REG - China Pet &Chem Corp - Half-year Report <Origin Href="QuoteRef">600028.SS</Origin> - Part 11
29/08/2017 07:08
- Part 11: For the preceding part double click ID:nRSc0740Pj
Net cash used in financing activities (16,038) (45,930)
Net increase in cash and cash equivalents 4,807 4,123
Cash and cash equivalents at 1 January 124,468 68,933
Effect of foreign currency exchange rate changes (148) 194
Cash and cash equivalents at 30 June 129,127 73,250
(4,263)
Net cash used in financing activities
(16,038)
(45,930)
Net increase in cash and cash equivalents
4,807
4,123
Cash and cash equivalents at 1 January
124,468
68,933
Effect of foreign currency exchange rate changes
(148)
194
Cash and cash equivalents at 30 June
129,127
73,250
The notes on pages 113 to 154 form part of these consolidated interim financial statements.
NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS
for the six-month period ended 30 June 2017
(Amounts in million)
(a) Reconciliation From Profit Before Taxation To Net Cash Generated Fom Operating Activities
Six-month periods ended 30 June
2017 2016
RMB RMB
Operating activities
Profit before taxation 45,957 35,521
Adjustments for:
Depreciation, depletion and amortisation 55,217 49,105
Dry hole costs written off 3,937 3,619
Share of profits from associates and joint ventures (7,651) (4,598)
Investment income (286) (99)
Interest income (2,457) (1,358)
Interest expense 3,979 5,164
(Gain)/loss on foreign currency exchange rate changes and derivative financial instruments (495) 647
Loss/(gain) on disposal of property, plant, equipment and other non-currents assets, net 98 (7)
Impairment losses on assets 4,076 1,423
102,375 89,417
Net charges from:
Accounts receivable and other current assets 2,213 (9,959)
Inventories (10,750) (4,091)
Accounts payable and other current liabilities (19,389) 12,167
74,449 87,534
Income tax paid (13,602) (11,422)
Net cash generated from operating activities 60,847 76,112
(9,959)
Inventories
(10,750)
(4,091)
Accounts payable and other current liabilities
(19,389)
12,167
74,449
87,534
Income tax paid
(13,602)
(11,422)
Net cash generated from operating activities
60,847
76,112
The notes on pages 113 to 154 form part of these consolidated interim financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the six-month period ended 30 June 2017
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
Pursuant to the resolution passed at the Directors' meeting on 29 October 2015, the Company entered into the JV Agreement
with Sinopec Assets Management Corporation ("SAMC") in relation to the formation of the Gaoqiao Petrochemical Co., Ltd.
According to the JV Agreement, the Company and SAMC jointly set up Gaoqiao Petrochemical Co., Ltd. for RMB 100 million in
cash in 2016. Subsequently, the Company subscribed capital contribution with the net assets of Gaoqiao Branch of the
Company and SAMC subscribed capital contribution with the net assets of Gaoqiao Branch of SAMC. The capital contribution
was completed on 1 June 2016, after which the Company held 55% of Gaoqiao Petrochemical Co., Ltd.'s voting rights and
became the parent company of Gaoqiao Petrochemical Co., Ltd.
As Sinopec Group Company controls both the Group and SAMC, the non-cash transaction described above between Sinopec and
SAMC has been accounted as business combination under the common control and it has been reflected in the accompanying
consolidated financial statements as combination of entities under common control in a manner of predecessor value
accounting. Accordingly, the assets and liabilities of Gaoqiao Branch of SAMC have been accounted for at historical cost,
and the consolidated financial statements of the Group prior to these acquisitions have been restated to include the
results of operation and the assets and liabilities of Gaoqiao Branch of SAMC on a combined basis.
At the completion date, the non-controlling interests amount to RMB 2,137 million was recognized in relation to SAMC's 45%
interest in Gaoqiao Branch of the Company.
The accompanying consolidated interim financial statements have been prepared in accordance with all applicable IFRSs as
issued by the International Accounting Standards Board ("IASB"). IFRS includes International Accounting Standards ("IAS")
and related interpretations ("IFRIC"). These consolidated interim 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.
(a) New and amended standards and interpretations adopted by the Group
The following relevant IFRSs, amendments to exisiting IFRSs and interpretation of IFRS have been published and are
mandatory for the year beginning on or after 1 January 2017 and have been adopted by the Group in current accounting
period:
Amendments to IAS 7, 'Statement of cash flows', the IASB has issued an amendment to IAS 7 introducing an additional
disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing
activities. The amendment is part of the IASB's Disclosure Initiative, which continues to explore how financial statement
disclosure can be improved. Amendments to IAS 7 are effective for annual periods beginning on or after 1 January 2017.
