CHINA METALLURGICAL GROUP CORPORATION Notes to the Consolidated Financial Statements For the year ended 31 December 2011 (All amounts in RMB Ten Thousand Yuan unless otherwise stated) [English translation for reference only] 1 General information China Metallurgical Construction Group Corporation, the predecessor of China Metallurgical Group Corporation, was a wholly state-owned enterprise incorporated in Beijing in 1982. On 8 May 2006, China Metallurgical Construction Group Corporation was renamed as China Metallurgical Group Corporation. On 27 April 2009, upon the approval of the State-owned Assets Supervision and Administration Commission (hereafter referred to as ―SASAC‖), the Chinese name of China Metallurgical Group Corporation was renamed as China Metallurgical Construction Group Corporation (hereafter referred to as ―the Company‖). The Company‘s business license registration number is 100000000000942, its legal representative is Wang Weimin, and its registered capital is RMB 749,286.14 ten thousand. The Company‘s registered office is at 28 Shuguang Xili, Chaoyang District, Beijing. At December 31, 2011, the paid-in capital was as follow: Investor Percentage of interest held (RMB ten thousand) （%) SASAC 749,286.14 100.00 749,286.14 100.00 The ultimate controlling party of the Company is SASAC. The Company‘s legal person governance structure relies on its Supervisory Committee to oversee the actions of its Board of Directors and management personnel. The Company's organisation structure is led by its president and executive director under the direction of its Board of Directors. The Company has 7 subsidiaries comprises 5 wholly-owned subsidiaries, 1 partially-owned subsidiary and 1 wholly owned hospital. Business scope of the Company and its subsidiaries (hereafter referred as the ―Group‖): The approved business scope includes metallurgical engineering, housing construction, transportation infrastructure projects as well as mining, environmental protection, electrical, chemical, light industry and electronic engineering research, planning, surveying, consulting, design, procurement, construction, installation, dimensional inspection, supervision and related technical services; domestic and overseas metal mineral resources development, smelting, and non-metallic mineral resources processing; production, marketing, and sales of production of these products, raw materials, research and development of products; development of residential and commercial real estate, sales and first-land development; development and sales of paper-making raw materials and products. The actual main scope of business activities of the Company and its subsidiaries (hereafter referred as the ―Group‖) during 2011 were as follows: Construction and related engineering consulting services in metallurgical, properties, transport infrastructure, mining, electronics and chemical industries; resources development; property development; paper manufacturing. The Group‘s main operating segments are as follows: engineering and construction, property development, resources development, equipment manufacturing, paper manufacturing and others. - 9 - CHINA METALLURGICAL GROUP CORPORATION Notes to the Consolidated Financial Statements For the year ended 31 December 2011 (All amounts in RMB Ten Thousand Yuan unless otherwise stated) [English translation for reference only] 2 Basis of preparation The Group has prepared its consolidated financial statements in accordance with the Basic Standard and 38 specific standards of the Accounting Standards for Business Enterprises issued by the Ministry of Finance on 15 February 2006, and the Application Guidance for Accounting Standard for Business Enterprises, Interpretations of Accounting Standards for Business Enterprises and other relevant regulations issued thereafter (hereafter referred to as ―the Accounting Standard for Business Enterprises‖ or ―CAS‖). 3 Statement of compliance with the Accounting Standards for Business Enterprises The financial statements of the Group for the year ended 31 December 2011 are in compliance with the Accounting Standards for Business Enterprises, and truly and completely present the financial position of the Group as of 31 December 2011 and of its operating results, cash flows and other information for the year then ended. 4 Summary of significant accounting policies and accounting estimates (1) Accounting period The Company‘s accounting year starts on 1 January and ends on 31 December. (2) Recording currency The recording currency of the Company and its domestic subsidiaries is Renminbi (―RMB‖). Items included in the financial statements of its subsidiaries abroad are measured using the currency of the primary economic environment in which the entity operates. The financial statements are translated and presented in RMB. The currency used in the Company‘s financial statements is RMB. (3) Business combinations (a) Common control business combination In a common control combination, assets and liabilities are transferred at book values. Any difference between the consideration given and the aggregate book value of the assets and liabilities acquired is included in equity to adjust capital reserve. Retained earnings shall be adjusted when capital reserve is insufficient to offset. Acquisition related costs are expensed as incurred. Costs of issuing equity or debt for a business combination should be included in the initial recognition of equity or debt. (b) Business combination other than common control combination The acquisition method of accounting is used to account for business combinations other than common control combinations by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the acquisition date. The excess of the consideration transferred over the fair value of the Group‘s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the profit or loss. Acquisition related costs are expensed as incurred. Costs of issuing equity or debt for a business combination should be included in the initial recognition of equity or debt. - 10 - CHINA METALLURGICAL GROUP CORPORATION Notes to the Consolidated Financial Statements For the year ended 31 December 2011 (All amounts in RMB Ten Thousand Yuan unless otherwise stated) [English translation for reference only] 4 Summary of significant accounting policies and accounting estimates (Continued) (4) Cash and cash equivalents For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, call deposits with banks and short-term and highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (5) Foreign currency translation (a) Foreign currency transactions Foreign currency transactions are translated into RMB using the exchange rates prevailing at the dates of the transactions. At the balance sheet date, monetary items denominated in foreign currencies are translated into RMB using the spot exchange rates on the balance sheet date. Exchange differences arising from these translations are recognised in profit or loss for the current year, except for those attributable to foreign currency borrowings that have been taken out specifically for the acquisition or construction of qualifying assets, which are capitalised as part of the cost of those assets. Non-monetary items denominated in foreign currencies that are measured at historical costs are translated at the balance sheet date using the spot exchange rates at the date of the transactions. The effect of exchange rate changes on cash is presented separately in the cash flow statement. (b) Translation of foreign currency financial statements The asset and liability items in the balance sheets for overseas operations are translated at the spot exchange rates on the balance sheet date. Among the owners‘ equity items, the items other than ―undistributed profits‖ are translated at the spot exchange rates of the transaction dates. The income and expense items in the income statements of overseas operations are translated at the average exchange rates of the transaction period. The differences arising from the above translation are presented separately in the owners‘ equity. The cash flows of overseas operations are translated at the spot exchange rates on the dates of the cash flows. The effect of exchange rate changes on cash is presented separately in the cash flow statement. (6) Financial instruments (a) Financial assets (i) Classification of financial assets Financial assets shall be classified into below categories when they are initially recognized: Financial assets at fair value through profit or loss, loans and receivables, financial assets available for sale and investments that are held to maturity. Classification of financial assets depends on the Group‘s intention and ability to hold the financial assets. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for the purpose of selling in the short term. They are presented as financial assets held for trading on the balance sheet. Receivables Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. 4 Summary of