BANCO COMERCIAL DE MACAU, S. A. · The directors of Banco Comercial de Macau, S. A. (‘the Bank’ or ‘BCM’) submit their report together with the audited financial statements

BANCO COMERCIAL DE MACAU, S. A.

DIRECTORS’ REPORT AND FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2007

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CONTENTS

Note Page Note Page Directors’ report 3 3 Critical accounting estimates and

assumptions 34

Independent auditors’ report 5 4 Net interest income 35 Income statement 6 5 Net fee and commission income 35 Balance sheet 7 6 Dividend income 36 Statement of changes in equity 8 7 Net trading income 36 Cash flow statement 9 8 Other operating income 36

1 General information 10 9 Operating expenses 36

2 Summary of significant accounting

policies 10

10 Provisions for bad and doubtful

debts 37

2.1 Basis of preparation 10 11 Income tax expense 37 2.2 Transition to MFRS 11 12 Cash and balances with banks 37 2.3 Foreign currency translation- Functional

and presentation currency 27 13 AMCM treasury bills 38

2.4 Interest income and expense 27 14 Placement with and loans and

advances to banks 38 2.5 Fee and commission income and expense 28 15 Loans and advances to customers 38 2.6 Dividend income 28 16 Reconciliation of allowance accounts

for losses on loans and advances to

customers 39 2.7 Treasury bills 28 17 Derivative financial instruments 39 2.8 Financial assets 28 18 Available-for-sale investments 39 2.9 Impairment of financial assets 29 19 Held-to-maturity investments 39 2.10 Financial liabilities 30 20 Other investments 40 2.11 Derivative financial instruments 30 21 Intangible assets 40 2.12 Repossessed assets 31 22 Premises and other fixed assets 41 2.13 Premises and other fixed assets 31 23 Other assets 42

2.14 Intangible assets 31 24 Balances and deposits from other

banks 42 2.15 Employee benefits 32 25 Deposits from customers 42 2.16 Provisions 32 26 Certificates of deposit issued 42 2.17 Deferred income tax 32 27 Other liabilities 42 2.18 Leases 33 28 Deferred income tax 43 2.19 Cash and cash equivalents 33 29 Contingent liabilities and

commitments 44

2.20 Financial guarantee contracts 34 30 Share capital 44 2.21 Loan commitments 34 31 Reserves 44 32 Approval of financial statements 45

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DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2007

The directors of Banco Comercial de Macau, S. A. (‘the Bank’ or ‘BCM’) submit their report together with the

audited financial statements for the year ended 31 December 2007.

Principal activities

BCM is a limited liability company by shares incorporated and domiciled in the Macau Special Administrative

Region ('MSAR' or ‘Macau’), where it engages in general banking business by providing retail, commercial and

private banking, and other related financial services to its customers.

Other particulars of the Bank are set out in note 1 to the financial statements.

Results and appropriations

The results of the Bank for the year ended 31 December 2007 are set out in the income statement on page 6.

The following appropriations of 2007 net profit will be proposed by the Directors for approval by the

Shareholders at the forthcoming Annual General Meeting:

Macau Patacas (MOP)

Retained earnings at 31 December 2006 after appropriations (restated) 261,144,144

Net profit for the year ended 31 December 2007 66,909,192

Retained earnings at 31 December 2007 328,053,336

Transfer to legal reserve (10%) (6,690,919)

Retained earnings at 31 December 2007 after appropriations 321,362,417

The Directors do not recommend the payment of any dividend.

Shareholders’ equity

Movements in shareholders’ equity of the Bank during the year are set out in the statement of changes in equity

on page 8.

Fixed assets

Details of the movements in fixed assets of the Bank are shown in note 22 to the financial statements.

Directors

The Directors during the year and up to the date of this report are:

David Shou-Yeh Wong (Chairman)

Hon-Hing Wong (Derek Wong)

Gary Pak-Ling Wang

Harold Tsu-Hing Wong

Lung-Man Chiu (John Chiu) (Chief Executive Officer)

Leonel Leonardo Guerreiro da Costa (Retired on 29 March 2007)

Kenneth Chan Sou Chao

António Candeias Castilho Modesto (Appointed on 29 March 2007)

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DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2007 (continued)

There being no provision in the Bank’s articles of association for retirement by rotation, all the remaining

Directors continue in office.

Directors’ interests in contracts

None of the directors had a beneficial interest in any contract of significance to the business of the Bank to

which the Bank, any of its holding companies, or fellow subsidiaries, was a party during the year.

Directors’ interests in equity or debentures

At no time during the year was the Bank, any of its holding companies or fellow subsidiaries a party of any arrangement to enable the Bank’s directors to acquire benefits by means of the acquisition of shares or

debentures of the Bank.

Management contracts

No contracts concerning the management and administration of the whole or any substantial part of the business

of the Bank were entered into or existed during the year except for an agreement ('Computer and Administrative

Services Agreement') with indefinite duration concerning the provision of services by Dah Sing Bank, Limited

('DSB'), the parent company, to the Bank, which was signed between the two entities on 1 November 2006, the

commencement date.

