XN000022-1995-03-29 — Page 12

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Notes to the Abridged Accounts

The abridged accounts, including Notes to the Abridged Accounts, agree with the detailed oudited accounts in all material aspects, except that some of the smaller items have been consolidated in the abridged accounts.

1.

PRINCIPAL ACCOUNTING POLICIES

(a)

VALUATION OF ASSETS AND LIABILITIES

In order to give a more appropriate presentation of the results and financial position of the Exchange Fund, the accounting policy with respect to the valuation of assets and liabilities has been changed in accordance with the recommendation of the International Accounting Standards Committee Exposure Draft E48. In prior years, all assets were shown at market value, with the exception of fixed deposits, which were shown at cost. All liabilities were shown at their face amount, with the exception of Exchange Fund Bills and Notes, which were shown at discounted or amortized value. This policy has been changed. All assets of the Exchange Fund, and its liabilities in respect of Exchange Fund Bills and Notes and other borrowings, are now shown at market value on the last day of each accounting period. The Fiscal Reserves Account is still shown at its face amount, with the difference between its market value and the face amount being included in other liabilities.

To reflect the above change in accounting policy, the abridged accounts for the year ended 31 December 1993 have been restated as follows:

(b)

Assets Liabilities

Net Assets

Revised

HK$mn

348,486

220,944

127,542

As Previously Published

Change

HK$mn

HK$mo

348,394

+92

220,776

+168

127,618

-76

The effect of the above restatement has been reflected in the 1993 Abridged income and Expenditure Account and Abridged Balance Sheet. For practical reasons, the change of the accounting policy bas not been retrospectively applied to periods prior to those included in these-Abridged Accounts.

TRANSLATION OF FOREIGN CURRENCY ASSETS AND LIABILITIES

=

US dollar assets and liabilities are translated into HK dollars at the linked exchange rate of US$1 HK$7.80. Assets and liabilities in other foreign currencies are translated into HK dollars based on US dollar middle market cross rates in London at the close of business on the last business day of the accounting period.

(c)

OFF BALANCE SHEET ITEMS

The Exchange Fund, as part of its reserves and monetary management operations, enters into interest rate swap contracts and foreign exchange contracts.

Interest rate swap contracts are contractual agreements between two counterparties for the exchange of periodic interest payments based on a notional principal amount and agreed-upon fixed and floating rates. Foreign exchange contracts include spot and forward contracts and involve the exchange of two currencies at a rate agreeable to the contracting parties.

These interest rate swap contracts and foreign exchange contracts are marked to market on the last day of each accounting period and any gains and losses are recognized in the Income and Expenditure Account as they arise.