2017
RMB million
RMB million
Sale of materials and others
64,503
58,930
Rental income
1,063
793
65,566
59,723
5 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following items are included in selling, general and administrative expenses:
2018
2017
RMB million
RMB million
Operating lease charges
12,297
12,104
Auditor's remuneration:
- audit services
94
72
- others
9
5
Impairment losses:
- trade accounts receivable
6
(51)
- other receivables
9
159
- accounts prepayments
29
2
6 PERSONNEL EXPENSES
2018
2017
RMB million
RMB million
Salaries, wages and other benefits
68,425
65,873
Contributions to retirement schemes (Note 38)
9,296
8,981
77,721
74,854
7 TAXES OTHER THAN INCOME TAX
2018
2017
RMB million
RMB million
Consumption tax (i)
201,901
192,907
City construction tax (ii)
18,237
18,274
Education surcharge
13,187
13,811
Resources tax
6,021
4,841
Others
7,152
5,459
246,498
235,292
Note:
(i) Consumption tax was levied based on sales quantities of taxable products, tax rate of products is presented as below:
Effective from
Products
13 January 2015
RMB/Ton
Gasoline
2,109.76
Diesel
1,411.20
Naphtha
2,105.20
Solvent oil
1,948.64
Lubricant oil
1,711.52
Fuel oil
1,218.00
Jet fuel oil
1,495.20
(ii) City construction tax is levied on an entity based on its total paid amount of value-added tax and consumption tax.
8 OTHER OPERATING EXPENSE, NET
2018
2017
RMB million
RMB million
Government grant (i)
7,539
4,893
Ineffective portion of change in fair value of cash flow hedges
(1,978)
(813)
Net realised and unrealised gain/(loss) on derivative financial instruments not qualified as hedging
191
(909)
Impairment losses on long-lived assets (ii)
(6,281)
(21,258)
Loss on disposal of property, plant, equipment and other non-currents assets, net
(1,526)
(1,518)
Fines, penalties and compensations
(276)
(89)
Donations
(180)
(152)
Gain on remeasurement of interests in the Shanghai SECCO (Note 36)
-
3,941
Others
(2,849)
(649)
(5,360)
(16,554)
Note:
(i) Government grants for the years ended 31 December 2018 and 2017 primarily represent financial appropriation income and non-income tax refunds received from respective government agencies without conditions or other contingencies attached to the receipts of the grants.
(ii) Impairment losses on long-lived assets for the year ended 31 December 2018 primarily represent impairment losses recognised in the exploration and production ("E&P") segment of RMB 4,274 million (2017: RMB 13,556 million), the chemicals segment of RMB 1,374 million (2017: RMB 4,922 million) and for the refining segment of RMB 353 million (2017: RMB 1,894 million), most of which are impairment losses on property, plant and equipment. The primary factor resulting in the E&P segment impairment loss was downward revision of oil and gas reserve in certain fields. The carrying values of these E&P properties were written down to recoverable amounts which were determined based on the present values of the expected future cash flows of the assets using a pre-tax discount rate 10.47% (2017: 10.47%). Further future downward revisions to the Group's oil price outlook would lead to further impairments which, in aggregate, are likely to be material. It is estimated that a general decrease of 5% in oil price, with all other variables held constant, would result in additional impairment loss on the Group's properties, plant and equipment relating to oil and gas producing activities by approximately RMB 312 million (2017: RMB 3,145 million). It is estimated that a general increase of 5% in operating cost, with all other variables held constant, would result in additional impairment loss on the Group's properties, plant and equipment relating to oil and gas producing activities by approximately RMB 315 million (2017: RMB 2,659 million). It is estimated that a general increase of 5% in discount rate, with all other variables held constant, would result in less impairment loss on the Group's properties, plant and equipment relating to oil and gas producing activities by approximately RMB 5 million (2017: additional RMB 461 million). The assets in the refining segment were written down due to the suspension of operations of certain production facilities, while the assets in the chemical segment were written down because of evidence indicates the economic performance of certain production facilities are worse than expected and due to the suspension of operations of certain production facilities.
9 INTEREST EXPENSE
2018
2017
RMB million
RMB million
Interest expense incurred
6,376
6,368
Less: Interest expense capitalised*
(493)
(723)
5,883
5,645
Accretion expenses (Note 33)
1,438
1,501
Interest expense
7,321
7,146
* Interest rates per annum at which borrowing costs were capitalised for construction in progress
2.37% to 4.66%
2.37% to 4.41%
10 INCOME TAX EXPENSE
Income tax expense in the consolidated income statement represents:
2018
2017
RMB million
RMB million
Current tax
- Provision for the year
27,176
26,668
- Adjustment of prior years
(719)
(72)
Deferred taxation (Note 28)
(6,244)
(10,317)
20,213
16,279
Reconciliation between actual income tax expense and the expected income tax expense at applicable statutory tax rates is as follows:
2018
2017
RMB million
RMB million
Profit before taxation
99,110
86,697
Expected PRC income tax expense at a statutory tax rate of 25%
24,778
21,674
Tax effect of non-deductible expenses
2,351
1,905
Tax effect of non-taxable income
(5,033)
(5,939)
Tax effect of preferential tax rate (i)
(1,259)
(793)
Effect of income taxes at foreign operations
77
(1,394)
Tax effect of utilisation of previously unrecognised tax losses and temporary differences
(779)
(613)
Tax effect of tax losses not recognised
609
1,485
Write-down of deferred tax assets
188
26
Adjustment of prior years
(719)
(72)
Actual income tax expense
20,213
16,279
Note:
(i) The provision for PRC current income tax is based on a statutory income tax rate of 25% of the assessable income of the Group as determined in accordance with the relevant income tax rules and regulations of the PRC, except for certain entities of the Group in western regions in the PRC are taxed at preferential income tax rate of 15% through the year 2020.
11 DIRECTORS' AND SUPERVISORS' EMOLUMENTS
(a) Directors' and supervisors' emoluments
The emoluments of every director and supervisor is set out below:
Emoluments paid or receivable in respect of director's
other services in connection with the management of the
affairs of the Company or its subsidiary undertaking
Emoluments paid
or receivable
in respect of a
person's services
as a director,
whether of the
Company or
its subsidiary
undertaking
2018
Name
Salaries,
allowances and
benefits in kind
Bonuses
Retirement
scheme
contributions
Directors'/
Supervisors' fee
Total
RMB'000
RMB'000
RMB'000
RMB'000
RMB'000
Directors
Dai Houliang (i)
224
179
65
-
468
Li Yunpeng
-
-
-
-
-
Yu Baocai (ii)
-
-
-
-
-
Ma Yongsheng (i)
53
328
14
-
395
Ling Yiqun (iii)
-
-
-
-
-
Liu Zhongyun (iii)
-
-
-
-
-
Li Yong (iii)
-
-
-
-
-
Wang Zhigang (iv)
21
456
6
-
483
Zhang Haichao (iv)
-
-
-
-
-
Jiao Fangzheng (v)
-
-
-
-
-
Independent non-executive directors
Tang Min
-
-
-
333
333
Fan Gang
-
-
-
333
333
Cai Hongbin (iii)
-
-
-
233
233
Johnny Karling Ng (iii)
-
-
-
233
233
Jiang Xiaoming (vi)
-
-
-
125
125
Andrew Y. Yan (vi)
-
-
-
125
125
Supervisors
Zhao Dong
-
-
-
-
-
Jiang Zhenying
-
-
-
-
-
Yang Changjiang (iii)
-
-
-
-
-
Zhang Baolong (iii)
-
-
-
-
-
Zou Huiping
298
663
74
-
1,035
Zhou Hengyou
174
122
44
-
340
Yu Renming
298
613
74
-
985
Yu Xizhi
298
636
74
-
1,008
Total
1,366
2,997
351
1,382
6,096
11 DIRECTORS' AND SUPERVISORS' EMOLUMENTS (Continued)
(a) Directors' and supervisors' emoluments (Continued)
The emoluments of every director and supervisor is set out below: (Continued)
Emoluments paid or receivable in respect of director's
other services in connection with the management of the
affairs of the Company or its subsidiary undertaking
Emoluments paid
or receivable
in respect of a
person's services
as a director,
whether of the
Company or
its subsidiary
undertaking
2017
Name
Salaries,
allowances
and benefits
in kind
Bonuses
Retirement
scheme
contributions
Directors'/
Supervisors' fee
Total
RMB'000
RMB'000
RMB'000
RMB'000
RMB'000
Directors
Wang Yupu(vii)
-
-
-
-
-
Dai Houliang
227
537
76
-
840
Li Yunpeng
-
-
-
-
-
Wang Zhigang
207
487
76
-
770
Zhang Haichao
-
-
-
-
-
Jiao Fangzheng
-
-
-
-
-
Ma Yongsheng
-
-
-
-
-
Independent non-executive directors
Jiang Xiaoming
-
-
-
300
300
Andrew Y. Yan
-
-
-
300
300
Tang Min
-
-
-
300
300
Fan Gang
-
-
-
300
300
Supervisors
Zhao Dong
-
-
-
-
-
Liu Zhongyun
-
-
-
-
-
Zhou Hengyou
-
-
-
-
-
Zou Huiping
207
480
71
-
758
Jiang Zhenying
207
480
71
-
758
Yu Renming
207
480
71
-
758
Yu Xizhi
122
103
42
-
267
Liu Yun(vii)
-
-
-
-
-
Wang Yajun(vii)
51
349
17
-
417
Total
1,228
2,916
424
1,200
5,768
Notes:
(i) Mr. Ma Yongsheng was appointed as president from 30 October 2018. Mr. Dai Houliang ceased being president and executive director and was elected as non-executive director from 30 October 2018.
(ii) Mr. Yu Baocai was elected to be director from 23 October 2018.
(iii) Mr. Ling Yiqun was elected to be director from 15 May 2018; Mr. Liu Zhongyun was elected to be director from 15 May 2018; Mr. Li Yong was elected to be director from 15 May 2018; Mr. Cai Hongbin was elected to be independent non-executive director from 15 May 2018; Mr. Johnny Karling Ng was elected to be independent non-executive director from 15 May 2018; Mr. Yang Changjiang was elected to be supervisor from 15 May 2018; Mr. Zhang Baolong was elected to be supervisor from 15 May 2018;
(iv) Mr. Wang Zhigang ceased being director from 29 January 2018; Mr. Zhang Haichao ceased being director from 29 January 2018.
(v) Mr. Jiao Fangzheng ceased being director from 7 June 2018.
(vi) Mr. Jiang Xiaoming ceased being independent non-executive director from 15 May 2018; Mr. Andrew Y. Yan ceased being independent non-executive director from 15 May 2018.
(vii) Mr. Wang Yupu ceased being chairman and independent director from 22 September 2017; Mr. Liu Yun ceased being supervisor and chairman of board of supervisor from 16 March 2017; Mr. Wang Yajun ceased being supervisor from 28 June 2017.
12 SENIOR MANAGEMENT'S EMOLUMENTS
For the year ended 31 December 2018, the five highest paid individuals in the Company included two supervisors and three senior management. The emolument paid to each of two supervisors and three senior management was above RMB 1,000 thousand. The total salaries, wages and other benefits was RMB 5,089 thousand, and the total amount of their retirement scheme contributions was RMB 370 thousand. For the year ended 31 December 2017, the five highest paid individuals in the Company included one director and four senior management.
13 DIVIDENDS
Dividends payable to shareholders of the Company attributable to the year represent:
2018
2017
RMB million
RMB million
Dividends declared and paid during the year of RMB 0.16 per share (2017: RMB 0.10 per share)
19,371
12,107
Dividends declared after the balance sheet date of RMB 0.26 per share (2017: RMB 0.40 per share)
31,479
48,428
50,850
60,535
Pursuant to the Company's Articles of Association and a resolution passed at the Directors' meeting on 24 August 2018, the directors authorised to declare the interim dividends for the year ending 31 December 2018 of RMB 0.16 (2017: RMB 0.10) per share totaling RMB 19,371 million (2017: RMB 12,107 million). Dividends were paid on 12 September 2018.
Pursuant to a resolution passed at the director's meeting on 22 March 2019, final dividends in respect of the year ended 31 December 2018 of RMB 0.26 (2017: RMB 0.40) per share totaling RMB 31,479 million (2017: RMB 48,428 million) were proposed for shareholders' approval at the Annual General Meeting. Final cash dividend proposed after the balance sheet date has not been recognised as a liability at the balance sheet date.
Dividends payable to shareholders of the Company attributable to the previous financial year, approved during the year represent:
2018
2017
RMB million
RMB million
Final cash dividends in respect of the previous financial year, approved during the year of
RMB 0.40 per share (2017: RMB 0.17 per share)
48,428
20,582
Pursuant to the shareholders' approval at the Annual General Meeting on 15 May 2018, a final dividend of RMB 0.40 per share totaling RMB 48,428 million according to total shares of 4 June 2018 was approved. All dividends have been paid in the year ended 31 December 2018.
Pursuant to the shareholders' approval at the Annual General Meeting on 28 June 2017, a final dividend of RMB 0.17 per share totaling RMB 20,582 million according to total shares of 18 July 2017 was approved. All dividends have been paid in the year ended 31 December 2017.
14 OTHER COMPREHENSIVE INCOME
2018
2017
Before tax
Tax
Net of tax
Before tax
Tax
Net of tax
amount
effect
amount
amount
effect
amount
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Cash flow hedges:
Effective portion of changes in fair value
of hedging instruments recognised during the year
(12,500)
2,159
(10,341)
(1,314)
240
(1,074)
Amounts transferred to initial carrying
amount of hedged items
-
-
-
(4)
1
(3)
Reclassification adjustments for amounts
transferred to the consolidated income statement
730
(130)
600
(575)
72
(503)
Net movement during the year
recognised in other comprehensive income(i)
(11,770)
2,029
(9,741)
(1,893)
313
(1,580)
Available-for-sale financial assets:
Changes in fair value recognised
during the year
-
-
-
(57)
-
(57)
Changes in the fair value of instruments at fair value
through other comprehensive income
(41)
(12)
(53)
-
-
-
Net movement during the year
recognised in other comprehensive income
(41)
(12)
(53)
(57)
-
(57)
Share of other comprehensive profit
of associates and joint ventures
(240)
11
(229)
1,053
-
1,053
Foreign currency translation differences
3,399
-
3,399
(3,792)
-
(3,792)
Other comprehensive income
(8,652)
2,028
(6,624)
(4,689)
313
(4,376)
(i) As at 31 December 2018, cash flow hedge reserve amounted to a loss of RMB 4,932 million (31 December 2017: a loss of RMB 460 million), of which a loss of RMB 4,917 million was attribute to shareholders of the Company (31 December 2017: a loss of RMB 510 million).
15 BASIC AND DILUTED EARNINGS PER SHARE
The calculation of basic earnings per share for the year ended 31 December 2018 is based on the profit attributable to ordinary shareholders of the Company of RMB 61,618 million (2017: RMB 51,244 million) and the weighted average number of shares of 121,071,209,646 (2017: 121,071,209,646) during the year.