The Bank shall pay to DSB, for services rendered to the Bank, per DSB's periodic billing. DSB and the Bank

shall review the fees annually at the end of each year.

Under the terms of the Computer and Administrative Services Agreement, either party can terminate it by giving

to the other no less than 9 months written notice or giving notice in writing to the other party if the other party

commits any material breach of any terms of the agreement and shall have failed to remedy the breach within 30

days after the receipt of the request in writing.

Auditors

The financial statements have been audited by Lowe Bingham & Matthews - PricewaterhouseCoopers who

retire and, being eligible, offer themselves for reappointment.

On behalf of the Board

(Signed on the original) (Signed on the original)

Lung-Man Chiu (John Chiu) Gary Pak-Ling Wang Chief Executive Officer Director

Macau, 27 February 2008

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INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF

BANCO COMERCIAL DE MACAU, S. A. (Incorporated in Macau with limited liability by shares)

We have audited the accompanying financial statements of Banco Comercial de Macau, S. A. (‘the Bank’ or

‘BCM’) set out on pages 6 to 45, which comprise the balance sheet as at 31 December 2007, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of

significant accounting policies and explanatory notes.

Directors’ responsibility for the financial statements

The Directors are responsible for the preparation and the true and fair presentation of the financial statements in

accordance with Financial Reporting Standards issued by the Government of the Macau Special Administrative

Region. These responsibilities include designing, implementing and maintaining appropriate internal control

relevant to the preparation and the true and fair presentation of financial statements that are free from material

misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; making

appropriate estimates that are reasonable in the circumstances; and keeping proper and accurate accounting

records.

Auditors’ responsibility

Our responsibility is to express an opinion on these financial statements based on our audit and to report our

opinion solely to you as a body, in accordance with our agreed terms of engagement and for no other purpose.

We do not assume responsibility towards or accept liability to any other person for the contents of this report.

We conducted the audit in accordance with Auditing Standards and Technical Standards on Auditing issued by

the Government of the Macau Special Administrative Region. Those standards require that the auditor comply

with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether

the financial statements are free from material misstatement.

An audit includes performing appropriate audit procedures to obtain audit evidence supporting the amounts and

disclosures in the financial statements. The procedures are selected according to the auditors’ professional

judgment, including the assessment of the risks of material misstatement of the financial statements, whether

due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the

entity’s preparation and true and fair presentation of the financial statements in order to design audit procedures

that are appropriated in the circumstances, but not for expressing an opinion on the effectiveness of the entity’s

internal control. An audit also includes evaluating the appropriateness of accounting policies used and the

reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of

the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit

opinion.

Audit opinion

In our opinion the financial statements give a true and fair view, in all material respects, of the financial position

of Banco Comercial de Macau, S. A. as at 31 December 2007 and of its operating results and its cash flows for

the year then ended in accordance with Financial Reporting Standards issued by the Government of the Macau

Special Administrative Region.

(Signed on the original)

Kenneth Patrick Chung

Registered Auditor

Lowe Bingham & Matthews - PricewaterhouseCoopers

Macau, 27 February 2008

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FINANCIAL STATEMENTS All amounts in thousands of Macau Patacas (MOP) unless otherwise stated

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER

Note 2007 2006

Restated

Interest income 558,981 491,179 Interest expense (318,344) (277,068)

Net interest income 4 240,637 214,111

Fee and commission income 29,522 28,420

Fee and commission expense (2,084) (1,393)

Net fee and commission income 5 27,438 27,027

Dividend income 6 1,010 803

Net trading income 7 18,080 14,280

Net gain on available-for-sale investments 785 -

Other operating income 8 17,008 9,570

Operating income 304,958 265,791

Operating expenses 9 (141,528) (128,400)

Operating profit before bad debt provisions 163,430 137,391

Bad and doubtful debt expense 10 (8,591) (9,377) Impairment of available-for-sale investment securities 18 (81,265) -

Recoveries of loans and interest previously written off 2,897 3,134

Profit before income tax 76,471 131,148

Income tax expense 11 (9,562) (16,472)

Profit for the year 66,909 114,676

Attributable to:

Equity holders of the Bank 66,909 114,676

The notes on pages 10 to 45 are an integral part of these financial statements.

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FINANCIAL STATEMENTS (continued) All amounts in thousands of Macau Patacas (MOP) unless otherwise stated

BALANCE SHEET AT 31 DECEMBER

Note 2007 2006

Restated

Assets

Cash and balances with banks 12 427,073 267,955 AMCM treasury bills 13 1,237,120 1,320,961

Placements with and loans and advances to banks 14 2,457,292 3,044,492 Loans and advances to customers 15 5,439,950 4,592,464

Investment securities - Available-for-sale 18 605,842 103,936 Investment securities - Held-to-maturity 19 109,546 248,743

Other investments 20 11,482 11,571 Intangible assets 21 6,027 8,102

Premises and other fixed assets 22 82,988 76,603 Deferred income tax assets 28 13,964 36