Amendments to IAS 12, 'Income taxes', the IASB has issued amendments to IAS 12, 'Income taxes'. These amendments on the
recognition of deferred tax assets for unrealised losses clarify how to account for deferred tax assets related to debt
instruments measured at fair value. Amendments to IAS 12 are effective for annual periods beginning on or after 1 January
2017.
There have been no significant changes to the accounting policies applied in these financial statements for the periods
presented as a result of these developments.
The Group has not early adopted any new standard or interpretation that is not yet effective for the current accounting
period.
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
The following relevant IFRSs, amendments to existing IFRSs and interpretation of IFRS have been published and are mandatory
for accounting periods beginning on or after 1 January 2018 or later periods and have not been early adopted by the Group.
Management is in the process of making an assessment of what the impact of these amendments, new standards and new
interpretations is expected to be in the period of initial application and has so far concluded that, except for IFRS 16,
the adoption of these amendments, new standards and new interpretations is unlikely to have a significant impact on the
Group's results of operations and financial position.
IFRS 9, 'Financial instruments', addresses the classification, measurement and recognition of financial assets and
financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the whole of IAS 39. IFRS 9
introduces a new model for the recognition of impairment losses - the expected credit losses model, which constitutes a
change from the incurred loss model in IAS 39. IFRS 9 applies to all hedging relationships, with the exception of portfolio
fair value hedges of interest rate risk. The new guidance better aligns hedge accounting with the risk management
activities of an entity and provides relief from the more "rule-based" approach of IAS 39. IFRS 9 is effective for annual
periods beginning on or after 1 January 2018. Earlier application is permitted.
IFRS 15, 'Revenue from contracts with customers', establishes a comprehensive framework for determining when to recognise
revenue and how much revenue to recognise through a 5-step approach. IFRS 15 provides specific guidance on capitalisation
of contract cost and licence arrangements. It also includes a cohesive set of disclosure requirements about the nature,
amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts with customers. The core
principle is that a company should recognise revenue to depict the transfer of promised goods or services to the customer
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or
services. IFRS 15 replaces the previous revenue standards: IAS 18 'Revenue' and IAS 11 'Construction Contracts' and the
related Interpretations on revenue recognition: IFRIC 13 'Customer Loyalty Programmes', IFRIC 15 'Agreements for the
Construction of Real Estate', IFRIC 18 'Transfers of Assets from Customers' and SIC-31 'Revenue-Barter Transactions
Involving Advertising Services'. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018.
Earlier application is permitted.
IFRS 16, 'Leases', provides updated guidance on the definition of leases, and the guidance on the combination and
separation of contracts. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control
the use of an identified asset for a period of time in exchange for consideration. IFRS 16 requires lessees to recognise
lease liability reflecting future lease payments and a 'right-of-use-asset' for almost all lease contracts, with an
exemption for certain short-term leases and leases of low-value assets. The lessors accounting stays almost the same as
under IAS 17 'Leases'. IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019. Earlier
application is permitted if IFRS 15 is also applied.
Amendments to IFRS 10 and IAS 28 on sale or contribution of assets between an investor and its associate or joint venture.
The amendments address an inconsistency between IFRS 10 and IAS 28 in the sale and contribution of assets between an
investor and its associate or joint venture. A full gain or loss is recognised when a transaction involves a business. A
partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if those
assets are in a subsidiary. The amendments were originally intended to be effective for annual periods beginning on or
after 1 January 2016. The effective date has now been deferred/removed. Early application of the amendments continues to be
permitted.
The accompanying consolidated interim financial statements are prepared on the historical cost basis except for the
remeasurement of available-for-sale securities (Note 2(k)), securities held for trading (Note 2(k)) and derivative
financial instruments (Note 2(l) and (n)) to their fair values.
The preparation of the consolidated interim 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 interim 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 IFRSs that have significant effect on the
consolidated interim financial statements and the major sources of estimation uncertainty are disclosed in Note 37.
2 SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of consolidation
The consolidated interim 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 interim financial statements of subsidiaries are included in the consolidated interim 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 period 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.
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)).
The particulars of the Group's principal subsidiaries are set out in Note 35.
(ii) Associates and joint ventures
An associate is an entity, not being a subsidiary, over which the Group exercises significant influence. 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 interim 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 period 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.
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
(Note 2(k)) or, when appropriate, the cost on initial recognition of an investment in an associate (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.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(a) Basis of consolidation (Continued)
(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 period 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 approximents 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.