The calculation of diluted earnings per share for the year ended 31 December 2018 is based on the profit attributable to ordinary shareholders of the Company (diluted) of RMB 61,618 million (2017: RMB 51,242 million) and the weighted average number of shares of 121,071,209,646 (2017: 121,071,209,646) calculated as follows:
(i) Profit attributable to ordinary shareholders of the Company (diluted)
2018
2017
RMB million
RMB million
Profit attributable to ordinary shareholders of the Company
61,618
51,244
After tax effect of employee share option scheme of Shanghai Petrochemical
-
(2)
Profit attributable to ordinary shareholders of the Company (diluted)
61,618
51,242
(ii) Weighted average number of shares (diluted)
2018
2017
Number of shares
Number of shares
Weighted average number of shares at 31 December
121,071,209,646
121,071,209,646
Weighted average number of shares (diluted) at 31 December
121,071,209,646
121,071,209,646
16 PROPERTY, PLANT AND EQUIPMENT
Equipment,
Plants and
Oil and gas,
machinery
buildings
properties
and others
Total
RMB million
RMB million
RMB million
RMB million
Cost:
Balance at 1 January 2017
114,920
650,685
892,936
1,658,541
Additions
854
1,627
11,983
14,464
Transferred from construction in progress
6,789
19,881
54,605
81,275
Reclassifications
(673)
(50)
723
-
Reclassification to lease prepayments and other long-term assets
(859)
(1,702)
(8,751)
(11,312)
Disposals
(878)
(211)
(10,985)
(12,074)
Exchange adjustments
(140)
(2,573)
(199)
(2,912)
Balance at 31 December 2017
120,013
667,657
940,312
1,727,982
Balance at 1 January 2018
120,013
667,657
940,312
1,727,982
Additions
221
1,567
3,856
5,644
Transferred from construction in progress
3,741
24,366
45,103
73,210
Reclassifications
1,634
138
(1,772)
-
Reclassification to lease prepayments and other long-term assets
(483)
-
(3,828)
(4,311)
Disposals
(3,183)
(146)
(18,323)
(21,652)
Exchange adjustments
98
2,142
147
2,387
Balance at 31 December 2018
122,041
695,724
965,495
1,783,260
Accumulated depreciation:
Balance at 1 January 2017
48,572
435,561
483,814
967,947
Depreciation for the year
4,075
55,057
46,585
105,717
Impairment losses for the year
554
8,832
10,450
19,836
Reclassifications
(122)
(77)
199
-
Reclassification to lease prepayments and other long-term assets
(238)
(1,305)
(2,682)
(4,225)
Disposals
(584)
(195)
(9,079)
(9,858)
Exchange adjustments
(57)
(2,056)
(96)
(2,209)
Balance at 31 December 2017
52,200
495,817
529,191
1,077,208
Balance at 1 January 2018
52,200
495,817
529,191
1,077,208
Depreciation for the year
4,038
48,616
47,250
99,904
Impairment losses for the year
274
4,027
1,848
6,149
Reclassifications
494
76
(570)
-
Reclassification to lease prepayments and other long-term assets
(120)
-
(1,390)
(1,510)
Disposals
(1,795)
(125)
(16,331)
(18,251)
Exchange adjustments
43
1,877
78
1,998
Balance at 31 December 2018
55,134
550,288
560,076
1,165,498
Net book value:
Balance at 1 January 2017
66,348
215,124
409,122
690,594
Balance at 31 December 2017
67,813
171,840
411,121
650,774
Balance at 31 December 2018
66,907
145,436
405,419
617,762
The additions to oil and gas properties of the Group for the year ended 31 December 2018 included RMB 1,567 million (2017: RMB 1,627 million) of estimated dismantlement costs for site restoration (Note 33).
At 31 December 2018 and 31 December 2017, the Group had no individually significant fixed assets which were pledged.
At 31 December 2018 and 31 December 2017, the Group had no individually significant fixed assets which were temporarily idle or pending for disposal.
At 31 December 2018 and 31 December 2017, the Group had no individually significant fully depreciated fixed assets which were still in use.
17 CONSTRUCTION IN PROGRESS
2018
2017
RMB million
RMB million
Balance at 1 January
118,645
129,581
Additions
108,555
85,552
Dry hole costs written off
(6,921)
(6,876)
Transferred to property, plant and equipment
(73,210)
(81,229)
Reclassification to lease prepayments and other long-term assets
(10,066)
(7,773)
Impairment losses for the year
(28)
(252)
Disposals
(19)
(315)
Exchange adjustments
7
(43)
Balance at 31 December
136,963
118,645
As at 31 December 2018, the amount of capitalised cost of exploratory wells included in construction in progress related to the exploration and production segment was RMB 7,296 million (2017: RMB 9,737 million). The geological and geophysical costs paid during the year ended 31 December 2018 were RMB 3,511 million (2017: RMB 3,710 million).
18 GOODWILL
31 December
31 December
2018
2017
RMB million
RMB million
Cost
16,537
16,495
Less: Accumulated impairment losses
(7,861)
(7,861)
8,676
8,634
Impairment tests for cash-generating units containing goodwill
Goodwill is allocated to the following Group's cash-generating units:
Principal activities
31 December
31 December
2018
2017
RMB million
RMB million
Sinopec Beijing Yanshan Petrochemical Branch
("Sinopec Yanshan")
Manufacturing of intermediate petrochemical
products and petroleum products
1,004
1,004
Sinopec Zhenhai Refining and Chemical Branch
("Sinopec Zhenhai")
Manufacturing of intermediate petrochemical
products and petroleum products
4,043
4,043
Shanghai SECCO Petrochemical Company Limited
("Shanghai SECCO") (Note36)
Production and sale of petrochemical products
2,541
2,541
Sinopec (Hong Kong) Limited
Trading of petrochemical products
921
879
Other units without individually significant goodwill
167
167
8,676
8,634
Goodwill represents the excess of the cost of purchase over the fair value of the underlying assets and liabilities. The recoverable amounts of the above cash generating units are determined based on value in use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a one-year period and pre-tax discount rates primarily ranging from 11.7% to 12.3% (2017: 10.8% to 11.4%). Cash flows beyond the one-year period are maintained constant. Based on the estimated recoverable amount, no major impairment loss was recognised.
Key assumptions used for cash flow forecasts for these entities are the gross margin and sales volume. Management determined the budgeted gross margin based on the gross margin achieved in the period immediately before the budget period and management's expectation on the future trend of the prices of crude oil and petrochemical products. The sales volume was based on the production capacity and/or the sales volume in the period immediately before the budget period.
19 INTEREST IN ASSOCIATES
The Group's investments in associates are with companies primarily engaged in the oil and gas, petrochemical, and marketing and distribution operations in the PRC.
The Group's principal associates are as follows:
Name of company
% of
ownership
interests
Principal activities
Measurement
method
Country of
incorporation
Principal place
of business
Sinopec Sichuan To East China Gas
50.00
Operation of natural gas
Equity method
PRC
PRC
Pipeline Co., Ltd. ("Pipeline Ltd")
pipelines and auxiliary
facilities
Sinopec Finance Company Limited
49.00
Provision of non-banking
Equity method
PRC
PRC
("Sinopec Finance")
financial services
PAO SIBUR Holding ("SIBUR")
10.00
Processing natural gas
Equity method
Russia
Russia
and manufacturing
petrochemical products
Zhongtian Synergetic Energy
Company Limited
38.75
Mining coal and
manufacturing of
Equity method
PRC
PRC
("Zhongtian Synergetic Energy")
coal-chemical products
Caspian Investments Resources Ltd.
("CIR") extraction
50.00
Crude oil and natural gas
extraction
Equity method
British Virgin Islands
The Republic of
Kazakhstan
Summarised financial information and reconciliation to their carrying amounts in respect of the Group's principal associates:
Pipeline Ltd
Sinopec Finance
SIBUR(i)
Zhongtian Synergetic Energy
CIR
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Current assets
12,498
11,317
209,837
161,187
22,502
20,719
7,477
8,232
6,712
5,612
Non-current assets
39,320
40,972
16,359
17,782
170,796
158,938
49,961
51,553
1,828
1,673
Current liabilities
(1,020)
(933)
(200,402)
(154,212)
(23,293)
(20,554)
(7,252)
(10,668)
(961)
(908)
Non-current liabilities
(3,026)
(3,176)
(332)
(6)
(58,628)
(61,771)
(31,436)
(31,494)
(673)
(170)
Net assets
47,772
48,180
25,462
24,751
111,377
97,332
18,750
17,623
6,906
6,207
Net assets attributable to
owners of the Company
47,772
48,180
25,462
24,751
110,860
96,761
18,750
17,623
6,906
6,207
Net assets attributable to
non-controlling interests
-
-
-
-
517
571
-
-
-
-
Share of net assets from associates
23,886
24,090
12,476
12,128
11,086
9,676
7,266
6,829
3,453
3,104
Carrying Amounts
23,886
24,090
12,476
12,128
11,086
9,676
7,266
6,829
3,453
3,104
Summarised statement of comprehensive income
Year ended 31 December
Pipeline Ltd
Sinopec Finance
SIBUR(i)
Zhongtian Synergetic Energy
CIR
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Turnover
4,746
5,644
4,536
3,542
59,927
52,496
12,235
3,569
2,856
2,563
Profit/(loss) for the year
2,022
2,543
1,868
1,536
10,400
9,601
1,142
123
583
(610)
Other comprehensive (loss)/income
-
-
(157)
(246)
6,410
(260)
-
-
116
(334)
Total comprehensive income/(loss)
2,022
2,543
1,711
1,290
16,810
9,341
1,142
123
699
(944)
Dividends declared by associates
1,207
-
490
-
271
221
-
-
-
-
Share of profit/(loss) from associates
1,011
1,272
915
753
1,040
960
443
48
292
(305)
Share of other comprehensive (loss) /
income from associates (ii)
-
-
(77)
(121)
641
(26)
-
-
58
(167)
The share of profit and other comprehensive loss for the year ended 31 December 2018 in all individually immaterial associates accounted for using equity method in aggregate was RMB 3,550 million (2017: RMB 3,182 million) and RMB 844 million (2017: other comprehensive income RMB 569 million) respectively. As at 31 December 2018, the carrying amount of all individually immaterial associates accounted for using equity method in aggregate was RMB 31,370 million (2017: RMB 23,899 million).
Notes:
(i) Sinopec is able to exercise significant influence in SIBUR since Sinopec has a member in SIBUR's Board of Director and has a member in SIBUR's Management Board.
(ii) Including foreign currency translation differences.
20 INTEREST IN JOINT VENTURES
The Group's principal interests in joint ventures are as follows:
Name of entity
% of
ownership
interests
Principal activities
Measurement
method
Country of
incorporation
Principal place
of business
Fujian Refining & Petrochemical
Company Limited ("FREP")
50.00
Manufacturing refining
oil products
Equity method
PRC
PRC
BASF-YPC Company Limited
("BASF-YPC")
40.00
Manufacturing
and distribution of
petrochemical products
Equity method
PRC
PRC
Taihu Limited ("Taihu")
49.00
Crude oil and natural gas extraction
Equity method
Cyprus
Russia
Yanbu Aramco Sinopec Refining
Company Ltd. ("YASREF")
37.50
Petroleum refining and
processing business
Equity method
Saudi Arabia
Saudi Arabia
Sinopec SABIC Tianjin Petrochemical
Company Limited
("Sinopec SABIC Tianjin")
50.00
Manufacturing
and distribution of
petrochemical products
Equity method
PRC
PRC
Summarised balance sheet and reconciliation to their carrying amounts in respect of the Group's principal joint ventures:
FREP
BASF-YPC
Taihu
YASREF
Sinopec SABIC Tianjin
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
31 December
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Current assets
Cash and cash equivalents
7,388
5,772
1,582
1,800
3,406
2,352
930
4,916
5,110
6,524
Other current assets
9,248
11,013
5,795
5,335
3,689
2,462
10,267
10,816
4,007
2,709
Total current assets
16,636
16,785
7,377
7,135
7,095
4,814
11,197
15,732
9,117
9,233
Non-current assets
19,271
19,740
11,086
12,075
9,216
7,978
51,873
51,553
13,990
13,248
Current liabilities
Current financial liabilities
(1,200)
(1,135)
(725)
(233)
(59)
(20)
(4,806)
(5,407)
(500)
(1,236)
Other current liabilities
(4,939)
(5,049)
(1,822)
(1,982)
(2,124)
(1,914)
(12,217)
(11,864)
(2,507)
(4,546)
Total current liabilities
(6,139)
(6,184)
(2,547)
(2,215)
(2,183)
(1,934)
(17,023)
(17,271)
(3,007)
(5,782)
Non-current liabilities
Non-current financial liabilities
(12,454)
(13,654)
(218)
(955)
(72)
(72)
(32,364)
(35,619)
(3,651)
(4,101)
Other non-current liabilities
(279)
(236)
(17)
(19)
(2,271)
(2,686)
(937)
(890)
(331)
(41)
Total non-current liabilities
(12,733)
(13,890)
(235)
(974)
(2,343)
(2,758)
(33,301)
(36,509)
(3,982)
(4,142)
Net assets
17,035
16,451
15,681
16,021
11,785
8,100
12,746
13,505
16,118
12,557
Net assets attributable to owners
of the company
17,035
16,451
15,681
16,021
11,373
7,818
12,746
13,505
16,118
12,557
Net assets attributable to
non-controlling interests
-
-
-
-
412
282
-
-
-
-
Share of net assets from joint ventures
8,518
8,226
6,272
6,409
5,573
3,831
4,780
5,064
8,059
6,279
Carrying Amounts
8,518
8,226
6,272
6,409
5,573
3,831
4,780
5,064
8,059
6,279
20 INTEREST IN JOINT VENTURES (Continued)
Summarised statement of comprehensive income
Year ended 31 December
FREP
BASF-YPC
Taihu
YASREF
Sinopec SABIC Tianjin
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Turnover
52,469
49,356
21,574
21,020
14,944
12,520
77,561
61,587
23,501
22,286
Depreciation, depletion and amortisation
(2,250)
(16)
(1,521)
(1,793)
(664)
(715)
(2,823)
(2,763)
(1,104)
(36)
Interest income
157
208
41
36
141
142
101
45
169
104
Interest expense
(647)
(857)
(43)
(71)
(151)
(142)
(1,382)
(1,382)
(167)
(223)
Profit/(loss) before taxation
3,920
6,977
3,625
4,565
3,493
1,697
(1,569)
548
3,916
5,113
Tax expense
(935)
(1,699)
(897)
(1,151)
(729)
(553)
(249)
57
(993)
(1,279)
Profit/(loss) for the year
2,985
5,278
2,728
3,414
2,764
1,144
(1,818)
605
2,923
3,834
Other comprehensive income/(loss)
-
-
-
-
921
25
1,059
(554)
-
-
Total comprehensive income/(loss)
2,985
5,278
2,728
3,414
3,685
1,169
(759)
51
2,923
3,834
Dividends declared by joint ventures
1,200
1,250
1,226
1,109
-
-
-
-
-
1,375
Share of net profit/(loss) from joint ventures
1,493
2,639
1,091
1,366
1,307
541
(682)
227
1,462
1,917
Share of other comprehensive income/
(loss) from joint ventures
-
-
-
-
435
12
397
(208)
-
-
The share of profit and other comprehensive loss for the year ended 31 December 2018 in all individually immaterial joint ventures accounted for using equity method in aggregate was RMB 2,052 million (2017: RMB 3,925 million) and RMB 839 million (2017: other comprehensive income RMB 994 million) respectively. As at 31 December 2018, the carrying amount of all individually immaterial joint ventures accounted for using equity method in aggregate was RMB 22,982 million (2017: RMB 21,552 million).