Other assets 23 31,634 36,127

Total assets 10,422,918 9,710,990

Liabilities

Balances and deposits from banks 24 156,496 4,851 Deposits from customers 25 9,217,481 8,492,870

Certificates of deposit issued 26 246,957 469,659

Other liabilities 27 65,028 46,227 Current income tax liabilities 19,886 16,511

Provisions 678 760

Total liabilities 9,706,526 9,030,878

Equity

Share capital 30 225,000 225,000 Share premium 50,000 50,000

Legal reserve 31 144,229 132,566 AFS reserve (30,890) (261)

Retained earnings 328,053 272,807

Total equity 716,392 680,112

Total liabilities and equity 10,422,918 9,710,990

Approved and authorized for issue by the Board of Directors on 27 February 2008

(Signed on the original) (Signed on the original) (Signed on the original)

David Shou-Yeh Wong Hon-Hing Wong (Derek Wong) Gary Pak-Ling Wang (Chairman)

(Signed on the original) (Signed on the original) (Signed on the original)

Harold Tsu-Hing Wong Lung-Man Chiu (John Chiu) Kenneth Chan Sou Chao (Chief Executive Officer)

(Signed on the original) António Candeias Castilho Modesto


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STATEMENT OF CHANGES IN EQUITY

Share

Capital (Note 30)

Share

premium

Legal

reserve (Note 31)

Available-for-sale

revaluation

reserve

Retained

earnings

Total

equity

Balance as 1 January 2006 225,000 50,000 123,592 - 167,105 565,697

Available-for-sale investments revaluation - - - (297) - (297) AFS revaluation deferred tax impact - - - 36 - 36

Transfer to legal reserve - - 8,974 - (8,974) - Net profit for the year (restated) - - - - 114,676 114,676

Balance as 31 December 2006 (restated) 225,000 50,000 132,566 (261) 272,807 680,112

Available-for-sale investments revaluation - - - (34,805) - (34,805) AFS revaluation deferred tax impact - - - 4,176 - 4,176

Transfer to legal reserve - - 11,663 - (11,663) - Net profit for the year - - - - 66,909 66,909

Balance at 31 December 2007 before appropriations 225,000 50,000 144,229 (30,890) 328,053 716,392


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CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 2006

Cash flows from operating activities Interest income received 550,043 482,465 Interest expense paid (307,628) (267,604)

Dividends received 1,010 803 Net fee and commission income received 28,605 25,617 Net trading income received 15,029 14,118 Recoveries of loans and interest previously written-off 2,897 3,134 Other operating income received 11,349 9,569 Other operating expenses paid (44,735) (42,483) Personnel expenses paid (81,028) (73,189) Income tax paid (15,939) (10,782)

Cash flows from operating activities before changes in operating assets and operating liabilities

159,603

141,648

Changes in operating assets and operating liabilities Net increase in AMCM treasury bills with original maturity of more than 3 months

(190,966)

(211,739)

Net (increase)/decrease in placements with and advances to banks

with original maturity of more than 3 months

214,047

(944,236) Net increase in loans and advances to customers (850,402) (679,767) Net (increase)/decrease in other operating assets 4,260 (14,530) Net increase/(decrease) in balances and deposits from banks 151,395 (3,189) Net increase in deposits from customers and certificates of deposit issued

491,439

1,005,959

Net increase in other liabilities 14,409 7,586

Net cash flows from operating assets and operating liabilities (165,818) (839,916)

Cash flows from investing activities Purchase of intangible assets (1,501) (4,646) Purchase of premises and other fixed assets (14,380) (3,193) Proceeds from sales of premises and other fixed assets 73 24 Purchase of available-for-sale investments (659,541) (104,077)

Proceeds from sales or redemptions of available-for-sale investments 55,704 - Purchase of held-to-maturity investments - (44,213) Proceeds from redemptions of held-to-maturity investments 137,680 116,929 Purchase of other investments (9) (2,578) Proceeds from sales of other investments 98 57,054

Net cash flows from investing activities (481,876) 15,300

Net cash flow from financing activities - -

Net decrease in cash and cash equivalents (488,091) (682,968)

Cash and cash equivalents at the beginning of the year 2,791,141 3,474,109

Cash and cash equivalents at the end of the year 2,303,050 2,791,141

Cash and cash equivalents comprise: Cash and balances with banks and AMCM 275,344 228,362 Items in course of collection from other banks 151,729 39,593 Placements with and deposits in AMCM (treasury bills) and other

banks with original maturity up to 3 months

1,875,977

2,523,186

Total cash and cash equivalents at 31 December 2,303,050 2,791,141


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NOTES TO THE FINANCIAL STATEMENTS All amounts in thousands of Macau Patacas (MOP) unless otherwise stated

1 General information

Banco Comercial de Macau, S. A. (‘the Bank’ or ‘BCM’) principally provides retail, commercial and

private banking services in Macau. The Bank is a limited liability company by shares and is

incorporated and domiciled in Macau. The address of its registered office is at Avenida da Praia

Grande No. 572, Macau.

In its retail banking activities, the Bank handles individual customers’ deposits and provides consumer

and housing loans, overdrafts, credit cards, insurance products and other banking services such as

remittances.