(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.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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 Estimated
usage period residuals rate
Buildings 12 to 50 years 3%
Equipment, machinery and others 4 to 30 years 3%
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, 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) Available-for-sale financial assets
Investment in available-for-sale securities are carried at fair value with any change in fair value recognised in other
comprehensive income and accumulated separately in equity in other reserves. When these investments are derecognised or
impaired, the cumulative gain or loss is reclassified from equity to the consolidated income statement. Investments in
equity securities, other than investments in associates and joint ventures, that do not have a quoted market price in an
active market and whose fair value cannot be reliably measured are recognised in the balance sheet at cost less impairment
losses (Note 2(o)).
Investments in securities held for trading are classified as current assets. Any attributable transaction costs are
recognised in the consolidated income statement as incurred. At each balance sheet date, the fair value is remeasured, with
any resultant gain or loss being recognised in the consolidated income statement.
(l) Derivative financial instruments
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 the consolidated income statement,
except where the derivatives qualify for cash flow hedge accounting or hedge the net investment in a foreign operation, in
which case recognition of any resultant gain or loss depends on the nature of the item being hedged (Note 2(n)).
(m) Offsetting financial instruments
Financial assets and liabilities are presented respectively in the consolidated balance sheet, without any offset. However,
they are offset and reported in the balance sheet when satisfied the following: (i) There is a legally enforceable right to
offset the recognised amounts. (ii) There is an intention to settle on a net basis or realise the asset and settle the
liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in
the normal course of business and in the event of default, insolvency or bankruptcy of the Company or the counterparty.
(n) Hedging
(i) Cash flow hedges
Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or
liability or a highly probable forecast transaction or the foreign currency risk of a committed future transaction, the
effective portion of any gains or losses on remeasurement of the derivative financial instrument to fair value are
recognised in other comprehensive income and accumulated separately in equity in other reserves. The ineffective portion of
any gain or loss is recognised immediately in the consolidated income statement.
If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset, the associated gain
or loss is reclassified from equity to be included in the initial cost or other carrying amount of the non-financial
asset.
If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability,
the associated gain or loss is reclassified from equity to the consolidated income statement in the same period or periods
during which the asset acquired or liability assumed affects the consolidated income statement (such as when interest
income or expense is recognised).
For cash flow hedges, other than those covered by the preceding two policy statements, the associated gain or loss is
reclassified from equity to the consolidated income statement in the same period or periods during which the hedged
forecast transaction affects the consolidated income statement.
When a hedging instrument expires or is sold, terminated, exercised, or the entity revokes designation of the hedge
relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point
remains in equity until the transaction occurs and it is recognised in accordance with the above policy. If the hedged
transaction is no longer expected to take place, the cumulative unrealised gain or loss is reclassified from equity to the
consolidated income statement immediately.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(n) Hedging (Continued)
(ii) Fair value hedges
A fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset or liability or an
unrecognised firm commitment, or an identified portion of such an asset, liability or unrecognised firm commitment.
The gain or loss from remeasuring the hedging instrument at fair value is recognised in profit or loss. The gain or loss on
the hedged item attributable to the hedged risk adjusts the carrying amount of the hedged item and is recognised in profit
or loss.
When a hedging instrument expires or is sold, terminated or exercised, or no longer meets the criteria for hedge
accounting, the Group discontinues prospectively the hedge accounting treatments. If the hedged item is a financial
instrument measured at amortised cost, any adjustment to the carrying amount of the hedged item is amortised to profit or
loss from the adjustment date to the maturity date using the recalculated effective interest rate at the adjustment date.
(iii) Hedge of net investments in foreign operations
The portion of the gain or loss on remeasurement to fair value of an instrument used to hedge a net investment in a foreign
operation that is determined to be an effective hedge is recognised in other comprehensive income and accumulated
separately in equity in the other reserve until the disposal of the foreign operation, at which time the cumulative gain or
loss is reclassified from equity to the consolidated income statement. The ineffective portion is recognised immediately in
the consolidated income statement. In this period no hedge of net investment in foreign operations was hold by the Group.
(o) Impairment of assets
(i) Trade accounts receivable, 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.
For investments in associates and joint ventures accounted under the equity method (Note 2(a) (ii)), the impairment loss is
measured by comparing the recoverable amount of the investment as a whole with its carrying amount in accordance with the
accounting policy set out in Note 2(o) (ii). The impairment loss is reversed if there has been a favourable change in the
estimates used to determine the recoverable amount in accordance with the accounting policy set out in Note 2(o) (ii).
(ii) Impairment of other long-lived assets is accounted as follows:
The carrying amounts of other long-lived 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 a
long-lived 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.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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.
(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
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.
Interest income is recognised on a time apportioned basis that takes into account the effective yield on the asset.