21 LEASE PREPAYMENTS
2018
2017
RMB million
RMB million
Cost:
Balance at 1 January
75,728
68,467
Additions
249
2,614
Transferred from construction in progress
7,829
4,151
Transferred from other long-term assets
1,402
3,987
Reclassification to other assets
(544)
(2,603)
Disposals
(152)
(531)
Exchange adjustments
219
(357)
Balance at 31 December
84,731
75,728
Accumulated amortisation:
Balance at 1 January
17,202
14,226
Amortisation charge for the year
2,519
2,076
Transferred from other long-term assets
617
2,027
Reclassification to other assets
(154)
(770)
Disposals
(31)
(266)
Exchange adjustments
64
(91)
Balance at 31 December
20,217
17,202
Net book value:
64,514
58,526
22 LONG-TERM PREPAYMENTS AND OTHER ASSETS
31 December
31 December
2018
2017
RMB million
RMB million
Operating rights of service stations
34,934
34,268
Long-term receivables from and prepayment to Sinopec Group Company and fellow subsidiaries
26,513
20,726
Prepayments for construction projects to third parties
5,502
4,999
Others (i)
24,459
21,989
Balance at 31 December
91,408
81,982
Note:
(i) Others mainly comprise prepaid operating lease charges and catalyst expenditures.
The cost of operating rights of service stations is charged to expense on a straight-line basis over the respective periods of the rights. The movement of operating rights of service stations is as follows:
2018
2017
RMB million
RMB million
Operating rights of service stations
Cost:
Balance at 1 January
48,613
36,908
Additions
3,948
11,837
Decreases
(345)
(132)
Balance at 31 December
52,216
48,613
Accumulated amortisation:
Balance at 1 January
14,345
10,012
Additions
3,019
4,361
Decreases
(82)
(28)
Balance at 31 December
17,282
14,345
Net book value at 31 December
34,934
34,268
23 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
31 December
31 December
2018
2017
RMB million
RMB million
Structured deposit
25,550
51,196
Equity investments, listed and at quoted market price
182
-
25,732
51,196
The financial assets are the structured deposit with financial institutions, which are presented as current assets since they are expected to be expired within 12 months from the end of the reporting period.
24 DERIVATIVES FINANCIAL ASSETS AND DERIVATIVES FINANCIAL LIABILITIES
Derivative financial assets and derivative financial liabilities of the Group are primarily commodity futures and swaps. See Note 41.
25 TRADE ACCOUNTS RECEIVABLE AND BILLS RECEIVABLE
31 December
31 December
2018
2017
RMB million
RMB million
Amounts due from third parties
50,108
56,203
Amounts due from Sinopec Group Company and fellow subsidiaries
3,170
7,941
Amounts due from associates and joint ventures
4,321
4,962
57,599
69,106
Less: Impairment losses for bad and doubtful debts
(606)
(612)
Trade accounts receivable, net
56,993
68,494
Bills receivable
7,886
16,207
64,879
84,701
The ageing analysis of trade accounts and bills receivables (net of impairment losses for bad and doubtful debts) is as follows:
31 December
31 December
2018
2017
RMB million
RMB million
Within one year
64,317
83,984
Between one and two years
353
573
Between two and three years
124
43
Over three years
85
101
64,879
84,701
Impairment losses for bad and doubtful debts are analysed as follows:
2018
2017
RMB million
RMB million
Balance at 1 January
612
683
Provision for the year
83
49
Written back for the year
(77)
(100)
Written off for the year
(19)
(21)
Others
7
1
Balance at 31 December
606
612
Sales are generally on a cash term. Credit is generally only available for major customers with well-established trading records. Amounts due from Sinopec Group Company and fellow subsidiaries are repayable under the same terms.
Trade accounts receivable and bills receivables (net of impairment losses for bad and doubtful debts) primarily represent receivables that are neither past due nor impaired. These receivables relate to a wide range of customers for whom there is no recent history of default.
Information about the impairment of trade accounts receivable and the Group's exposure to credit risk can be found in Note 41.
26 INVENTORIES
31 December
31 December
2018
2017
RMB million
RMB million
Crude oil and other raw materials
85,469
85,975
Work in progress
13,690
14,774
Finished goods
88,929
84,448
Spare parts and consumables
2,872
2,651
190,960
187,848
Less: Allowance for diminution in value of inventories
(6,376)
(1,155)
184,584
186,693
The cost of inventories recognised as an expense in the consolidated income statement amounted to RMB 2,366,199 million for the year ended 31 December 2018 (2017: RMB 1,854,629 million). It includes the write-down of inventories of RMB 5,535 million mainly related to crude oil, finished goods and work in progress of refined oil products and chemical products (2017: RMB 436 million mainly related to the spare parts and consumables in refining segment and chemical segment).
27 PREPAID EXPENSES AND OTHER CURRENT ASSETS
31 December
31 December
2018
2017
RMB million
RMB million
Other receivables
26,455
17,704
Advances to suppliers
5,937
4,901
Value-added input tax to be deducted
21,331
17,926
Prepaid income tax
300
398
54,023
40,929
28 DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and deferred tax liabilities before offset are attributable to the items detailed in the table below:
Deferred tax assets
Deferred tax liabilities
31 December
31 December
31 December
31 December
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
Receivables and inventories
2,563
381
-
-
Payables
1,808
1,925
-
-
Cash flow hedges
1,131
165
(27)
(50)
Property, plant and equipment
15,427
14,150
(8,666)
(9,928)
Tax losses carried forward
3,709
2,325
-
-
Available-for-sale financial assets
-
117
-
-
Financial assets at fair value through other comprehensive income
117
-
(1)
-
Intangible assets
474
227
(535)
(563)
Others
174
180
(428)
(264)
Deferred tax assets/(liabilities)
25,403
19,470
(9,657)
(10,805)
At 31 December 2018, certain subsidiaries of the Company did not recognise deferred tax of deductible loss carried forward of RMB 18,308 million (2017: RMB 20,821 million), of which RMB 2,437 million (2017: RMB 5,938 million) was incurred for the year ended 31 December 2018, because it was not probable that the future taxable profits will be realised. These deductible losses carried forward of RMB 2,373 million, RMB 3,887 million, RMB 3,673 million, RMB 5,938 million and RMB 2,437 will expire in 2019, 2020, 2021, 2022,2023 and after, respectively.
Periodically, management performed assessment on the probability that future taxable profit will be available over the period which the deferred tax assets can be realised or utilised. In assessing the probability, both positive and negative evidence was considered, including whether it is probable that the operations will have sufficient future taxable profits over the periods which the deferred tax assets are deductible or utilised and whether the tax losses result from identifiable causes which are unlikely to recur. During the year ended 31 December 2018, write-down of deferred tax assets amounted to RMB 188 million (2017: RMB 26 million) (Note 10).
28 DEFERRED TAX ASSETS AND LIABILITIES (Continued)
Movements in the deferred tax assets and liabilities are as follows:
Recognised in
Recognised
Balance at
consolidated
in other
Acquisition of
Balance at
1 January
2017
income
statement
comprehensive
income
Others
Shanghai
SECCO
31 December
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Receivables and inventories
87
300
(5)
(1)
-
381
Payables
391
1,534
-
-
-
1,925
Cash flow hedges
(215)
9
313
8
-
115
Property, plant and equipment
(3,351)
8,475
287
(8)
(1,181)
4,222
Tax losses carried forward
2,477
(135)
(17)
-
-
2,325
Available-for-sale financial assets
-
117
-
-
-
117
Intangible assets
260
(27)
-
-
(569)
(336)
Others
(96)
44
4
-
(36)
(84)
Net deferred tax (liabilities)/assets
(447)
10,317
582
(1)
(1,786)
8,665
Recognised in
Recognised
Balance at
consolidated
in other
Transferred
Balance at
1 January
2018
income
statement
comprehensive
income
Others
from
reserve
31 December
2018
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Receivables and inventories
381
2,176
3
3
-
2,563
Payables
1,925
(117)
-
-
-
1,808
Cash flow hedges
115
(10)
2,029
1
(1,031)
1,104
Property, plant and equipment
4,222
2,650
(130)
19
-
6,761
Tax losses carried forward
2,325
1,414
6
(36)
-
3,709
Available-for-sale financial assets
117
-
-
(117)
-
-
Financial assets at fair value through
other comprehensive income
-
-
(1)
117
-
116
Intangible assets
(336)
273
-
2
-
(61)
Others
(84)
(142)
(2)
(26)
-
(254)
Net deferred tax assets/(liabilities)
8,665
6,244
1,905
(37)
(1,031)
15,746
29 SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND FELLOW SUBSIDIARIES
Short-term debts represent:
31 December
31 December
2018
2017
RMB million
RMB million
Third parties' debts
Short-term bank loans
17,088
31,105
RMB denominated
13,201
23,685
US Dollar ("USD") denominated
3,887
7,420
Short-term other loans
300
299
RMB denominated
300
299
Current portion of long-term bank loans
12,074
1,402
RMB denominated
12,039
1,379
USD denominated
35
23
Current portion of long-term corporate bonds
-
22,532
RMB denominated
-
16,000
USD denominated
-
6,532
12,074
23,934
29,462
55,338
Loans from Sinopec Group Company and fellow subsidiaries
Short-term loans
27,304
23,297
RMB denominated
3,061
1,706
USD denominated
22,780
19,668
Hong Kong Dollar ("HKD") denominated
1,441
1,903
EUR denominated
22
-
Singapore Dollar ("SGD") denominated
-
20
Current portion of long-term loans
4,361
2,014
RMB denominated
4,361
2,014
31,665
25,311
61,127
80,649
The Group's weighted average interest rates on short-term loans were 3.37% (2017: 2.72 %) at 31 December 2018. The above borrowings are unsecured.
29 SHORT-TERM AND LONG-TERM DEBTS AND LOANS FROM SINOPEC GROUP COMPANY AND FELLOW SUBSIDIARIES (Continued)
Long-term debts represent:
31 December
31 December
Interest rate and final maturity
2018
2017
RMB million
RMB million
Third parties' debts
Long-term bank loans
RMB denominated
Interest rates ranging from 1.08% to
4.66% per annum at 31 December 2018
with maturities through 2033
31,025
25,644
USD denominated
Interest rates ranging from 1.55% to
4.29% per annum at 31 December 2018
with maturities through 2031
109
192
31,134
25,836
Corporate bonds (i)
RMB denominated
IFixed interest rates ranging from 3.70% to
4.90% per annum at 31 December 2018
with maturity through 2022
20,000
36,000
USD denominated
Fixed interest rates ranging from 3.13% to
4.25% per annum at 31 December 2018
with maturities through 2043
11,951
17,902
31,951
53,902
Total third parties' long-term debts
63,085
79,738
Less: Current portion
(12,074)
(23,934)
51,011
55,804
Long-term loans from Sinopec Group Company
and fellow subsidiaries
RMB denominated
Interest rates ranging from interest free to
4.99% per annum at 31 December 2018
with maturities through 2030
46,877
45,334
Less: Current portion
(4,361)
(2,014)
42,516
43,320
93,527
99,124
Short-term and long-term bank loans, short-term other loans and loans from Sinopec Group Company and fellow subsidiaries are primarily unsecured and carried at amortised cost.
Note:
(i) These corporate bonds are carried at amortised cost. At 31 December 2018, RMB 11,951 million (2017: RMB 17,902 million) (USD denominated corporate bonds) are guaranteed by Sinopec Group Company.
30 TRADE ACCOUNTS PAYABLE AND BILLS PAYABLE
31 December
31 December
2018
2017
RMB million
RMB million
Amounts due to third parties
170,818
177,224
Amounts due to Sinopec Group Company and fellow subsidiaries
9,142
13,350
Amounts due to associates and joint ventures
6,381
9,499
186,341
200,073
Bills payable
6,416
6,462
Trade accounts and bills payables measured at amortised cost
192,757
206,535
The ageing analysis of trade accounts and bills payables are as follows:
31 December
31 December
2018
2017
RMB million
RMB million
Within 1 month or on demand
182,763
195,189
Between 1 month and 6 months
6,670
8,076
Over 6 months
3,324
3,270
192,757
206,535
31 CONTRACT LIABILITIES
As at 31 December 2018, the Group's contract liabilities primarily represent advances from customers. Related performance obligations are satisfied and revenue is recognised within one year.
As at 1 January 2018, the Group's contract liabilities was RMB 120,734 million, of which RMB 119,138 million was recognised as revenue in 2018.
32 OTHER PAYABLES
31 December
31 December
2018
2017
RMB million
RMB million
Salaries and welfare payable
7,312
7,162
Interest payable
634
723
Payables for constructions
54,992
60,010
Other payables
22,852
29,028
Financial liabilities carried at amortised costs
85,790
96,923
Taxes other than income tax
80,361
58,925
Receipts in advance (Note 1 (a))
-
120,734
166,151
276,582
33 PROVISIONS
Provisions primarily represent provision for future dismantlement costs of oil and gas properties. The Group has mainly committed to the PRC government to establish certain standardised measures for the dismantlement of its oil and gas properties by making reference to the industry practices and is thereafter constructively obligated to take dismantlement measures of its oil and gas properties.
Movement of provision of the Group's obligations for the dismantlement of its oil and gas properties is as follow:
2018
2017
RMB million
RMB million
Balance at 1 January
39,407
36,918
Provision for the year
1,567
1,627
Accretion expenses
1,438
1,501
Utilised for the year
(598)
(467)
Exchange adjustments
193
(172)
Balance at 31 December
42,007
39,407
34 SHARE CAPITAL
31 December
31 December
2018
2017
RMB million
RMB million
Registered, issued and fully paid
95,557,771,046 listed A shares (2017: 95,557,771,046) of RMB 1.00 each
95,558
95,558
25,513,438,600 listed H shares (2017: 25,513,438,600) of RMB 1.00 each
25,513
25,513
121,071
121,071
The Company was established on 25 February 2000 with a registered capital of 68.8 billion domestic state-owned shares with a par value of RMB 1.00 each. Such shares were issued to Sinopec Group Company in consideration for the assets and liabilities transferred to the Company (Note 1).
Pursuant to the resolutions passed at an Extraordinary General Meeting held on 25 July 2000 and approvals from relevant government authorities, the Company is authorised to increase its share capital to a maximum of 88.3 billion shares with a par value of RMB 1.00 each and offer not more than 19.5 billion shares with a par value of RMB 1.00 each to investors outside the PRC. Sinopec Group Company is authorised to offer not more than 3.5 billion shares of its shareholdings in the Company to investors outside the PRC. The shares sold by Sinopec Group Company to investors outside the PRC would be converted into H shares.
In October 2000, the Company issued 15,102,439,000 H shares with a par value of RMB 1.00 each, representing 12,521,864,000 H shares and 25,805,750 American Depositary Shares ("ADSs", each representing 100 H shares), at prices of HKD 1.59 per H share and USD 20.645 per ADS, respectively, by way of a global initial public offering to Hong Kong and overseas investors. As part of the global initial public offering, 1,678,049,000 state-owned ordinary shares of RMB 1.00 each owned by Sinopec Group Company were converted into H shares and sold to Hong Kong and overseas investors.
In July 2001, the Company issued 2.8 billion listed A shares with a par value of RMB 1.00 each at RMB 4.22 by way of a public offering to natural persons and institutional investors in the PRC.
During the year ended 31 December 2010, the Company issued 88,774 listed A shares with a par value of RMB 1.00 each, as a result of exercise of 188,292 warrants entitled to the Bonds with Warrants.
During the year ended 31 December 2011, the Company issued 34,662 listed A shares with a par value of RMB 1.00 each, as a result of conversion by the holders of the 2011 Convertible Bonds.