In its commercial and private banking activities, the Bank handles deposit and current accounts as well

as property business, project and trade finance loans, banking guarantees and letters of credit for

corporate, institutional and high net worth customers.

The Bank also provides investment products and stock trading services to various segments of its

clientele.

The immediate and ultimate holding companies are Dah Sing Bank, Limited (‘DSB’) and Dah Sing

Financial Holdings Limited (‘DSFH’) respectively, both of which are incorporated and domiciled in

Hong Kong. DSFH is listed in Hong Kong.

The financial regulatory authority is the Monetary Authority of Macau ('AMCM').

These financial statements are presented in thousands of Macau Patacas (‘MOP’), unless otherwise

stated.

These financial statements have been approved for issue by the Board of Directors on 27 February

2008.

2 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out

below. These policies have been consistently applied to all years presented, unless otherwise stated.

2.1 Basis of preparation

The financial statements of the Bank have been prepared in accordance Section 3 of Chapter 1 of the

Macau Commercial Code and Financial Reporting Standards issued by the Government of Macau

Special Administrative Region under Administrative Regulation No. 25/2005 on 9 December 2005

(‘MFRS’). The MFRS, which has become effective from 1 January 2007, has fully adopted certain

financial reporting standards (‘IAS’ or ‘IFRS’) issued by the International Accounting Standards

Board (‘IASB’) prevailing at the time when the above Administrative Regulation was issued. In

summary, the MFRS comprises the following specific framework and standards published by IASB in

March 2004:

Framework of the Preparation and Presentation of Financial Statements

IFRS 1: First-time Adoption of IFRS

IAS 1: Presentation of Financial Statements

IAS 2 : Inventories

IAS 7: Cash Flow Statement

IAS 8: Accounting Policies, Changes in Accounting Estimates, and Errors

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2 Summary of significant accounting policies (continued)

2.1 Basis of preparation (continued)

IAS 10: Events After the Balance Sheet Date

IAS 11: Construction Contracts

IAS 12: Income Taxes

IAS 16: Property, Plant and Equipment

IAS 17: Leases

IAS 18: Revenue

IAS 21: The effects of Changes in Foreign Exchange rates

IAS 23: Borrowing costs

IAS 36: Impairment of Assets

IAS 37: Provisions, Contingent Liabilities and Contingent Assets

IAS 38: Intangible assets

In previous years, financial statements of the Bank were prepared in accordance with Section 3 of the

Macau Commercial Code and accounting policies, which the directors considered appropriate.

Accounting practices previously adopted by the Bank differ in certain aspects from MFRS. When

preparing the Bank’s 2007 financial statements, management has modified some of the Bank’s

accounting policies in order to comply with MFRS. Accordingly, the comparative figures in these

financial statements have been restated to reflect these changes.

Reconciliations and descriptions of the effect of adoption of MFRS and changes of the Bank’s

accounting policies on the Bank’s equity, balance sheet and income statement are provided in note 2.2.

These financial statements have been prepared under the historical cost convention, except that available for sale investment securities are carried at market value.

The preparation of financial statements in conformity with MFRS requires the use of certain critical

accounting estimates. It also requires management to exercise its judgment in the process of applying

the Bank’s accounting policies. The areas involving a higher degree of judgment or complexity, or

areas where assumptions and estimates are significant to the financial statements are disclosed in note

3.

2.2 Transition to MFRS

2.2.1 Basis of transition to MFRS

The Bank’s financial statements for the year ended 31 December 2007 are the first set of annual

financial statements that comply with MFRS. These financial statements have been prepared as

described in Note 2.1. The Bank has applied IFRS 1 in preparing these financial statements.

The Bank’s transition date is 1 January 2006. The Bank prepared its opening MFRS balance sheet at

that date. The reporting date of these financial statements is 31 December 2007. The Bank’s MFRS

adoption date is 1 January 2007.

The Bank has not elected to apply any exemptions from following retrospective applications.

The Bank has applied the mandatory exception that estimates under MFRS at 1 January 2006 should

be consistent with estimates made for the same date under previous accounting policies, unless there is

evidence that those estimates were in error.

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2.2 Transition to MFRS (continued)

2.2.2 Reconciliations between current accounting policies (including MFRS and changes in

accounting policy) and previous accounting policies

The following reconciliations provide a quantification of the effect of the transition to MFRS on:

- Equity at 1 January 2006 and 31 December 2006 [Note 2.2.2(a)];

- Balance sheet as at 1 January 2006 [Note 2.2.2 (b)];

- Balance sheet as at and 31 December 2006 [Note 2.2.2(c)];

- Income statement for the year ended 31 December 2006 [Note 2.2.2(d)].