A government grant that becomes receivable as compensation for expenses or losses already incurred with no future related
costs is recognised as income in the period in which it becomes receivable.
(t) 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.
(u) Repairs and maintenance expenditure
Repairs and maintenance expenditure is expensed as incurred.
(v) 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.
(w) 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 2,672 million for the six-month period ended 30 June 2017 (2016: RMB 3,112
million).
(x) Operating leases
Operating lease payments are charged to the consolidated income statement on a straight-line basis over the period of the
respective leases.
2 SIGNIFICANT ACCOUNTING POLICIES (Continued)
(y) 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
33.
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.
(z) 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.
(aa) Dividends
Dividends and distributions of profits proposed in the profit appropriation plan which will be authorised 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.
(bb) Segment reporting
Operating segments, and the amounts of each segment item reported in the 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, natural gas, refined petroleum products and chemical
products.
4 OTHER OPERATING REVENUES
Six-month periods ended 30 June
2017 2016
RMB million RMB million
Sale of materials, service and others 27,670 21,979
Rental income 339 445
28,009 22,424
28,009
22,424
5 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following items are included in selling, general and administrative expenses:
Six-month periods ended 30 June
2017 2016
RMB million RMB million
Operating lease charges 6,292 7,469
Impairment losses:
- trade accounts receivable (82) (1)
- other receivables (14) (91)
- accounts prepayments 7 2
(91)
- accounts prepayments
7
2
6 PERSONNEL EXPENSES
Six-month periods ended 30 June
2017 2016
RMB million RMB million
Salaries, wages and other benefits 26,915 24,950
Contributions to retirement schemes (Note 33) 4,413 4,113
31,328 29,063
31,328
29,063
7 TAXES OTHER THAN INCOME TAX
Six-month periods ended 30 June
2017 2016
RMB million RMB million
Consumption tax (i) 95,398 95,030
City construction tax (ii) 9,022 8,899
Education surcharge 6,876 6,729
Resources tax 2,396 1,776
Other 2,605 397
116,297 112,831
Other
2,605
397
116,297
112,831
Note:
(i) Consumption tax was levied based on sales quantities of taxable products, tax rate of products is presented as
below:
Effective from
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
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, consumption tax and
business tax. Pursuant to the 'Circular on the Overall Promotion of Pilot Program of Levying VAT in place of Business Tax'
(Cai Shui 2016 36) jointly issued by the Ministry of Finance and the State Administration of Taxation, revenue from
modern service of the subsidiaries of the Group, are subject to VAT from 1 May 2016, and the applicable tax rate is 6%,
while the business tax was from 3% to 5% before then.
8 OTHER OPERATING (EXPENSE)/INCOME, NET
Six-month periods ended 30 June
2017 2016
RMB million RMB million
Government grant (i) 1,441 1,026
Ineffective portion of change in fair value of cash flow hedges 142 585
Net realised and unrealised gain on derivative financial instruments not qualified as hedging 403 250
Impairment losses on long-lived assets (ii) (3,962) (1,257)
(Loss)/gain on disposal of property, plant, equipment and other non-currents assets, net (98) 7
Fines, penalties and compensations (21) (36)
Donations (13) (48)
Others 123 (435)
(1,985) 92
Donations
(13)
(48)
Others
123
(435)
(1,985)
92
Note:
(i) Government grants for the six-month periods ended 30 June 2017 and 2016 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 periods ended 30 June 2017 primarily represent impairment losses
recognised in the exploration and production (E&P) segment of RMB 3,487 million (2016: nil), the chemicals segment of RMB
309 million (2016: RMB 118 million) and for the refining segment of RMB 166 million (2016: RMB 1,108 million) (Note 34),
most of which are impairment losses on property, plant and equipment (Note 14). The primary factors resulting in the E&P
segment impairment loss were high operating cost for certain oil 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% (2016: 10.80%). Further future downward revisions to the Group's oil price
outlook by 5% or more 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 E&P segment by approximately RMB 2,401 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 in E&P segment by approximately RMB
1,879 million. It is estimated that a general increase of 5% in discount rate, with all other variables held constant,
would result in additional impairment loss in E&P segment by approximately RMB 809 million. The assets in the chemicals and
refining segment were written down mainly due to the suspension of operations of certain production facilities.
9 INTEREST EXPENSE
Six-month periods ended 30 June
2017 2016
RMB million RMB million
Interest expense incurred 3,602 5,078
Less: Interest expense capitalised* (282) (409)
3,320 4,669
Accretion expenses (Note 29) 659 495
Interest expense 3,979 5,164
* Interest rates per annum at which borrowing costs were capitalised for
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