During the year ended 31 December 2012, the Company issued 117,724,450 listed A shares with a par value of RMB 1.00 each, as a result of conversion by the holders of the 2011 Convertible Bonds.
On 14 February 2013, the Company issued 2,845,234,000 listed H shares ("the Placing") with a par value of RMB 1.00 each at the Placing Price of HKD 8.45 per share. The aggregate gross proceeds from the Placing amounted to approximately HKD 24,042,227,300.00 and the aggregate net proceeds (after deduction of the commissions and estimated expenses) amounted to approximately HKD 23,970,100,618.00.
In June 2013, the Company issued 21,011,962,225 listed A shares and 5,887,716,600 listed H shares as a result of bonus issues of 2 shares converted from the retained earnings, and 1 share transferred from the share premium for every 10 existing shares.
During the year ended 31 December 2013, the Company issued 114,076 listed A shares with a par value of RMB 1.00 each, as a result of conversion by the holders of the 2011 Convertible Bonds.
During the year ended 31 December 2014, the Company issued 1,715,081,853 listed A shares with a par value of RMB 1.00 each, as a result of conversion by the holders of the 2011 Convertible Bonds.
During the year ended 31 December 2015, the Company issued 2,790,814,006 listed A shares with a par value of RMB 1.00 each, as a result of conversion by the holders of the 2011 Convertible Bonds.
All A shares and H shares rank pari passu in all material aspects.
Capital management
Management optimises the structure of the Group's capital, which comprises of equity and debts. In order to maintain or adjust the capital structure of the Group, management may cause the Group to issue new shares, adjust the capital expenditure plan, sell assets to reduce debt, or adjust the proportion of short-term and long-term loans. Management monitors capital on the basis of the debt-to-capital ratio, which is calculated by dividing long-term loans (excluding current portion), including long-term debts and loans from Sinopec Group Company and fellow subsidiaries, by the total of equity attributable to shareholders of the Company and long-term loans (excluding current portion), and liability-to-asset ratio, which is calculated by dividing total liabilities by total assets. Management's strategy is to make appropriate adjustments according to the Group's operating and investment needs and the changes of market conditions, and to maintain the debt-to-capital ratio and the liability-to-asset ratio of the Group at a range considered reasonable. As at 31 December 2018, the debt-to-capital ratio and the liability-to-asset ratio of the Group were 11.5% (2017: 12.0 %) and 46.2% (2017: 46.5 %), respectively.
The schedule of the contractual maturities of loans and commitments are disclosed in Notes 29 and 35, respectively.
There were no changes in the management's approach to capital management of the Group during the year. Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements.
35 COMMITMENTS AND CONTINGENT LIABILITIES
Operating lease commitments
The Group leases land and buildings, service stations and other equipment through non-cancellable operating leases. These operating leases do not contain provisions for contingent lease rentals. None of the rental agreements contains escalation provisions that may require higher future rental payments.
At 31 December 2018 and 2017, the future minimum lease payments of the Group under operating leases are as follows:
31 December
31 December
2018
2017
RMB million
RMB million
Within one year
15,625
11,114
Between one and two years
14,668
11,492
Between two and three years
13,986
10,730
Between three and four years
13,734
10,552
Between four and five years
13,494
10,428
Thereafter
281,287
202,806
352,794
257,122
Capital commitments
At 31 December 2018 and 2017, the capital commitments of the Group are as follows:
31 December
31 December
2018
2017
RMB million
RMB million
Authorised and contracted for (i)
141,045
120,386
Authorised but not contracted for
54,392
57,997
195,437
178,383
These capital commitments relate to oil and gas exploration and development, refining and petrochemical production capacity expansion projects, the construction of service stations and oil depots and investment commitments.
Note:
(i) The investment commitments of the Group is RMB 5,553 million (2017: RMB 3,364 million).
Commitments to joint ventures
Pursuant to certain of the joint venture agreements entered into by the Group, the Group is obliged to purchase products from the joint ventures based on market prices.
Exploration and production licenses
Exploration licenses for exploration activities are registered with the Ministry of Natural Resources. The maximum term of the Group's exploration licenses is 7 years, and may be renewed twice within 30 days prior to expiration of the original term with each renewal being for a two-year term. The Group is obligated to make progressive annual minimum exploration investment relating to the exploration blocks in respect of which the license is issued. The Ministry of Natural Resources also issues production licenses to the Group on the basis of the reserve reports approved by relevant authorities. The maximum term of a full production license is 30 years unless a special dispensation is given by the State Council. The maximum term of production licenses issued to the Group is 80 years as a special dispensation was given to the Group by the State Council. The Group's production license is renewable upon application by the Group 30 days prior to expiration.
The Group is required to make payments of exploration license fees and production right usage fees to the Ministry of Natural Resources annually which are expensed. Expenses recognised were approximately RMB 231 million for the year ended 31 December 2018 (2017: RMB 308 million).
Estimated future annual payments are as follows:
31 December
31 December
2018
2017
RMB million
RMB million
Within one year
380
205
Between one and two years
79
83
Between two and three years
33
32
Between three and four years
28
28
Between four and five years
28
28
Thereafter
852
882
1,400
1,258
35 COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Contingent liabilities
At 31 December 2018 and 2017, the guarantees by the Group in respect of facilities granted to the parties below are as follows:
31 December
31 December
2018
2017
RMB million
RMB million
Joint ventures
5,033
940
Associates(ii)
12,168
13,520
Others
7,197
9,732
24,398
24,192
Management monitors the conditions that are subject to the guarantees to identify whether it is probable that a loss will occur, and recognises any such losses under guarantees when those losses are reliabily estimable. At 31 December 2018 and 2017, it was not probable that the Group will be required to make payments under the guarantees. Thus no liability has been accrued for a loss related to the Group's obligation under these guarantee arrangements.
Note:
(ii) The Group provided a guarantee in respect to standby credit facilities granted to Zhongtian Synergetic Energy by banks amount to RMB 17,050 million. At 31 December 2018, the amount withdrawn by Zhongtian Synergetic Energy and guaranteed by the Group was RMB 12,168 million (2017: RMB 13,520 million).
Environmental contingencies
Under existing legislation, management believes that there are no probable liabilities that will have a material adverse effect on the financial position or operating results of the Group. The PRC government, however, has moved, and may move further towards more rigorous enforcement of applicable laws, and towards the adoption of more stringent environmental standards. Environmental liabilities are subject to considerable uncertainties which affect management's ability to estimate the ultimate cost of remediation efforts. These uncertainties include (i) the exact nature and extent of the contamination at various sites including, but not limited to refineries, oil fields, service stations, terminals and land development areas, whether operating, closed or sold, (ii) the extent of required cleanup efforts, (iii) varying costs of alternative remediation strategies, (iv) changes in environmental remediation requirements, and (v) the identification of new remediation sites. The amount of such future cost is indeterminable due to such factors as the unknown magnitude of possible contamination and the unknown timing and extent of the corrective actions that may be required. Accordingly, the outcome of environmental liabilities under proposed or future environmental legislation cannot reasonably be estimated at present, and could be material.
The Group paid normal routine pollutant discharge fees of approximately RMB 7,940 million in the consolidated financial statements for the year ended 31 December 2018 (2017: RMB 7,851 million).
Legal contingencies
The Group is a defendant in certain lawsuits as well as the named party in other proceedings arising in the ordinary course of business. Management has assessed the likelihood of an unfavourable outcome of such contingencies, lawsuits or other proceedings and believes that any resulting liabilities will not have a material adverse effect on the financial position, operating results or cash flows of the Group.
36 BUSINESS COMBINATION
For the year ended 31 December 2018, significant business combination didn't occur in the Group.
On 26 October 2017, a subsidiary of the Company, Gaoqiao Petrochemical Co., Ltd., purchased 50% equity interest in Shanghai SECCO from BP Chemicals East China Investment Limited with a cash consideration of RMB 10,135 million ("the Transaction"). Before the Transaction, the Company and one of its subsidiaries held 30% and 20% equity interest in Shanghai SECCO, respectively. After the Transaction, the Company, together with its subsidiaries, hold 100% equity interest of Shanghai SECCO, which became a subsidiary of the Company.
Shanghai SECCO is principally engaged in the production and sale of petrochemical products including acrylonitrile, polystyrene, polyethylene, etc.
Based on the purchase price allocation performed, details of the purchase consideration, the net assets acquired and goodwill are as follows:
RMB million
Purchase consideration:
Acquisition Date (26 October 2017)
- Cash consideration for the purchase of 50% equity interest acquired
10,135
- Acquisition-date fair value of the 50% equity interest held before the acquisition
10,135
Total purchase consideration
20,270
Fair value at the
Acquisition Date
RMB million
The assets and liabilities recognised as a result of the acquisition are as follows:
Cash and cash equivalents
5,653
Bills receivable
641
Inventories
1,702
Trade and other receivables
558
Prepayments
1,349
Other current assets
761
Total current assets
10,664
Property, plant and equipment, net
9,587
Lease prepayments
1,920
Intangible assets
1,017
Construction in progress
231
Long-term prepaid expenses
117
Deferred tax assets
11
Total non-current assets
12,883
Total assets
23,547
Trade and other payables
(2,115)
Advances received
(383)
Employee benefits payable
(96)
Tax payable
(1,438)
Total current liabilities
(4,032)
Deferred tax liabilities (Note 28)
(1,786)
Net assets acquired
17,729
Goodwill
2,541
The goodwill is attributable to the high profitability of the acquired business and synergy to be achieved post the Transaction among Shanghai SECCO and the Group's existing petrochemical operations located in eastern China.
As of Acquisition Date, a gain of RMB 3,941 million was recognised as a result of remeasuring the 50% equity interest held before the Transaction to its fair value, which is included in other operating (expense)/income in the Group's consolidated income statement for the year ended 31 December 2017.
Shanghai SECCO contributed revenue of RMB 5,222 million and net profit of RMB 726 million to the Group for the period from the Acquisition Date to 31 December 2017.
If the acquisition had occurred on 1 January 2017, consolidated pro-forma revenue and profit for the year ended 31 December 2017 would have been RMB 2,365,632 million and RMB 74,930 million respectively. These amounts have been calculated using the subsidiary's results and adjusting them for the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from 1 January 2017, together with the consequential tax effects.
37 RELATED PARTY TRANSACTIONS
Parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control or jointly control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to control or common control. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Group or of any entity that is a related party of the Group.
(a) Transactions with Sinopec Group Company and fellow subsidiaries, associates and joint ventures
The Group is part of a larger group of companies under Sinopec Group Company, which is controlled by the PRC government, and has significant transactions and relationships with Sinopec Group Company and fellow subsidiaries. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.
The principal related party transactions with Sinopec Group Company and fellow subsidiaries, associates and joint ventures, which were carried out in the ordinary course of business are as follows:
Note
2018
2017
RMB million
RMB million
Sales of goods
(i)
272,789
244,211
Purchases
(ii)
192,224
165,993
Transportation and storage
(iii)
7,319
7,716
Exploration and development services
(iv)
23,489
21,210
Production related services
(v)
28,472
20,824
Ancillary and social services
(vi)
6,664
6,653
Operating lease charges for land
(vii)
7,765
8,015
Operating lease charges for buildings
(vii)
521
510
Other operating lease charges
(vii)
869
626
Agency commission income
(viii)
113
127
Interest income
(ix)
848
807
Interest expense
(x)
1,110
554
Net deposits withdrawn from/(placed with) related parties
(ix)
6,457
(7,441)
Net funds obtained from related parties
(xi)
31,684
19,661
The amounts set out in the table above in respect of the year ended 31 December 2018 and 2017 represent the relevant costs and income as determined by the corresponding contracts with the related parties.
Included in the transactions disclosed above, for the year ended 31 December 2018 are: a) purchases by the Group from Sinopec Group Company and fellow subsidiaries amounting to RMB 140,570 million (2017: RMB 128,863 million) comprising purchases of products and services (i.e. procurement, transportation and storage, exploration and development services and production related services) of RMB 123,772 million (2017: RMB 112,619 million), ancillary and social services provided by Sinopec Group Company and fellow subsidiaries of RMB 6,664 million (2017: RMB 6,652 million), operating lease charges for land, buildings and others paid by the Group of RMB 7,765 million, RMB 521 million and RMB 738 million (2017: RMB 8,015 million, RMB 510 million and RMB 513 million), respectively and interest expenses of RMB 1,110 million (2017: RMB 554 million); and b) sales by the Group to Sinopec Group Company and fellow subsidiaries amounting to RMB 59,472 million (2017: RMB 60,045 million), comprising RMB 58,606 million (2017: RMB 59,213 million) for sales of goods, RMB 848 million (2017: RMB 807 million) for interest income and RMB 18 million (2017: RMB 25 million) for agency commission income.
At 31 December 2018 and 2017, there was no guarantee given to banks by the Group in respect of banking facilities to related parties, except for the guarantees disclosed in Note 35.
The directors of the Company are of the opinion that the above transactions with related parties were conducted in the ordinary course of business and on normal commercial terms or in accordance with the agreements governing such transactions, and this has been confirmed by the independent non-executive directors.
Note:
(i) Sales of goods represent the sale of crude oil, intermediate petrochemical products, petroleum products and ancillary materials.
(ii) Purchases represent the purchase of materials and utility supplies directly related to the Group's operations such as the procurement of raw and ancillary materials and related services, supply of water, electricity and gas.
(iii) Transportation and storage represent the cost for the use of railway, road and marine transportation services, pipelines, loading, unloading and storage facilities.
(iv) Exploration and development services comprise direct costs incurred in the exploration and development such as geophysical, drilling, well testing and well measurement services.
(v) Production related services represent ancillary services rendered in relation to the Group's operations such as equipment repair and general maintenance, insurance premium, technical research, communications, firefighting, security, product quality testing and analysis, information technology, design and engineering, construction of oilfield ground facilities, refineries and chemical plants, manufacture of replacement parts and machinery, installation, project management, environmental protection and management services.
37 RELATED PARTY TRANSACTIONS (Continued)
(a) Transactions with Sinopec Group Company and fellow subsidiaries, associates and joint ventures (Continued)
(vi) Ancillary and social services represent expenditures for social welfare and support services such as educational facilities, media communication services, sanitation, accommodation, canteens, and property maintenance.
(vii) Operating lease charges represent the rental paid to Sinopec Group Company for operating leases in respect of land, buildings and equipment.
(viii) Agency commission income represents commission earned for acting as an agent in respect of sales of products and purchase of materials for certain entities owned by Sinopec Group Company.
(ix) Interest income represents interest received from deposits placed with Sinopec Finance Company Limited and Sinopec Century Bright Capital Investment Limited, finance companies controlled by Sinopec Group Company. The applicable interest rate is determined in accordance with the prevailing saving deposit rate. The balance of deposits at 31 December 2018 was RMB 41,057 million (2017: RMB 47,514 million).
(x) Interest expense represents interest charges on the loans obtained from Sinopec Group Company and fellow subsidiaries.
(xi) The Group obtained loans, discounted bills and others from Sinopec Group Company and fellow subsidiaries.