2.2.2 (a) Equity as at 1 January 2006 and 31 December 2006

Note 31 December

2006

Note 1 January

2006

Total equity under previous accounting polices 679,188 562,856

(i) Capitalization and depreciation of subsequent

costs that should be included in the carrying value

of premises 2.2.2

(c) (g) 375 2.2.2

(b) (e) 422

(ii) Recognition of a provision for liabilities under a defined benefit pension scheme

2.2.2

(c) (l) (760) 2.2.2

(b) (i) (839)

(iii) Fee and commission income previously

recognized up-front that is now amortized using

the effective interest method 2.2.2

(c) (c) (3,593) -

(iv) Recognition of the existing pension plan residual

account 2.2.2

(c) (i) 4,866 2.2.2

(b) (f) 3,258

(v) Recognition of deferred income tax asset in

relation to the revaluation of the available-for-sale

portfolio 2.2.2

(c) (h) 36 -

Total equity under MFRS 680,112 565,697

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accounting policy) and previous accounting policies (continued)

2.2.2 (b) Reconciliation of balance sheet at 1 January 2006

Balance sheet at 1 January 2006 Previous

accounting

policies

Effects of

changes

Note Current

accounting

policies

Assets

Cash and balances with banks 262,514 - 262,514

AMCM treasury bills 1,206,500 (4,732) (a) 1,201,768 Placements with and loans and advances to

banks 2,676,746 9,031 (b) 2,685,777

Loans and advances to customers 3,910,963 8,332 (c) 3,919,295 Investment securities - Available-for-sale - - -

Investment securities - Held-to-

maturity 318,319 4,337 (d) 322,656

Other investments 66,047 - 66,047

Intangible assets 7,950 - 7,950

Premises and other fixed assets 81,290 (185) (e) 81,105

Deferred income tax assets - - -

Other assets 43,346 (20,003) (f) 23,343

Total assets 8,573,675 (3,220) 8,570,455

Liabilities

Balances and deposits from banks 8,039 6 (g) 8,045

Deposits from customers 7,395,269 15,396 (g) 7,410,665

Certificates of deposit issued 535,152 1,284 (g) 536,436

Other liabilities 61,539 (23,586) (h) 37,953 Current income tax liabilities 10,820 - 10,820

Deferred income tax liabilities - - -

Provisions - 839 (i) 839

Total liabilities 8,010,819 (6,061) 8,004,758

Equity

Share capital 225,000 - 225,000

Share premium 50,000 - 50,000

Legal reserve 123,592 - 123,592

Retained earnings 164,264 2,841 (j) 167,105

Total equity 562,856 2,841 565,697

Total liabilities and equity 8,573,675 (3,220) 8,570,455

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2.2.2 (b) Reconciliation of balance sheet at 1 January 2006 (continued)

(a) AMCM treasury bills

Reclassification of unearned discounts from other liabilities (4,732)

Previously, AMCM treasury bills, purchased at discount, were reported in

the balance sheet at their nominal amount, which included principal

invested, plus accrued interest or discounts, plus unearned interest or

discounts. The adoption of the current accounting policy has resulted in the

recognition of financial assets on an amortized cost basis. Accordingly,

unearned discounts have been reclassified from other liabilities to AMCM treasury bills.

(b) Placements with and loans and advances to banks

Reclassification of accrued interest from other assets 9,031

The adoption of the current accounting policy has resulted in the recognition

of financial assets on an amortized cost basis. Accordingly, accrued interest

should be reported with the principal amount. In previous years, these items

were reported in the balance sheet as other assets.

(c) Loans and advances to customers

(i) Reclassification of accrued interest from other assets 11,032 (ii) Reclassification of repossessed assets to other assets (2,700)

8,332

(i) The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly,

accrued interest should be reported with the principal amount. In

previous years, these items were reported in the balance sheet as other

assets.

(ii) In current year, a change in accounting policy has resulted in

repossessed assets being reported under other assets. In previous years,

these were reported in the balance sheet under loans and advances to

customers and other accounts.

(d) Investment securities – Held to maturity


The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, accrued interest



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(e) Premises and other fixed assets

(i) Capitalization of previously incurred expenses 422

(ii) Reclassification of items from premises and other fixed assets to other

assets

(607)

(185)

(i) The adoption of IAS 16 has resulted in the capitalization of costs,

which were previously expensed in the income statement as incurred.

However, as these are expected to be used in more than one future

period, they are capitalized and will be depreciated over the asset’s

expected useful life.

(ii) The adoption of IAS 16 has resulted in the reclassification of certain

assets that do not meet the recognition criteria of IAS 16.

(f) Other assets

(i) Reclassification of accrued interest (24,400)

(ii) Netting of interest accrued on IRS (2,168)

(iii) Reclassification of repossessed assets 2,700

(iv) Recognition of pension plan residual account 3,258

(v) Reclassification of items from premises and other fixed assets to other

assets

607

(20,003)

(i) The adoption of the current accounting policy has resulted in the

recognition of financial assets on an amortized cost basis. Accordingly, accrued interest should be reported with the respective principal

amount. In previous years, these items were reported in the balance

sheet as other assets.

(ii) In previous years, interest accrued on interest rate swaps ‘IRS’ was

presented in gross terms in other assets and in other liabilities. Because

interest of IRS is settled on net basis, interest receivable on IRS in other

assets is netted against interest payable on IRS in other liabilities.

