Notes to the Financial Statements For the year ended 31st December, 2004 1. ORGANISATION AND OPERATIONS Brilliance China Automotive Holdings Limited (the ‘‘Company’’) was incorporated in Bermuda on 9th June, 1992 with limited liability. The Company’s American depositary shares (‘‘ADSs’’) and shares are traded on The New York Stock Exchange Inc. and The Stock Exchange of Hong Kong Limited (‘‘SEHK’’), respectively. The Company is an investment holding company. The principal activities of the Company’s subsidiaries (together with the Company referred to as the ‘‘Group’’) are the manufacture and sale of minibuses, sedans and automotive components in the People’s Republic of China (the ‘‘PRC’’). 2. PRINCIPAL ACCOUNTING POLICIES (a) Statement of compliance These financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (which include all applicable Statements of Standard Accounting Practice and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on SEHK. A summary of the significant accounting policies adopted by the Group is set out below. (b) Recently issued accounting standards The Hong Kong Institute of Certified Public Accountants has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (‘‘new HKFRSs’’) which are effective for accounting periods beginning on or after 1st January, 2005. The Group has not early adopted these new HKFRSs in the financial statements for the year ended 31st December, 2004. The Group has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position. (c) Basis of preparation of the financial statements The measurement basis used in the preparation of the financial statements is historical cost. 34 Notes to the Financial Statements (Cont’d) For the year ended 31st December, 2004 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (d) Basis of consolidation (i) Consolidation The consolidated financial statements of the Group include the financial statements of the Company and its subsidiaries made up to 31st December. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effectivedateofacquisitionoruptotheeffectivedate of disposal, as appropriate. All significant intercompany transactions and balances and any unrealised gains or losses arising from intercompany transactions are eliminated on consolidation. Minority 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 separately from liabilities and the shareholders’ equity. Minority interests in the results of the Group for the year are also separately presented in the consolidated income statement. (ii) Subsidiaries Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to govern the financial and operating policies; to appoint or remove the majority of the members of the board of directors; or to cast majority of votes at the meetings of the board of directors. In the Company’s balance sheet an investment in a subsidiary is stated at cost less accumulated impairment losses. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable. (iii) Associates An associate is an enterprise, not being a subsidiary or a joint venture, in which an equity interest is held for the long-term and the Group has 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 over those policies. 35 Notes to the Financial Statements (Cont’d) For the year ended 31st December, 2004 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (d) Basis of consolidation (Cont’d) (iii) Associates (Cont’d) The consolidated income statement includes the Group’s share of results of its associates for the year. In the consolidated balance sheet, interests in associates are the Group’s share of the net assets of the associates and goodwill or negative goodwill (net of accumulated amortisation) on acquisition less any accumulated impairment losses. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interests in the associates. Unrealised losses are eliminated unless the transactions provide evidence of an impairment of the asset transferred. (iv) Jointly controlled entities A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity which is subject to joint control and none of the participating parties has unilateral control over the economic activity. TheconsolidatedincomestatementincludestheGroup’sshareofresultsofjointlycontrolled entities for the year. The consolidated balance sheet includes the Group’s share of net assets of the jointly controlled entities and goodwill or negative goodwill (net of accumulated amortisation) on acquisition less any accumulated impairment losses. Unrealised gains on transactions between the Group and its jointly controlled entities are eliminated to the extent of the Group’s interests in the jointly controlled entities. Unrealised losses are eliminated unless the transactions provide evidence of an impairment of the asset transferred. (v) Translation of foreign currencies Subsidiaries, associates and jointly controlled entities establishedinthePRC maintain their books and records in Renminbi (‘‘RMB’’) as functional currency while the Company and other subsidiaries maintain their books and recordsinAmericanDollarasfunctionalcurrency. Transactions in currencies other than the respective functional currencies are translated into respective functional currencies at exchange rates ruling at the transaction dates. Monetary assets and liabilities expressed in other currencies at the balance sheet date are re-translated into respective functional currencies at rates of exchange ruling at the balance sheet date. Exchange differences arising in these cases aredealtwithintheincomestatement. 36 Notes to the Financial Statements (Cont’d) For the year ended 31st December, 2004 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (d) Basis of consolidation (Cont’d) (v) Translation of foreign currencies (Cont’d) The Group prepares consolidated financial statements in RMB. For the purpose of consolidation, the balance sheets of subsidiaries expressed in American Dollar are translated into RMB at the rates of exchange ruling at the balance sheet date whilst the income statements are translated at the average rate.Exchangedifferencesaredealtwithasa movement in reserves. Cumulative translation adjustments reserve under shareholders’ equity represents exchange differences arising from the Company’s change in functional currency in previous years. (e) Intangibles (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable assets and liabilities of the acquired subsidiaries, jointly controlled entities and associates at the date of acquisition. Goodwill on acquisitions is amortised using the straight-line method over the shorter of the estimatedfutureeconomiclifeof20yearsortheremaining lives of the respective subsidiaries, jointly controlled entities and associates from their initial recognition. (ii) Research and development costs Research costs are expensed as incurred. Costs incurred on development projects relating to the design and testing of new or improved products are recognised as an intangible asset where the technical feasibility and intention of completing the product under development has been demonstrated and the resources are available to do so; and costs are identifiable and there is an ability to sell or use the asset that will generate probable future economic benefits. Such development costs are recognised as an asset less accumulated amortisation and accumulated impairment losses. Amortisation is provided on a straight-line basis over a period which reflects the pattern in which the related economic benefits are recognised. Development costs that do not meet the above criteria are expensed as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. 37 Notes to the Financial Statements (Cont’d) For the year ended 31st December, 2004 2. PRINCIPAL ACCOUNTING POLICIES (Cont’d) (e) Intangibles (Cont’d) (iii) Acquired intangible assets Acquired intangible assets are stated at cost less accumulated amortisation and accumulated impairment losses. Amortisation is provided on a straight-line basis over the estimated useful lives of 7 to 10 years. (f) Property, plant and equipment Property, plant and equipment, other than construction-in-progress, are stated at cost less accumulated depreciation and accumulated impairment losses. Thecostofanitemofproperty,plantandequipment comprises its purchase