In connection with the Reorganisation, the Company and Sinopec Group Company entered into a number of agreements under which 1) Sinopec Group Company will provide goods and products and a range of ancillary, social and supporting services to the Group and 2) the Group will sell certain goods to Sinopec Group Company. These agreements impacted the operating results of the Group for the year ended 31 December 2018. The terms of these agreements are summarised as follows:
‧ The Company has entered into a non-exclusive "Agreement for Mutual Provision of Products and Ancillary Services" ("Mutual Provision Agreement") with Sinopec Group Company effective from 1 January 2000 in which Sinopec Group Company has agreed to provide the Group with certain ancillary production services, construction services, information advisory services, supply services and other services and products. While each of Sinopec Group Company and the Company is permitted to terminate the Mutual Provision Agreement upon at least six months notice, Sinopec Group Company has agreed not to terminate the agreement if the Group is unable to obtain comparable services from a third party. The pricing policy for these services and products provided by Sinopec Group Company to the Group is as follows:
(1) the government-prescribed price;
(2) where there is no government-prescribed price, the government-guidance price;
(3) where there is neither a government-prescribed price nor a government-guidance price, the market price; or
(4) where none of the above is applicable, the price to be agreed between the parties, which shall be based on a reasonable cost incurred in providing such services plus a profit margin not exceeding 6%.
‧ The Company has entered into a non-exclusive "Agreement for Provision of Cultural and Educational, Health Care and Community Services" with Sinopec Group Company effective from 1 January 2000 in which Sinopec Group Company has agreed to provide the Group with certain cultural, educational, health care and community services on the same pricing terms and termination conditions as described in the above Mutual Provision Agreement.
‧ The Company has entered into a series of lease agreements with Sinopec Group Company to lease certain lands and buildings effective on 1 January 2000. The lease term is 40 or 50 years for lands and 20 years for buildings, respectively. The Company and Sinopec Group Company can renegotiate the rental amount every three years for land. The Company and Sinopec Group Company can renegotiate the rental amount for buildings every year. However such amount cannot exceed the market price as determined by an independent third party.
‧ The Company has entered into agreements with Sinopec Group Company effective from 1 January 2000 under which the Group has been granted the right to use certain trademarks, patents, technology and computer software developed by Sinopec Group Company.
‧ The Company has entered into a service stations franchise agreement with Sinopec Group Company effective from 1 January 2000 under which its service stations and retail stores would exclusively sell the refined products supplied by the Group.
‧ On the basis of a series of continuing connected transaction agreements signed in 2000, the Company and Sinopec Group Company have signed the Fifth Supplementary Agreement and the Fourth Revised Memorandum of land use rights leasing contract on August 24, 2018, which took effect on January 1, 2019 and made adjustment to "Mutual Supply Agreement", "Agreement for Provision of Cultural and Educational, Health Care and Community Services", "Buildings Leasing Contract", "Intellectual Property Contract" and "Land Use Rights Leasing Contract" etc.,. The memorandum was effective since January 1, 2019. Sinopec Group Company agreed to lease 410 million square meters of land to the Company, and to adjust the total fee of land to about RMB 14 billion, according to the newly confirmed area of leasing land and the situation of land market.
37 RELATED PARTY TRANSACTIONS (Continued)
(a) Transactions with Sinopec Group Company and fellow subsidiaries, associates and joint ventures (Continued)
Amounts due from/to Sinopec Group Company and fellow subsidiaries, associates and joint ventures included in the following accounts captions are summarised as follows:
31 December
31 December
2018
2017
RMB million
RMB million
Trade accounts receivable and bills receivable
7,555
13,174
Prepaid expenses and other current assets
7,665
5,633
Long-term prepayments and other assets
23,482
20,726
Total
38,702
39,533
Trade accounts payable and bills payable
17,530
24,104
Contract liabilities
3,273
-
Other payables
18,160
20,990
Other long-term liabilities
12,470
10,165
Short-term loans and current portion of long-term loans from Sinopec Group Company
and fellow subsidiaries
31,665
25,311
Long-term loans excluding current portion from Sinopec Group Company and fellow subsidiaries
42,516
43,320
Total
125,614
123,890
Amounts due from/to Sinopec Group Company and fellow subsidiaries, associates and joint ventures, other than short-term loans and long-term loans, bear no interest, are unsecured and are repayable in accordance with normal commercial terms. The terms and conditions associated with short-term loans and long-term loans payable to Sinopec Group Company and fellow subsidiaries are set out in Note 29.
The long-term borrowings mainly include an interest-free loan with a maturity period of 20 years amounting to RMB 35,560 million from the Sinopec Group Company (a state-owned enterprise) through the Sinopec Finance. This borrowing is a special arrangement to reduce financing costs and improve liquidity of the Company during its initial global offering in 2000.
As at and for the year ended 31 December 2018, and as at and for the year ended 31 December 2017, no individually significant impairment losses for bad and doubtful debts were recognised in respect of amounts due from Sinopec Group Company and fellow subsidiaries, associates and joint ventures.
(b) Key management personnel emoluments
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including directors and supervisors of the Group. The key management personnel compensation is as follows:
2018
2017
RMB'000
RMB'000
Short-term employee benefits
5,745
5,344
Retirement scheme contributions
351
424
6,096
5,768
(c) Contributions to defined contribution retirement plans
The Group participates in various defined contribution retirement plans organised by municipal and provincial governments for its staff. The details of the Group's employee benefits plan are disclosed in Note 38. As at 31 December 2018 and 2017, the accrual for the contribution to post-employment benefit plans was not material.
37 RELATED PARTY TRANSACTIONS (Continued)
(d) Transactions with other state-controlled entities in the PRC
The Group is a state-controlled energy and chemical enterprise and operates in an economic regime currently dominated by entities directly or indirectly controlled by the PRC government through its government authorities, agencies, affiliations and other organisations (collectively referred as "state-controlled entities").
Apart from transactions with Sinopec Group Company and fellow subsidiaries, the Group has transactions with other state-controlled entities, include but not limited to the followings:
‧ sales and purchases of goods and ancillary materials;
‧ rendering and receiving services;
‧ lease of assets;
‧ depositing and borrowing money; and
‧ uses of public utilities.
These transactions are conducted in the ordinary course of the Group's business on terms comparable to those with other entities that are not state-controlled.
38 EMPLOYEE BENEFITS PLAN
As stipulated by the regulations of the PRC, the Group participates in various defined contribution retirement plans organised by municipal and provincial governments for its staff. The Group is required to make contributions to the retirement plans at rates ranging from 13.0% to 20.0% of the salaries, bonuses and certain allowances of its staff. In addition, the Group provides a supplementary retirement plan for its staff at rates not exceeding 5% of the salaries. The Group has no other material obligation for the payment of pension benefits associated with these plans beyond the annual contributions described above. The Group's contributions for the year ended 31 December 2018 were RMB 9,296 million (2017: RMB 8,981 million).
39 SEGMENT REPORTING
Segment information is presented in respect of the Group's business segments. The format is based on the Group's management and internal reporting structure.
In a manner consistent with the way in which information is reported internally to the Group's chief operating decision maker for the purposes of resource allocation and performance assessment, the Group has identified the following five reportable segments. No operating segments have been aggregated to form the following reportable segments.
(i) Exploration and production, which explores and develops oil fields, produces crude oil and natural gas and sells such products to the refining segment of the Group and external customers.
(ii) Refining, which processes and purifies crude oil, that is sourced from the exploration and production segment of the Group and external suppliers, and manufactures and sells petroleum products to the chemicals and marketing and distribution segments of the Group and external customers.
(iii) Marketing and distribution, which owns and operates oil depots and service stations in the PRC, and distributes and sells refined petroleum products (mainly gasoline and diesel) in the PRC through wholesale and retail sales networks.
(iv) Chemicals, which manufactures and sells petrochemical products, derivative petrochemical products and other chemical products mainly to external customers.
(v) Corporate and others, which largely comprises the trading activities of the import and export companies of the Group and research and development undertaken by other subsidiaries.
39 SEGMENT REPORTING (Continued)
The segments were determined primarily because the Group manages its exploration and production, refining, marketing and distribution, chemicals, and others businesses separately. The reportable segments are each managed separately because they manufacture and/or distribute distinct products with different production processes and due to their distinct operating and gross margin characteristics.
(1) Information of reportable segmental revenues, profits or losses, assets and liabilities
The Group's chief operating decision maker evaluates the performance and allocates resources to its operating segments on an operating profit basis, without considering the effects of finance costs or investment income. Inter-segment transfer pricing is based on the market price or cost plus an appropriate margin, as specified by the Group's policy.
Assets and liabilities dedicated to a particular segment's operations are included in that segment's total assets and liabilities. Segment assets include all tangible and intangible assets, except for interest in associates and joint ventures, investments, deferred tax assets, cash and cash equivalents, time deposits with financial institutions and other unallocated assets. Segment liabilities exclude short-term debts, long-term debts, loans from Sinopec Group Company and fellow subsidiaries, income tax payable, deferred tax liabilities and other unallocated liabilities.
Information of the Group's reportable segments is as follows:
2018
2017
RMB million
RMB million
Turnover
Exploration and production
External sales
93,499
69,168
Inter-segment sales
95,954
77,804
189,453
146,972
Refining
External sales
148,930
132,478
Inter-segment sales
1,109,088
874,271
1,258,018
1,006,749
Marketing and distribution
External sales
1,408,989
1,191,902
Inter-segment sales
5,224
3,962
1,414,213
1,195,864
Chemicals
External sales
457,406
373,814
Inter-segment sales
73,835
49,615
531,241
423,429
Corporate and others
External sales
716,789
533,108
Inter-segment sales
650,271
440,303
1,367,060
973,411
Elimination of inter-segment sales
(1,934,372)
(1,445,955)
Turnover
2,825,613
2,300,470
Other operating revenues
Exploration and production
10,738
10,533
Refining
5,389
5,104
Marketing and distribution
32,424
28,333
Chemicals
15,492
14,314
Corporate and others
1,523
1,439
Other operating revenues
65,566
59,723
Turnover and other operating revenues
2,891,179
2,360,193
39 SEGMENT REPORTING (Continued)
(1) Information of reportable segmental revenues, profits or losses, assets and liabilities (Continued)
2018
2017
RMB million
RMB million
Result
Operating (loss)/profit
By segment
- Exploration and production
(10,107)
(45,944)
- Refining
54,827
65,007
- Marketing and distribution
23,464
31,569
- Chemicals
27,007
26,977
- Corporate and others
(9,293)
(4,484)
- Elimination
(3,634)
(1,655)
Total segment operating profit
82,264
71,470
Share of profits from associates and joint ventures
- Exploration and production
2,598
1,449
- Refining
109
989
- Marketing and distribution
3,155
2,945
- Chemicals
6,298
9,621
- Corporate and others
1,814
1,521
Aggregate share of profits from associates and joint ventures
13,974
16,525
Investment (losses)/income
- Exploration and production
(3)
40
- Refining
315
28
- Marketing and distribution
43
90
- Chemicals
596
86
- Corporate and others
920
18
Aggregate investment income
1,871
262
Net finance costs
1,001
(1,560)
Profit before taxation
99,110
86,697
31 December
31 December
2018
2017
RMB million
RMB million
Assets
Segment assets
- Exploration and production
321,686
343,404
- Refining
271,356
273,123
- Marketing and distribution
317,641
309,727
- Chemicals
156,865
158,472
- Corporate and others
152,799
170,045
Total segment assets
1,220,347
1,254,771
Interest in associates and joint ventures
145,721
131,087
Available-for-sale financial assets
-
1,676
Financial assets at fair value through other comprehensive income
1,450
-
Deferred tax assets
21,694
15,131
Cash and cash equivalents, time deposits with financial institutions
167,015
165,004
Other unallocated assets
36,081
27,835
Total assets
1,592,308
1,595,504
Liabilities
Segment liabilities
- Exploration and production
94,170
99,568
- Refining
103,809
101,429
- Marketing and distribution
159,536
164,101
- Chemicals
37,413
35,293
- Corporate and others
144,216
117,781
Total segment liabilities
539,144
518,172
Short-term debts
29,462
55,338
Income tax payable
6,699
13,015
Long-term debts
51,011
55,804
Loans from Sinopec Group Company and fellow subsidiaries
74,181
68,631
Deferred tax liabilities
5,948
6,466
Other unallocated liabilities
29,328
25,188
Total liabilities
735,773
742,614
39 SEGMENT REPORTING (Continued)
(1) Information of reportable segmental revenues, profits or losses, assets and liabilities (Continued)
2018
2017
RMB million
RMB million
Capital expenditure
Exploration and production
42,155
31,344
Refining
27,908
21,075
Marketing and distribution
21,429
21,539
Chemicals
19,578
23,028
Corporate and others
6,906
2,398
117,976
99,384
Depreciation, depletion and amortisation
Exploration and production
60,331
66,843
Refining
18,164
18,408
Marketing and distribution
16,296
15,463
Chemicals
13,379
12,873
Corporate and others
1,797
1,723
109,967
115,310
Impairment losses on long-lived assets
Exploration and production
4,274
13,556
Refining
353
1,894
Marketing and distribution
264
675
Chemicals
1,374
4,922
Corporate and others
16
211
6,281
21,258
(2) Geographical information
The following tables set out information about the geographical information of the Group's external sales and the Group's non-current assets, excluding financial instruments and deferred tax assets. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers, and segment assets are based on the geographical location of the assets.
2018
2017
RMB million
RMB million
External sales
Mainland China
2,119,580
1,758,365
Singapore
395,129
269,349
Others
376,470
332,479
2,891,179
2,360,193
31 December
31 December
2018
2017
RMB million
RMB million
Non-current assets
Mainland China
989,668
979,329
Others
50,892
48,572
1,040,560
1,027,901
40 PRINCIPAL SUBSIDIARIES
At 31 December 2018, the following list contains the particulars of subsidiaries which principally affected the results, assets and liabilities of the Group.
Interests held
Particulars
Interests
by non-
of issued capital
held by the
controlling
Name of company
(million)
Company %
interests %
Principal activities
Sinopec Great Wall Energy & Chemical
RMB 22,761
100.00
-
Coal chemical industry investment
Company Limited
management, production and sale
of coal chemical products
Sinopec Yangzi Petrochemical Company
RMB 15,651
100.00
-
Manufacturing of intermediate
Limited
petrochemical products and petroleum products
Sinopec Pipeline Storage & Transportation
RMB 12,000
100.00
-
Pipeline storage and transportation of crude oil
Company Limited
Sinopec Overseas Investment Holding
USD 1,662
100.00
-
Investment holding of overseas business
Limited ("SOIH")
Sinopec International Petroleum Exploration
RMB 8,000
100.00
-
Investment in exploration, production
and Production Limited ("SIPL")
and sale of petroleum and natural gas
Sinopec Yizheng Chemical Fibre Limited
RMB 4,000
100.00
-
Production and sale of polyester
Liability Company
chips and polyester fibres
Sinopec Lubricant Company Limited
RMB 3,374
100.00
-
Production and sale of refined
petroleum products, lubricant base
oil, and petrochemical materials
China International United Petroleum and
RMB 3,000
100.00
-
Trading of crude oil and
Chemical Company Limited
petrochemical products
Sinopec Qingdao Petrochemical Company
RMB 1,595
100.00
-
Manufacturing of intermediate petrochemical
Limited
products and petroleum products
Sinopec Catalyst Company Limited
RMB 1,500
100.00
-
Production and sale of catalyst products
China Petrochemical International Company
RMB 1,400
100.00
-
Trading of petrochemical products
Limited
Sinopec Chemical Sales Company Limited
RMB 1,000
100.00
-
Marketing and distribution of
petrochemical products
Sinopec Beihai Refining and Chemical
RMB 5,294
98.98
1.02
Import and processing of crude oil, production,
Limited Liability Company
storage and sale of petroleum products and
petrochemical products
Sinopec Qingdao Refining and Chemical
RMB 5,000
85.00
15.00
Manufacturing of intermediate petrochemical
Company Limited
products and petroleum products
Sinopec Hainan Refining and Chemical
RMB 3,986
75.00
25.00
Manufacturing of intermediate petrochemical
Company Limited
products and petroleum products
Sinopec Marketing Co. Limited
RMB 28,403
70.42
29.58
Marketing and distribution of refined petroleum
("Marketing Company")
products
Shanghai SECCO Petrochemical Company
RMB 7,801
67.60
32.40
Production and sale of petrochemical products
Limited ("Shanghai SECCO") (Note 36)
Sinopec-SK (Wuhan) Petrochemical
RMB 6,270
65.00
35.00
Production, sale, research and development
Company Limited ("Zhonghan Wuhan")
of ethylene and downstream byproducts
Sinopec Kantons Holdings Limited
HKD 248
60.33
39.67
Provision of crude oil jetty services and
("Sinopec Kantons")
natural gas pipeline transmission services
Gaoqiao Petrochemical Company Limited
RMB 10,000
55.00
45.00
Manufacturing of intermediate petrochemical
products and petroleum products
Sinopec Shanghai Petrochemical Company
RMB 10,824
50.44
49.56
Manufacturing of synthetic fibres, resin
Limited ("Shanghai Petrochemical")
and plastics, intermediate petrochemical
products and petroleum products
Fujian Petrochemical Company Limited
RMB 8,140
50.00
50.00
Manufacturing of plastics,
("Fujian Petrochemical") (i)
intermediate petrochemical
products and petroleum products
Except for Sinopec Kantons and SOIH, which are incorporated in Bermuda and Hong Kong respectively, all of the above principal subsidiaries are incorporated and operate their businesses principally in the PRC. All of the above principal subsidiaries are limited companies.