(iii) In current year, a change in accounting policy has resulted in

repossessed assets being reported under other assets. In previous years,

these were reported in the balance sheet under loans and advances to customers and other accounts.

(iv) In current year a change in accounting policy has resulted in the

forfeited contributions to the Bank’s defined contribution plan being

used to offset their contributions to the plan. In previous years, forfeited

contributions were not recognized.

(v) The adoption of IAS 16 has resulted in the reclassification of certain


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(g) Reclassification of accrued interest from other liabilities

Balances and deposits with Banks 6

Deposits from customers 15,396

Certificates of deposit issued 1,284


of financial liabilities on an amortized cost basis. Accordingly, accrued interest should be reported with the principal amount. In previous years,

these items were reported in the balance sheet as other liabilities.

(h) Other liabilities

(i) Reclassification of accrued interest to other liabilities (16,686)

(ii) Reclassification of unearned discounts to AMCM treasury bills (4,732)

(iii) Netting of interest accrued on IRS with other assets (2,168)

(23,586)



accrued interest should be reported with the respective principal

amount. In previous years, these items were reported in the balance sheet as other assets.

(ii) Previously, AMCM treasury bills, purchased at discount, were reported

in the balance sheet at their nominal amount, which included principal


discounts. The adoption of the current accounting policy has resulted in

the recognition of financial assets on an amortized cost basis.

Accordingly, unearned discounts have been reclassified from other

liabilities to AMCM treasury bills.

(iii) In previous years, interest accrued on interest rate swaps ‘IRS’ was

presented in gross terms in other assets and in other liabilities. Because interest of IRS is settled on net basis, interest receivable on IRS in other


- - 17 -






2.2.2. (b) Reconciliation of balance sheet at 1 January 2006 (continued)

(i) Provisions

Recognition of retirement benefit obligations 839

The adoption of IAS 37 has resulted in the recognition of provision for

retirement benefit obligations. Previously, these were recognized in the income statement on a cash basis.

(j) Equity (retained earnings)

Cumulative effect of all of the above adjustments (a) to (i) 2,841

The cumulative effect of all of the above adjustments (a) to (i) has resulted

in an increase in retained earnings at 1 January 2006 of MOP2,841,181.

- - 18 -






2.2.2. (c) Reconciliation of balance sheet at 31 December 2006

Balance sheet at 31 December 2006 Previous

accounting

policies

Effects of

changes

Note Current

accounting

policies Assets

Cash and balances with banks 267,955 - 267,955

AMCM treasury bills 1,327,000 (6,039) (a) 1,320,961

Placements with and loans and advances to

banks 3,025,119 19,373 (b) 3,044,492

Loans and advances to customers 4,587,133 5,331 (c) 4,592,464

Investment securities - Available-for-sale 103,780 156 (d) 103,936

Investment securities - Held-to-

maturity 245,603 3,140 (e) 248,743

Other investments 11,571 - 11,571

Intangible assets 8,857 (755) (f) 8,102

Premises and other fixed assets 76,083 520 (g) 76,603

Deferred income tax assets - 36 (h) 36

Other assets 66,570 (30,443) (i) 36,127

Total assets 9,719,671 (8,681) 9,710,990

Liabilities

Balances and deposits from banks 4,850 1 (j) 4,851 Deposits from customers 8,468,331 24,539 (j) 8,492,870

Certificates of deposit issued 468,049 1,610 (j) 469,659

Other liabilities 82,742 (36,515) (k) 46,227

Current income tax liabilities 16,511 - 16,511

Deferred income tax liabilities - - -

Provisions - 760 (l) 760

Total liabilities 9,040,483 (9,605) 9,030,878

Equity

Share capital 225,000 - 225,000

Share premium 50,000 - 50,000

Legal reserves 132,566 - 132,566

Retained earnings 271,622 924 (m) 272,546

Total equity 679,188 924 680,112

Total liabilities and equity 9,719,671 (8,681) 9,710,990

- - 19 -






2.2.2 (c) Reconciliation of balance sheet at 31 December 2006 (continued)

(a) AMCM treasury bills

Reclassification of unearned discounts from other liabilities (6,039)

Previously, AMCM treasury bills, purchased at discount, were reported in

the balance sheet at their nominal amount, which included principal


discounts. The adoption of the current accounting policy has resulted in the


unearned discounts have been reclassified from other liabilities to AMCM

treasury bills.

(b) Placements with and loans and advances to banks






(c) Loans and advances to customers

(i) Reclassification of accrued interest from other assets 10,680

(ii) Reclassification of accrued interest on car loans from other assets 3,131 (iii) Reclassification of fee and commission income from the income

statement

(3,593)

(iv) Reclassification of repossessed assets to other assets (4,887)

5,331

(i) to (iii) The adoption of the current accounting policy has resulted in the


accrued interest and other deferred income should be reported with the

principal amount. Previously, these items were reported in the balance

sheet as other assets or other liabilities.

(iv) In current year, a change in accounting policy has resulted in

repossessed assets being reported under other assets. Previously, these

were reported in the balance sheet under loans and advances to


(d) Investment securities – Available-for-sale

Reclassification of accrued interest from other assets 156



should be reported with the principal amount. Previously, these items were

reported in the balance sheet as other assets.