Note:
(i) The Group consolidated the financial statements of the entity because it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
40 PRINCIPAL SUBSIDIARIES (Continued)
Summarised financial information on subsidiaries with material non-controlling interests
Set out below are the summarised financial information which the amount before inter-company eliminations for each subsidiary that has non-controlling interests that are material to the Group.
Summarised consolidated balance sheet
Marketing Company
SIPL
Shanghai Petrochemical
Fujian Petrochemical
Sinopec Kantons
Shanghai SECCO
Zhonghan Wuhan
At
31 December
At
31 December
At
31 December
At
31 December
At
31 December
At
31 December
At
31 December
At
31 December
At
31 December
At
31 December
At
31 December
At
31 December
At
31 December
At
31 December
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Current assets
130,861
156,494
16,731
19,555
25,299
19,866
816
992
1,209
1,196
9,537
11,602
2,750
1,636
Current liabilities
(181,766)
(212,620)
(483)
(7,118)
(13,913)
(10,922)
(50)
(376)
(3,722)
(2,351)
(2,233)
(4,174)
(2,333)
(3,975)
Net current (liabilities)/ assets
(50,905)
(56,126)
16,248
12,437
11,386
8,944
766
616
(2,513)
(1,155)
7,304
7,428
417
(2,339)
Non-current assets
261,062
253,455
38,020
34,769
19,087
19,577
11,444
9,925
12,895
13,089
12,301
12,797
12,612
13,598
Non-current liabilities
(2,086)
(1,774)
(31,050)
(28,523)
(10)
(6)
(688)
(681)
(132)
(2,430)
(1,698)
(1,740)
-
-
Net non-current assets
258,976
251,681
6,970
6,246
19,077
19,571
10,756
9,244
12,763
10,659
10,603
11,057
12,612
13,598
Net assets
208,071
195,555
23,218
18,683
30,463
28,515
11,522
9,860
10,250
9,504
17,907
18,485
13,029
11,259
Attributable to owners of the Company
141,244
132,549
5,266
3,468
15,295
14,253
5,761
4,930
6,165
5,716
12,105
12,496
8,469
7,318
Attributable to non-controlling interests
66,827
63,006
17,952
15,215
15,168
14,262
5,761
4,930
4,085
3,788
5,802
5,989
4,560
3,941
Summarised consolidated statement of comprehensive income
Marketing Company
SIPL
Shanghai Petrochemical
Fujian Petrochemical
Sinopec Kantons
Shanghai SECCO (ii)
Zhonghan Wuhan
Year ended 31 December
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Turnover
1,443,698
1,221,530
5,037
6,136
107,689
91,962
5,261
6,068
1,398
1,498
26,320
5,222
17,134
16,139
Profit for the year
22,046
27,520
3,272
1,075
5,336
6,154
1,576
2,726
1,065
1,046
3,099
726
1,879
2,730
Total comprehensive income
22,589
26,986
4,536
396
5,336
6,153
1,576
2,726
1,067
1,146
3,099
726
1,879
2,730
Comprehensive income/ (loss) attributable to
non-controlling interests
7,794
9,033
2,737
(38)
2,645
3,052
788
1,363
399
433
1,004
235
658
956
Dividends paid to non-controlling interests
3,964
9,544
-
-
1,616
1,344
600
625
104
70
1,191
-
-
-
Summarised statement of cash flows
Marketing Company
SIPL
Shanghai Petrochemical
Fujian Petrochemical
Sinopec Kantons
Shanghai SECCO (ii)
Zhonghan Wuhan
Year ended 31 December
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Net cash generated from/ (used in)
operating activities
24,825
51,038
3,467
2,758
6,659
7,061
38
(558)
738
968
3,766
1,639
3,308
2,976
Net cash generated from/(used in)
investing activities
8,339
(35,738)
4,096
(2,211)
(1,928)
(2,401)
(215)
225
648
193
(480)
5,567
(3,099)
(2,415)
Net cash (used in)/generated from
financing activities
(32,084)
(16,499)
(5,419)
243
(3,507)
(2,590)
43
(158)
(1,551)
(1,093)
(3,676)
-
525
(631)
Net increase/(decrease) in cash and cash
equivalents
1,080
(1,199)
2,144
790
1,224
2,070
(134)
(491)
(165)
68
(390)
7,206
734
(70)
Cash and cash equivalents at 1 January
12,921
14,373
3,605
3,045
7,504
5,441
226
717
343
289
7,205
-
64
134
Effect of foreign currency exchange rate changes
141
(253)
244
(230)
14
(7)
-
-
20
(14)
2
(1)
-
-
Cash and cash equivalents at 31 December
14,142
12,921
5,993
3,605
8,742
7,504
92
226
198
343
6,817
7,205
798
64
(ii) The summarized consolidated statement of comprehensive income and the summarized statement of cash flow of Shanghai SECCO present the results from the acquisition date to 31 December 2017.
41 FINANCIAL RISK MANAGEMENT AND FAIR VALUES
Overview
Financial assets of the Group include cash and cash equivalents, time deposits with financial institutions, investments, financial assets at fair value through profit or loss, derivative financial assets, bills receivable, trade accounts receivable, amounts due from Sinopec Group Company and fellow subsidiaries, amounts due from associates and joint ventures, financial assets at fair value through other comprehensive income and other receivables. Financial liabilities of the Group include short-term debts, loans from Sinopec Group Company and fellow subsidiaries, derivative financial liabilities, bills payable, trade accounts payable, amounts due to Sinopec Group Company and fellow subsidiaries, other payables and long-term debts.
The Group has exposure to the following risks from its uses of financial instruments:
‧ credit risk;
‧ liquidity risk; and
‧ market risk.
The Board of Directors has overall responsibility for the establishment, oversight of the Group's risk management framework, and developing and monitoring the Group's risk management policies.
The Group's risk management policies are established to identify and analyse the risks faced by the Group, and set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, through its training and management controls and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. Internal audit department undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Group's audit committee.
Credit risk
(i) Risk management
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's deposits placed with financial institutions (including structured deposit) and receivables from customers. To limit exposure to credit risk relating to deposits, the Group primarily places cash deposits only with large financial institutions in the PRC with acceptable credit ratings. The majority of the Group's trade accounts receivable relate to sales of petroleum and chemical products to related parties and third parties operating in the petroleum and chemical industries. No single customer accounted for greater than 10% of total accounts receivable at 31 December 2018, except the amounts due from Sinopec Group Company and fellow subsidiaries. Management performs ongoing credit evaluations of the Group's customers' financial condition and generally does not require collateral on trade accounts receivable. The Group maintains an impairment loss for doubtful accounts and actual losses have been within management's expectations.
The carrying amounts of cash and cash equivalents, time deposits with financial institutions, trade accounts and bills receivables, derivative financial instruments, financial assets at fair value through profit or loss and other receivables, represent the Group's maximum exposure to credit risk in relation to financial assets.
(ii) Impairment of financial assets
The Group's primary type of financial assets that are subject to the expected credit loss model is trade accounts receivables and other receivables.
The Group's cash deposits are placed only with large financial institutions with acceptable credit ratings, and there is no material impairment loss identified.
For trade accounts receivables, the group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade accounts receivables.
To measure the expected credit losses, trade accounts receivables have been grouped based on shared credit risk characteristics and the days past due.
The expected loss rates are based on the payment profiles of sales over a period of 36 month before 31 December 2018 or 1 January 2018, respectively, and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables.
The detailed analysis of trade accounts receivables, based on which the Group generated its payment profile is listed in note 25.
All of the entity's other receivables (Note 25) are considered to have low credit risk, and the loss allowance recognised during the period was therefore limited to 12 months expected losses. The Group considers 'low credit risk' for other receivables when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term.
41 FINANCIAL RISK MANAGEMENT AND FAIR VALUES (Continued)
Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach in managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. Management prepares monthly cash flow budget to ensure that the Group will always have sufficient liquidity to meet its financial obligations as they fall due. The Group arranges and negotiates financing with financial institutions and maintains a certain level of standby credit facilities to reduce the Group's liquidity risk.
At 31 December 2018, the Group has standby credit facilities with several PRC financial institutions which provide borrowings up to RMB 387,748 million (2017: RMB 361,852 million) on an unsecured basis, at a weighted average interest rate of 3.87% per annum (2017: 3.40%). At 31 December 2018, the Group's outstanding borrowings under these facilities were RMB 21,236 million (2017: RMB 56,567 million) and were included in debts.
The following table sets out the remaining contractual maturities at the balance sheet date of the Group's financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on prevailing rates current at the balance sheet date) and the earliest date the Group would be required to repay:
31 December 2018
Total
contractual
Within
More than 1
More than 2
Carrying
undiscounted
1 year or
year but less
years but less
More than
amount
cash flow
on demand
than 2 years
than 5 years
5 years
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Short-term debts
29,462
30,123
30,123
-
-
-
Long-term debts
51,011
61,809
1,889
16,938
27,190
15,792
Loans from Sinopec Group Company and
fellow subsidiaries
74,181
75,207
32,127
37,977
3,741
1,362
Derivatives financial liabilities
13,571
13,571
13,571
-
-
-
Trade accounts payable and bills payable
192,757
192,757
192,757
-
-
-
Other payables
85,790
85,790
85,790
-
-
-
446,772
459,257
356,257
54,915
30,931
17,154
31 December 2017
Total
contractual
Within
More than 1
More than 2
Carrying
undiscounted
1 year or
year but less
years but less
More than
amount
cash flow
on demand
than 2 years
than 5 years
5 years
RMB million
RMB million
RMB million
RMB million
RMB million
RMB million
Short-term debts
55,338
56,562
56,562
-
-
-
Long-term debts
55,804
66,202
2,166
14,477
32,316
17,243
Loans from Sinopec Group Company and fellow
subsidiaries
68,631
68,950
25,504
4,439
39,007
-
Derivatives financial liabilities
2,665
2,665
2,665
-
-
-
Trade accounts payable and bills payable
206,535
206,535
206,535
-
-
-
Other payables
96,923
96,923
96,923
-
-
-
485,896
497,837
390,355
18,916
71,323
17,243
Management believes that the Group's current cash on hand, expected cash flows from operations and available standby credit facilities from financial institutions will be sufficient to meet the Group's short-term and long-term capital requirements.
41 FINANCIAL RISK MANAGEMENT AND FAIR VALUES (Continued)
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.
Currency risk
Currency risk arises on financial instruments that are denominated in a currency other than the functional currency in which they are measured. The Group's currency risk exposure primarily relates to short-term and long-term debts and loans from Sinopec Group Company and fellow subsidiaries denominated in USD. The Group enters into foreign exchange contracts to manage its currency risk exposure.
Included in short-term and long-term debts and loans from Sinopec Group Company and fellow subsidiaries of the Group are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:
31 December
31 December
2018
2017
million
million
Gross exposure arising from loans
USD
668
204
A 5 percent strengthening/weakening of RMB against the following currencies at 31 December 2018 and 2017 would have increased/decreased net profit for the year of the Group by the amounts shown below. This analysis has been determined assuming that the change in foreign exchange rates had occurred at the balance sheet date and had been applied to the foreign currency balances to which the Group has significant exposure as stated above, and that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2017.
31 December
31 December
2018
2017
million
million
USD
172
50
Other than the amounts as disclosed above, the amounts of other financial assets and liabilities of the Group are substantially denominated in the functional currency of respective entity within the Group.
Interest rate risk
The Group's interest rate risk exposure arises primarily from its short-term and long-term debts. Debts bearing interest at variable rates and at fixed rates expose the Group to cash flow interest rate risk and fair value interest rate risk respectively. The interest rates of short-term and long-term debts, and loans from Sinopec Group Company and fellow subsidiaries of the Group are disclosed in Note 29.
As at 31 December 2018, it is estimated that a general increase/decrease of 100 basis points in variable interest rates, with all other variables held constant, would decrease/increase the Group's net profit for the year by approximately RMB 424 million (2017: decrease/increase by approximately RMB 450 million). This sensitivity analysis has been determined assuming that the change of interest rates was applied to the Group's debts outstanding at the balance sheet date with exposure to cash flow interest rate risk. The analysis is performed on the same basis for 2017.
Commodity price risk
The Group engages in oil and gas operations and is exposed to commodity price risk related to price volatility of crude oil, refined oil products and chemical products. The fluctuations in prices of crude oil, refined oil products and chemical products could have significant impact on the Group. The Group uses derivative financial instruments, including commodity futures and swaps, to manage a portion of this risk.
As at 31 December 2018, the Group had certain commodity contracts of crude oil, refined oil products and chemical products designated as qualified cash flow hedges and economic hedges. As at 31 December 2018, the fair value of such derivative hedging financial instruments is derivative financial assets of RMB 7,844 million (2017: RMB 515 million) and derivative financial liabilities of RMB 13,568 million (2017: RMB 2,624 million).
As at 31 December 2018, it is estimated that a general increase/decrease of USD 10 per barrel in basic price of derivative financial instruments, with all other variables held constant, would impact the fair value of derivative financial instruments, which would decrease/increase the Group's profit for the period by approximately RMB 197 million (2017: decrease/increase RMB 4,049 million), and increase/decrease the Group's other reserves by approximately RMB 6,850 million (2017: decrease/increase RMB 701 million). This sensitivity analysis has been determined assuming that the change in prices had occurred at the balance sheet date and the change was applied to the Group's derivative financial instruments at that date with exposure to commodity price risk. The analysis is performed on the same basis for 2017.