- - 20 -







(e) Investment securities – Held to maturity



of financial assets on an amortized cost basis. Accordingly, accrued interest should be reported with the principal amount. In previous years, these items


(f) Intangible assets

Reclassification of projects under development belonging to premises and

other fixed assets

(755)

Previously, projects under development, belonging either to intangibles or to premises and other fixed assets, were classified as intangibles. Projects

under development belonging to premises and other fixed assets have been

reclassified accordingly.

(g) Premises and other fixed assets

(i) Capitalization of previously incurred expenses 375

(ii) Reclassification of projects under development belonging to premises

and other fixed assets

755

(iii) Reclassification of items from premises and other fixed assets to other

assets

(610)

520

(i) The adoption of IAS 16 has resulted in the capitalization of costs which

were previously expensed in the income statement as incurred, being,

however, expected to be used in more than one future period. These capitalized costs will be depreciated over the asset’s expected useful

life.

(ii) Previously, projects under development, belonging either to intangibles

or to premises and other fixed assets, were classified as intangibles.

Projects under development belonging to premises and other fixed

assets have been reclassified accordingly.

(iii) The adoption of IAS 16 has resulted in the reclassification of certain


- - 21 -







(h) Deferred tax asset

Recognition of deferred tax asset 36

The adoption of IAS 12 has resulted in the recognition of deferred income

tax. Previously, deferred income tax was not recognized in the income

statement.

(i) Other assets

(i) Reclassification of accrued interest to other financial assets (36,480)

(ii) Reclassification of items from premises and other fixed assets to other

assets

610

(iii) Netting of interest accrued on IRS with other assets (4,326)

(iv) Reclassification of repossessed assets 4,887

(v) Recognition of the existing pension plan residual account 4,866

(30,443)



accrued interest should be reported with the respective principal

amount. Previously, these items were reported in the balance sheet as other assets.

(ii) The adoption of IAS 16 has resulted in the reclassification of certain



presented in gross terms in other assets and in other liabilities. Because interest of IRS is settled on net basis, interest receivable on IRS in other


(iv) In current year, a change in accounting policy has resulted in

repossessed assets being reported under other assets. Previously, these

were reported in the balance sheet under loans and advances to


(v) In current year a change in accounting policy has resulted in the


used to offset its contributions to the plan. Previously, forfeited contributions were not recognized.

- - 22 -







(j) Reclassification of accrued interest from other liabilities

Balances and deposits with banks 1

Deposits from customers 24,539

Certificates of deposit issued 1,610


of financial liabilities on an amortized cost basis. Accordingly, accrued

interest should be reported with the principal amount. Previously, these

items were reported in the balance sheet as other liabilities.

(k) Other liabilities

(i) Reclassification of accrued interest to other liabilities (26,150)

(ii) Reclassification of unearned discounts to AMCM treasury bills (6,039) (iii) Netting of interest accrued on IRS with other assets (4,326)

(36,515)

(i) and (ii) The adoption of the current accounting policy has resulted in the

recognition of financial assets and liabilities on an amortized cost basis.

Accordingly, accrued and deferred interest and other income should be

reported with the respective principal amount. Previously, these items

were reported in the balance sheet as other liabilities.

(ii) Previously, AMCM treasury bills, purchased at discount, were reported

in the balance sheet at their nominal amount, which included principal


discounts. The adoption of the current accounting policy has resulted in

the recognition of financial assets on an amortized cost basis. Accordingly, unearned discounts have been reclassified from other

liabilities to AMCM treasury bills.


presented in gross terms in other assets and in other liabilities. Because

interest of IRS is settled on net basis, interest receivable on IRS in other


- - 23 -







(l) Provisions

Recognition of retirement benefit obligations 760

The adoption of IAS 37 has resulted in the recognition of provision for

retirement benefit obligations. Previously, these were recognized in the

income statement on a cash basis.

(m) Equity (retained earnings)

Cumulative effect of all of the above adjustments (a) to (i) 924

The cumulative effect of all of the above adjustments (a) to (l) has resulted

in an increase in retained earnings at 31 December 2006 of MOP924,068.

- - 24 -






2.2.2 (d) Reconciliation of the income statement for the year ended 31 December 2006

Income statement for the year

ended 31 December 2006

Previous

accounting

policies

Effects of

changes

Note Current

accounting

policies

Interest income 512,294 (21,115) (a) 491,179

Interest expense (303,964) 26,896 (b) (277,068)

Net interest income 208,330 5,781 214,111

Fee and commission income 37,794 (9,374) (c) 28,420 Fee and commission expense (1,393) - (1,393)

Net fee and commission income 36,401 (9,374) 27,027

Dividend income 803 - 803

Net trading income 14,280 - 14,280

Other operating income 9,570 - 9,570

Operating income 269,384 (3,593) 265,791

Operating expenses (130,040) 1,640 (d) (128,400)