41 FINANCIAL RISK MANAGEMENT AND FAIR VALUES (Continued)
Fair values
(i) Financial instruments carried at fair value
The following table presents the carrying value of financial instruments measured at fair value at the balance sheet date across the three levels of the fair value hierarchy defined in IFRS 7, 'Financial Instruments: Disclosures', with the fair value of each financial instrument categorised in its entirety based on the lowest level of input that is significant to that fair value measurement. The levels are defined as follows:
‧ Level 1 (highest level): fair values measured using quoted prices (unadjusted) in active markets for identical financial instruments.
‧ Level 2: fair values measured using quoted prices in active markets for similar financial instruments, or using valuation techniques in which all significant inputs are directly or indirectly based on observable market data.
‧ Level 3 (lowest level): fair values measured using valuation techniques in which any significant input is not based on observable market data.
At 31 December 2018
Level 1
Level 2
Level 3
Total
RMB million
RMB million
RMB million
RMB million
Assets
Financial assets at fair value through profit or loss:
- Structured deposit
-
-
25,550
25,550
- Equity investments, listed and at quoted market price
182
-
-
182
Derivative financial assets:
- Derivative financial assets
874
7,013
-
7,887
Financial assets at fair value through other comprehensive income:
- Equity investments
127
-
1,323
1,450
1,183
7,013
26,873
35,069
Liabilities
Derivative financial liabilities:
- Derivative financial liabilities
5,500
8,071
-
13,571
5,500
8,071
-
13,571
At 31 December 2017
Level 1
Level 2
Level 3
Total
RMB million
RMB million
RMB million
RMB million
Assets
Financial assets at fair value through profit or loss:
- Structured deposit
-
-
51,196
51,196
Available-for-sale financial assets:
- Listed
178
-
-
178
Derivative financial assets:
- Derivative financial assets
343
183
-
526
521
183
51,196
51,900
Liabilities
Derivative financial liabilities:
- Derivative financial liabilities
1,277
1,388
-
2,665
1,277
1,388
-
2,665
During the years ended 31 December 2018 and 2017, there was no transfer between instruments in Level 1 and Level 2.
Management of the Group uses discounted cash flow model with inputted interest rate and commodity index, which were influenced by historical fluctuation and the probability of market fluctuation, to evaluate the fair value of the structural deposits classified as Level 3 financial assets.
41 FINANCIAL RISK MANAGEMENT AND FAIR VALUES (Continued)
Fair values (Continued)
(ii) Fair values of financial instruments carried at other than fair value
The disclosures of the fair value estimates, and their methods and assumptions of the Group's financial instruments, are made to comply with the requirements of IFRS 7 and IFRS 9 and should be read in conjunction with the Group's consolidated financial statements and related notes. The estimated fair value amounts have been determined by the Group using market information and valuation methodologies considered appropriate. However, considerable judgement is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group could realise in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The fair values of the Group's financial instruments carried at other than fair value (other than long-term indebtedness and investments in unquoted equity securities) approximate their carrying amounts due to the short-term maturity of these instruments. The fair values of long-term indebtedness are estimated by discounting future cash flows using current market interest rates offered to the Group that range from 2.76% to 4.90% (2017: 1.79% to 4.90%). The following table presents the carrying amount and fair value of the Group's long-term indebtedness other than loans from Sinopec Group Company and fellow subsidiaries at 31 December 2018 and 2017:
31 December
31 December
2018
2017
RMB million
RMB million
Carrying amount
63,085
79,738
Fair value
62,656
78,040
The Group has not developed an internal valuation model necessary to estimate the fair values of loans from Sinopec Group Company and fellow subsidiaries as it is not considered practicable to estimate their fair values because the cost of obtaining discount and borrowing rates for comparable borrowings would be excessive based on the Reorganisation, the Group's existing capital structure and the terms of the borrowings.
Except for the above items, the financial assets and liabilities of the Group are carried at amounts not materially different from their fair values at 31 December 2018 and 2017.
42 ACCOUNTING ESTIMATES AND JUDGEMENTS
The Group's financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the consolidated financial statements. Management bases the assumptions and estimates on historical experience and on various other assumptions that it believes to be reasonable and which form the basis for making judgements about matters that are not readily apparent from other sources. On an ongoing basis, management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.
The selection of critical accounting policies, the judgements and other uncertainties affecting application of such policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the consolidated financial statements. The significant accounting policies are set forth in Note 2. Management believes the following critical accounting policies involve the most significant judgements and estimates used in the preparation of the consolidated financial statements.
42 ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)
Oil and gas properties and reserves
The accounting for the exploration and production's oil and gas activities is subject to accounting rules that are unique to the oil and gas industry. There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method. The Group has elected to use the successful efforts method. The successful efforts method reflects the volatility that is inherent in exploring for mineral resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred. These costs primarily include dry hole costs, seismic costs and other exploratory costs. Under the full cost method, these costs are capitalised and written-off or depreciated over time.
Engineering estimates of the Group's oil and gas reserves are inherently imprecise and represent only approximate amounts because of the subjective judgements involved in developing such information. There are authoritative guidelines regarding the engineering criteria that have to be met before estimated oil and gas reserves can be designated as "proved". Proved and proved developed reserves estimates are updated at least annually and take into account recent production and technical information about each field. In addition, as prices and cost levels change from year to year, the estimate of proved and proved developed reserves also changes. This change is considered a change in estimate for accounting purposes and is reflected on a prospective basis in relation to depreciation rates. Oil and gas reserves have a direct impact on the assessment of the recoverability of the carrying amounts of oil and gas properties reported in the financial statements. If proved reserves estimates are revised downwards, earnings could be affected by changes in depreciation expense or an immediate write-down of the property's carrying amount.
Future dismantlement costs for oil and gas properties are estimated with reference to engineering estimates after taking into consideration the anticipated method of dismantlement required in accordance with industry practices in similar geographic area, including estimation of economic life of oil and gas properties, technology and price level. The present values of these estimated future dismantlement costs are capitalised as oil and gas properties with equivalent amounts recognised as provisions for dismantlement costs.
Despite the inherent imprecision in these engineering estimates, these estimates are used in determining depreciation expense, impairment loss and future dismantlement costs. Capitalised costs of proved oil and gas properties are amortised on a unit-of-production method based on volumes produced and reserves.
Impairment for long-lived assets
If circumstances indicate that the net book value of a long-lived asset may not be recoverable, the asset may be considered "impaired", and an impairment loss may be recognised in accordance with IAS 36 "Impairment of Assets". The carrying amounts of long-lived assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. For goodwill, the recoverable amount is estimated annually. The recoverable amount is the greater of the net selling price and the value in use. It is difficult to precisely estimate selling price because quoted market prices for the Group's assets or cash-generating units are not readily available. In determining the value in use, expected cash flows generated by the asset or the cash-generating unit are discounted to their present value, which requires significant judgement relating to level of sale volume, selling price, amount of operating costs and discount rate. Management uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of sale volume, selling price, amount of operating costs and discount rate.
Depreciation
Property, plant and equipment, other than oil and gas properties, are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account the estimated residual value. Management reviews the estimated useful lives of the assets at least annually in order to determine the amount of depreciation expense to be recorded during any reporting period. The useful lives are based on the Group's historical experience with similar assets and take into account anticipated technological changes. The depreciation expense for future periods is adjusted if there are significant changes from previous estimates.
Measurement of expected credit losses
The Group measures and recognises expected credit losses, considering reasonable and supportable information about the relevant past events, current conditions and forecasts of future economic conditions. The Group regularly monitors and reviews the assumptions used for estimating expected credit losses.
Allowance for diminution in value of inventories
If the costs of inventories become higher than their net realisable values, an allowance for diminution in value of inventories is recognised. Net realisable value represents the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Management bases the estimates on all available information, including the current market prices of the finished goods and raw materials, and historical operating costs. If the actual selling prices were to be lower or the costs of completion were to be higher than estimated, the actual allowance for diminution in value of inventories could be higher than estimated.
43 PARENT AND ULTIMATE HOLDING COMPANY
The directors consider the parent and ultimate holding company of the Group as at 31 December 2018 is Sinopec Group Company, a state-owned enterprise established in the PRC. This entity does not produce financial statements available for public use.
44 BALANCE SHEET AND RESERVE MOVEMENT OF THE COMPANY
BALANCE SHEET OF THE COMPANY (Amounts in million)
Note
31 December
31 December
2018
2017
RMB
RMB
Non-current assets
Property, plant and equipment, net
302,048
329,814
Construction in progress
51,598
50,046
Investment in subsidiaries
251,970
245,156
Interest in associates
21,143
15,579
Interest in joint ventures
16,094
14,822
Available-for-sale financial assets
-
395
Financial assets at fair value through other comprehensive income
395
-
Deferred tax assets
11,021
6,834
Lease prepayments
7,101
6,916
Long-term prepayments and other assets
13,129
14,072
Total non-current assets
674,499
683,634
Current assets
Cash and cash equivalents
59,120
72,309
Time deposits with financial institutions
23,759
20,236
Financial assets at fair value through profit or loss
22,500
48,179
Trade accounts receivable and bills receivable
30,145
37,766
Dividends receivable
2,313
16,327
Inventories
45,825
44,933
Prepaid expenses and other current assets
73,442
79,111
Total current assets
257,104
318,861
Current liabilities
Short-term debts
14,511
33,454
Loans from Sinopec Group Company and fellow subsidiaries
5,815
3,214
Derivative financial liabilities
967
-
Trade accounts payable and bills payable
84,418
86,604
Contract liabilities
4,230
-
Other payables
178,936
194,291
Total current liabilities
288,877
317,563
Net current (liabilities)/assets
(31,773)
1,298
Total assets less current liabilities
642,726
684,932
Non-current liabilities
Long-term debts
27,200
40,442
Loans from Sinopec Group Company and fellow subsidiaries
40,904
43,225
Provisions
33,094
31,405
Other long-term liabilities
5,310
3,613
Total non-current liabilities
106,508
118,685
536,218
566,247
Equity
Share capital
121,071
121,071
Reserves
(a)
415,147
445,176
Total equity
536,218
566,247
44 BALANCE SHEET AND RESERVE MOVEMENT OF THE COMPANY (Continued)
(a) RESERVES MOVEMENT OF THE COMPANY
The reconciliation between the opening and closing balances of each component of the Group's consolidated reserves is set out in the consolidated statement of changes in equity. Details of the change in the Company's individual component of reserves between the beginning and the end of the year are as follows:
The Company
2018
2017
RMB million
RMB million
Capital reserve
Balance at 1 January
9,195
9,175
Others
6
20
Balance at 31 December
9,201
9,195
Share premium
Balance at 1 January
55,850
55,850
Balance at 31 December
55,850
55,850
Statutory surplus reserve
Balance at 1 January
82,682
79,640
Appropriation
3,996
3,042
Balance at 31 December
86,678
82,682
Discretionary surplus reserve
Balance at 1 January
117,000
117,000
Balance at 31 December
117,000
117,000
Other reserves
Balance at 1 January
2,460
2,438
Share of other comprehensive loss of associates and joint ventures, net of deferred tax
(64)
(120)
Cash flow hedges, net of deferred tax
(617)
53
Special reserve
507
89
Balance at 31 December
2,286
2,460
Retained earnings
Balance at 1 January
177,989
183,321
Profit for the year
38,460
30,488
Distribution to owners (Note 13)
(67,799)
(32,689)
Appropriation
(3,996)
(3,042)
Special reserve
(507)
(89)
Others
(15)
-
Balance at 31 December
144,132
177,989
415,147
445,176
(C) DIFFERENCES BETWEEN CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH THE ACCOUNTING POLICIES COMPLYING WITH CASs AND IFRS (UNAUDITED)
Other than the differences in the classifications of certain financial statements captions and the accounting for the items described below, there are no material differences between the Group's consolidated financial statements prepared in accordance with the accounting policies complying with CASs and IFRS. The reconciliation presented below is included as supplemental information, is not required as part of the basic financial statements and does not include differences related to classification, presentation or disclosures. Such information has not been subject to independent audit or review. The major differences are:
(i) GOVERNMENT GRANTS
Under CASs, grants from the government are credited to capital reserve if required by relevant governmental regulations. Under IFRS, government grants relating to the purchase of fixed assets are recognised as deferred income and are transferred to the income statement over the useful life of these assets.
(ii) SAFETY PRODUCTION FUND
Under CASs, safety production fund should be recognised in profit or loss with a corresponding increase in reserve according to PRC regulations. Such reserve is reduced for expenses incurred for safety production purposes or, when safety production related fixed assets are purchased, is reduced by the purchased cost with a corresponding increase in the accumulated depreciation. Such fixed assets are not depreciated thereafter. Under IFRS, payments are expensed as incurred, or capitalised as fixed assets and depreciated according to applicable depreciation methods.
Effects of major differences between the shareholders' equity under CASs and the total equity under IFRS are analysed as follows:
Note
31 December
31 December
2018
2017
RMB million
RMB million
Shareholders' equity under CASs
857,659
854,070
Adjustments:
Government grants
(i)
(1,124)
(1,180)
Total equity under IFRS*
856,535
852,890
Effects of major differences between the net profit under CASs and the profit for the year under IFRS are analysed as follows:
Note
2018
2017
RMB million
RMB million
Net profit under CASs
80,289
70,294
Adjustments:
Government grants
(i)
56
110
Safety production fund
(ii)
909
126
Others
(2,357)
(112)
Profit for the year under IFRS*
78,897
70,418
* The figures are extracted from the consolidated financial statements prepared in accordance with the accounting policies complying with IFRS during the year ended 31 December 2017 and 2018 which have been audited by PricewaterhouseCoopers.
(D) SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
In accordance with "Accounting Standards Codification (ASC) Topic 932 Extractive Activities - Oil and Gas", issued by the Financial Accounting Standards Board of the United States, "Rule 4-10 of Regulation S-X", issued by Securities and Exchange Commission (SEC), and in accordance with "Industrial Information Disclosure Guidelines for Public Company - No.8 Oil and Gas Exploitation", issued by Shanghai Stock Exchange, this section provides supplemental information on oil and gas exploration and producing activities of the Group and its equity method investments at 31 December 2018 and 2017, and for the years then ended in the following six separate tables. Tables I through III provide historical cost information under IFRS pertaining to capitalised costs related to oil and gas producing activities; costs incurred in oil and gas exploration and development; and results of operation related to oil and gas producing activities. Tables IV through VI present information on the Group's and its equity method investments' estimated net proved reserve quantities; standardised measure of discounted future net cash flows; and changes in the standardised measure of discounted cash flows.
Tables I to VI of supplemental information on oil and gas producing activities set out below represent information of the Company and its consolidated subsidiaries and equity method investments.
Table I: Capitalised costs related to oil and gas producing activities
2018
2017
RMB million
RMB million
Other
Other
Total
China
countries
Total
China
countries
The Group
Property cost, wells and related equipments
and facilities
695,724
651,531
44,193
667,657
625,621
42,036
Supporting equipments and facilities
199,321
199,304
17
210,711
210,694
17
Uncompleted wells, equipments and facilities
40,778
40,770
8
41,397
41,389
8
Total capitalised costs
935,823
891,605
44,218
919,765
877,704
42,061
Accumulated depreciation, depletion,
amortisation and impairment losses
(658,093)
(618,593)
(39,500)
(601,318)
(565,651)
(35,667)
Net capitalised costs
277,730
273,012
4,718
318,447
312,053
6,394
Equity method investments
Share of net capitalised costs of associates
and joint ventures
6,304
-
6,304
6,357
-
6,357
Total of the Group's and its equity method
investments' net capitalised costs
284,034
273,012
11,022
324,804
312,053
12,751
Table II: Costs incurred in oil and gas exploration and development
2018
2017
RMB million
RMB million
Other
Other
Total
China
countries
Total
China
countries
The Group
Exploration
12,108
12,108
-
11,589
11,589
-
Development
27,453
27,329
124
30,844
30,710
134
Total costs incurred
39,561
39,437
124
42,433
42,299
134
Equity method investments
Share of costs of exploration and development
of associates and joint ventures
793
-
793
724
-
724
Total of the Group's and its equity method investments'
exploration and development costs
40,354
39,437
917
43,157
42,299
858
Table III: Results of operations related to oil and gas producing activities
2018
2017
RMB million
RMB million
Other
Other
Total
China
countries
Total
China
countries
The Group
Revenues
Sales
57,860
57,860
-
43,644
43,644
-
Transfers
89,569
84,532
5,037
73,447
67,311
6,136
147,429
142,392
5,037
117,091
110,955
6,136
Production costs excluding taxes
(47,227)
(45,953)
(1,274)
(46,311)
(44,977)
(1,334)
Exploration expenses
(10,744)
(10,744)
-
(11,089)
(11,089)
-
Depreciation, depletion, amortisation
and impairment losses
(62,832)
(60,877)
(1,955)
(80,399)
(74,856)
(5,543)
Taxes other than income tax
(11,400)
(11,400)
-
(8,726)
(8,726)
-
Profit before taxation
15,226
13,418
1,808
(29,434)
(28,693)
(741)
Income tax expense
709
-
709
1,188
-
1,188
Results of operation from producing activities
15,935
13,418
2,517
(28,246)
(28,693)
447
Equity method investments
Revenues
Sales
9,530
-
9,530
8,080
-
8,080
9,530
-
9,530
8,080
-
8,080
Production costs excluding taxes
(2,455)
-
(2,455)
(2,748)
-
(2,748)
Exploration expenses
-
-
-
-
-
-
Depreciation, depletion, amortisation
and impairment losses
(1,163)
-
(1,163)
(1,243)
-
(1,243)
Taxes other than income tax
(4,075)
-
(4,075)
(3,628)
-
(3,628)
Profit before taxation
1,837
-
1,837
461
-
461
Income tax expense
(667)
-
(667)
(347)
-
(347)
Share of profit for producing activities of
associates and joint ventures
1,170
-
1,170
114
-
114
Total of the Group's and its equity method investments'
results of operations for producing activities
17,105
13,418
3,687
(28,132)
(28,693)
561
The results of operations for producing activities for the years ended 31 December 2018 and 2017 are shown above. Revenues include sales to unaffiliated parties and transfers (essentially at third-party sales prices) to other segments of the Group. Income taxes are based on statutory tax rates, reflecting allowable deductions and tax credits. General corporate overhead and interest income and expense are excluded from the results of operations.
Table IV: Reserve quantities information
The Group's and its equity method investments' estimated net proved underground oil and gas reserves and changes thereto for the years ended 31 December 2018 and 2017 are shown in the following table.
Proved oil and gas reserves are those quantities of oil and gas, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulation before contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether the estimate is a deterministic estimate or probabilistic estimate. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change as additional information becomes available.
Proved developed oil and gas reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well.
"Net" reserves exclude royalties and interests owned by others and reflect contractual arrangements and obligation of rental fee in effect at the time of the estimate.
Table IV: Reserve quantities information (Continued)
2018
2017
Other
Other
Total
China
countries
Total
China
countries
The Group
Proved developed and undeveloped reserves
(oil) (million barrels)
Beginning of year
1,293
1,261
32
1,256
1,216
40
Revisions of previous estimates
160
158
2
151
148
3
Improved recovery
95
90
5
90
86
4
Extensions and discoveries
79
79
-
60
60
-
Production
(260)
(249)
(11)
(264)
(249)
(15)
End of year
1,367
1,339
28
1,293
1,261
32
Non-controlling interest in proved developed and
undeveloped reserves at the end of year
12
-
12
14
-
14
Proved developed reserves
Beginning of year
1,156
1,124
32
1,120
1,080
40
End of year
1,271
1,244
27
1,156
1,124
32
Proved undeveloped reserves
Beginning of year
137
137
-
136
136
-
End of year
96
95
1
137
137
-
Proved developed and undeveloped
reserves (gas) (billion cubic feet)
Beginning of year
6,985
6,985
-
7,160
7,160
-
Revisions of previous estimates
(40)
(40)
-
(107)
(107)
-
Improved recovery
142
142
-
72
72
-
Extensions and discoveries
680
680
-
769
769
-
Production
(974)
(974)
-
(909)
(909)
-
End of year
6,793
6,793
-
6,985
6,985
-
Proved developed reserves
Beginning of year
6,000
6,000
-
6,436
6,436
-
End of year
5,822
5,822
-
6,000
6,000
-
Proved undeveloped reserves
Beginning of year
985
985
-
724
724
-
End of year
971
971
-
985
985
-
Table IV: Reserve quantities information (Continued)
2018
2017
Other
Other
Total
China
countries
Total
China
countries
Equity method investments
Proved developed and undeveloped reserves of
associates and joint ventures (oil) (million barrels)
Beginning of year
306
-
306
296
-
296
Revisions of previous estimates
12
-
12
12
-
12
Improved recovery
4
-
4
8
-
8
Extensions and discoveries
5
-
5
20
-
20
Production
(28)
-
(28)
(30)
-
(30)
End of year
299
-
299
306
-
306
Proved developed reserves
Beginning of year
273
-
273
273
-
273
End of year
261
-
261
273
-
273
Proved undeveloped reserves
Beginning of year
33
-
33
23
-
23
End of year
38
-
38
33
-
33
Proved developed and undeveloped reserves of
associates and joint ventures (gas)
(billion cubic feet)
Beginning of year
12
-
12
18
-
18
Revisions of previous estimates
2
-
2
(2)
-
(2)
Improved recovery
2
-
2
-
-
-
Extensions and discoveries
-
-
-
-
-
-
Production
(3)
-
(3)
(4)
-
(4)
End of year
13
-
13
12
-
12
Proved developed reserves
Beginning of year
12
-
12
18
-
18
End of year
13
-
13
12
-
12
Proved undeveloped reserves
Beginning of year
-
-
-
-
-
-
End of year
-
-
-
-
-
-
Total of the Group and its equity method investments
Proved developed and undeveloped reserves
(oil) (million barrels)
Beginning of year
1,599
1,261
338
1,552
1,216
336
End of year
1,666
1,339
327
1,599
1,261
338
Proved developed and undeveloped reserves
(gas) (billion cubic feet)
Beginning of year
6,997
6,985
12
7,178
7,160
18
End of year
6,806
6,793
13
6,997
6,985
12
Table V: Standardised measure of discounted future net cash flows
The standardized measure of discounted future net cash flows, related to the above proved oil and gas reserves, is calculated in accordance with the requirements of "ASC Topic 932 Extractive Activities - Oil and Gas", "SEC Rule 4-10 of Regulation S-X", and "Industrial Information Disclosure Guidelines for Public Company - No.8 Oil and Gas Exploitation". Estimated future cash inflows from production are computed by applying the average, first-day-of-the-month price for oil and gas during the twelve-month period before the ending date of the period covered by the report to year-end quantities of estimated net proved reserves. Future price changes are limited to those provided by contractual arrangements in existence at the end of each reporting year. Future development and production costs are those estimated future expenditures necessary to develop and produce year-end estimated proved reserves based on year-end cost indices, assuming continuation of year-end economic conditions. Estimated future income taxes are calculated by applying appropriate year-end statutory tax rates to estimated future pre-tax net cash flows, less the tax basis of related assets. Discounted future net cash flows are calculated using 10% discount factors. This discounting requires a year-by-year estimate of when the future expenditure will be incurred and when the reserves will be produced.
The information provided does not represent management's estimate of the Group's and its equity method investments' expected future cash flows or value of proved oil and gas reserves. Estimates of proved reserve quantities are imprecise and change over time as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculations. The arbitrary valuation requires assumptions as to the timing and amount of future development and production costs. The calculations are made for the years ended 31 December 2018 and 2017 and should not be relied upon as an indication of the Group's and its equity method investments' future cash flows or value of its oil and gas reserves.
2018
2017
RMB million
RMB million
Other
Other
Total
China
countries
Total
China
countries
The Group
Future cash flows
868,058
854,563
13,495
639,336
628,187
11,149
Future production costs
(381,893)
(376,532)
(5,361)
(292,789)
(287,914)
(4,875)
Future development costs
(22,310)
(19,300)
(3,010)
(24,999)
(20,314)
(4,685)
Future income tax expenses
(42,728)
(40,651)
(2,077)
(1,374)
-
(1,374)
Undiscounted future net cash flows
421,127
418,080
3,047
320,174
319,959
215
10% annual discount for estimated timing
of cash flows
(126,910)
(126,617)
(293)
(97,082)
(97,115)
33
Standardised measure of
discounted future net cash flows
294,217
291,463
2,754
223,092
222,844
248
Discounted future net cash flows attributable
to non-controlling interests
1,239
-
1,239
112
-
112
Equity method investments
Future cash flows
48,778
-
48,778
43,587
-
43,587
Future production costs
(12,462)
-
(12,462)
(12,131)
-
(12,131)
Future development costs
(4,433)
-
(4,433)
(4,692)
-
(4,692)
Future income tax expenses
(5,632)
-
(5,632)
(4,406)
-
(4,406)
Undiscounted future net cash flows
26,251
-
26,251
22,358
-
22,358
10% annual discount for estimated timing
of cash flows
(13,012)
-
(13,012)
(9,803)
-
(9,803)
Standardised measure of
discounted future net cash flows
13,239
-
13,239
12,555
-
12,555
Total of the Group's and its equity method
investments' results of standardised measure
of discounted future net cash flows
307,456
291,463
15,993
235,647
222,844
12,803
Table VI: Changes in the standardised measure of discounted cash flows
2018
2017
RMB million
RMB million
The Group
Sales and transfers of oil and gas produced, net of production costs
(88,802)
(62,054)
Net changes in prices and production costs
98,952
7,487
Net changes in estimated future development cost
(5,468)
(7,320)
Net changes due to extensions, discoveries and improved recoveries
41,385
29,799
Revisions of previous quantity estimates
22,040
20,608
Previously estimated development costs incurred during the year
9,507
5,747
Accretion of discount
22,405
20,909
Net changes in income taxes
(28,894)
(231)
Net changes for the year
71,125
14,945
Equity method investments
Sales and transfers of oil and gas produced, net of production costs
(3,001)
(1,704)
Net changes in prices and production costs
1,620
2,479
Net changes in estimated future development cost
(196)
(856)
Net changes due to extensions, discoveries and improved recoveries
341
1,205
Revisions of previous quantity estimates
818
688
Previously estimated development costs incurred during the year
272
206
Accretion of discount
1,196
967
Net changes in income taxes
(366)
(621)
Net changes for the year
684
2,364
Total of the Group's and its equity method investments' results of net changes for the year
71,809
17,309
CORPORATE INFORMATION
STATUTORY NAME
中国石油化工股份有限公司
ENGLISH NAME
China Petroleum & Chemical Corporation
CHINESE ABBREVIATION
中国石化
ENGLISH ABBREVIATION
Sinopec Corp.
LEGAL REPRESENTATIVE
Mr. Dai Houliang
AUTHORISED REPRESENTATIVES
Mr. Ma Yongsheng
Mr. Huang Wensheng
SECRETARY TO THE BOARD
Mr. Huang Wensheng
REPRESENTATIVE ON SECURITIES MATTERS
Mr. Zheng Baomin
REGISTERED ADDRESS AND PLACE OF BUSINESS
No.22 Chaoyangmen North Street,
Chaoyang District
Beijing, PRC
Postcode
:
100728
Tel.
:
86-10-59960028
Fax
:
86-10-59960386
Website
:
http://www.sinopec.com/listco/
E-mail addresses
:
ir@sinopec.com
PLACE OF BUSINESS IN HONG KONG
20th Floor, Office Tower
Convention Plaza
1 Harbour Road
Wanchai
Hong Kong
INFORMATION DISCLOSURE AND PLACES FOR COPIES OF RELATIVE REPORTS
No change during the reporting period
LEGAL ADVISORS
People's Republic of China:
Haiwen & Partners
20th Floor, Fortune Financial Centre
No. 5, Dong San Huan Central Road
Chaoyang District
Beijing PRC
Postcode: 100020
Hong Kong:
Herbert Smith Freehills
23rd Floor, Gloucester Tower
15 Queen's Road
Central, Hong Kong
U.S.A.:
Skadden, Arps, Slate, Meagher & Flom LLP
30/F, China World Office 2
No. 1, Jian Guo Men Wai Avenue,
Beijing, PRC
REGISTRARS
A Shares:
China Securities Registration and Clearing
Company Limited Shanghai Branch Company
36th Floor, China Insurance Building
166 Lujiazui East Road
Shanghai, PRC
H Shares:
Hong Kong Registrars Limited
R1712-1716, 17th Floor, Hopewell Centre
183 Queen's Road East
Hong Kong
DEPOSITARY FOR ADRS
The US:
Citibank, N.A.
388 Greenwich St., 14th Floor
New York NY 10013
United States of America
COPIES OF THIS ANNUAL REPORT ARE AVAILABLE AT
The PRC:
China Petroleum & Chemical Corporation
Board Secretariat
No.22 Chaoyangmen North Street,
Chaoyang District
Beijing, PRC
The US:
Citibank, N.A.
388 Greenwich St., 14th Floor
New York NY 10013
USA
The UK:
Citibank, N.A.
Citigroup Centre
Canada Square, Canary Wharf
London E14 5LB, U.K.
PLACES OF LISTING OF SHARES, STOCK NAMES AND STOCK CODES
A Shares:
Shanghai Stock Exchange
Stock name
:
SINOPEC CORP
Stock code
:
600028
H Shares:
Hong Kong Stock Exchange
Stock code
:
00386
ADRs:
New York Stock Exchange
Stock code
:
SNP
London Stock Exchange
Stock code
:
SNP
NAMES AND ADDRESSES OF AUDITORS OF SINOPEC CORP.
Domestic Auditors
:
PricewaterhouseCoopers
Zhong Tian LLP
Address
:
11th Floor
PricewaterhouseCoopers,
2 Corporate Avenue,
202 Hu Bin Road,
Huangpu District,
Shanghai, PRC 200021
Overseas Auditors
:
PricewaterhouseCoopers
Address
:
22nd Floor,
Prince's Building,
Central, Hong Kong
DOCUMENTS FOR INSPECTION
The following documents will be available for inspection during normal business hours after 22 March 2019 at the registered address of Sinopec Corp. upon requests by the relevant regulatory authorities and shareholders in accordance with the Articles of Association and the laws and regulations of PRC:
a) The original copies of the 2018 annual report signed by Mr. Dai Houliang, the Chairman;
b) The original copies of financial statements and consolidated financial statements as of 31 December 2018 prepared under IFRS and CASs, signed by Mr. Dai Houliang, the Chairman, Mr. Wang Dehua, the Chief Financial Officer and head of the financial department of Sinopec Corp.;
c) The original auditors' reports signed by the auditors; and
d) Copies of the documents and announcements that Sinopec Corp. has published in the newspapers designated by the CSRC during the reporting period.
By Order of the Board
Dai Houliang
Chairman
Beijing, PRC, 22 March 2019
If there is any inconsistency between the Chinese and English versions of this annual report, the Chinese version shall prevail.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDFR CKPDQOBKKKNB
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