Operating profit before bad debt

provisions 139,344 (1,953) 137,391

Bad and doubtful debt expense (9,377) - (9,377)

Recoveries of loans and interest previously written off 3,134 - 3,134

Profit before income tax 133,101 (1,953) 131,148

Current income tax expense (16,472) - (16,472)

Profit for the year 116,629 (1,953) 114,676

(a) Interest income

(i) Amortization of up-front fees using the effective interest method 586

(ii) Reclassification of loan initiation and early repayment fee 5,195

(vi) Netting of interest on IRS (26,896)

(21,115)

- - 25 -






2.2.2 (d) Reconciliation of the income statement for the year ended 31 December 2006 (continued)

(a) Interest income (continued)

(i) The adoption of IAS 18 has resulted in the recognition of interest

income using the effective interest method. Accordingly, up-front fees

have been amortized using the effective interest method. In prior years,

these had been recognized in full on inception of the loan as fee and

commission income in the income statement.

(ii) Early repayment fees should be included under interest income as this

payment is directly linked to the interest yield the Bank receives. In

prior years, this was recognized in fee and commission income in the

income statement.

(iii) In previous years, interest on interest rate swaps ‘IRS’ was presented in

gross terms in interest income and interest expense. Because interest of

IRS is settled on net basis, interest income is netted against interest

expense.

(b) Interest expense

Netting of interest on IRS 26,896

In previous years, interest on interest rate swaps ‘IRS’ was presented in

gross terms in interest income and interest expense. Because interest of IRS

is settled on net basis, interest income is netted against interest expense.

(c) Fee and commission income

(i) Amortization of up-front fees using the effective interest method (586)

(ii) Deferment of up-front fees to be amortized using the effective interest

method

(3,593)

(iii) Reclassification of loan initiation and early repayment fee (5,195)

(9,374)

(i) The adoption of IAS 18 has resulted in the recognition of interest

income using the effective interest method. Accordingly, up-front fees have been amortized using the effective interest method and classified

as interest income. In prior years, these had been recognized in full on

inception of the loan and classified in fee and commission income in the

income statement.

(ii) Fee and commission income previously recognized up-front needs to be

amortized using the effective interest method.

- - 26 -






2.2.2 (d) Reconciliation of the income statement for the year ended 31 December 2006 (continued)

(c) Fee and commission income (continued)

(iii) Early repayment fees should be included under interest income as it is

an integral part of the effective interest rate. In prior years, this was

recognized as fee and commission income in the income statement.

(d) Operating expenses

(i) Recognition of the balance of the pension plan residual account 1,608

(ii) Depreciation of capitalized costs as a result of the adoption of IAS 16 (47)

(iii) Reversal of payments under defined benefit scheme 79

1,640

(i) In current year a change in accounting policy has resulted in the


used to offset its contributions to the plan. Previously, forfeited

contributions were not recognized. This is the compensation part

allocated to 2006.

(ii) The adoption of IAS 16 has resulted in the capitalization of costs which

were previously expensed in the income statement as incurred, being,

however, expected to be used in more than one future period. This the

amortization for 2006 of the capitalized costs

(iii) The adoption of IAS 37 has resulted in the recognition of provision for

retirement benefit obligations in the opening balance sheet. Previously,

these were recognized in the income statement on a cash basis. This

adjustment reflects the reversal of payments that were recognized on a

cash basis in 2006.

- - 27 -

NOTES TO THE FINANCIAL STATEMENTS All amounts in thousands Macau Patacas (MOP) unless otherwise stated


2.3 Foreign currency translation

2.3.1 Functional and presentation currency

Items included in the financial statements of the Bank are measured using the Macau Pataca (MOP) as

the functional currency.

2.3.2 Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates

prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement

of such transactions and from the translation at year-end exchange rates of monetary assets and

liabilities denominated in foreign currencies are recognized in the income statement.

Changes in the fair value of monetary securities denominated in foreign currency classified as

available-for-sale are analyzed between translation differences resulting from changes in the amortized

cost of the securities and other changes in the carrying amount of the securities. Translation

differences related to changes in the amortized cost are recognized in the income statement, and other

changes in the carrying amount are recognized in equity.

2.4 Interest income and expense

Interest income and expense for all interest-bearing financial instruments are recognized within

'interest income' and 'interest expense' in the income statement using the effective interest method.

The effective interest method is a method of calculating the amortized cost of a financial asset or a

financial liability and allocating the interest income or interest expense over the relevant period. The

effective interest rate is the rate that exactly discounts estimated future cash payments or receipts

through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate

the Bank estimates cash flows considering all contractual terms of the financial instrument (for

example, prepayment options) but does not consider future credit losses. The calculation includes all

fees and points paid or received between parties to the contract that are an integral part of the effective

interest rate, transaction costs and all other premiums and discounts.

Interest income or expense arising from entering into interest rate swaps (IRS), recognized as off-

balance sheet financial instruments, are also included in interest income or expense.

Once a financial asset has been written down upon the recognition of a specific provision, interest is

recognized on a cash basis in accordance with Notice 18/93 - AMCM.

- - 28 -



2.5 Fee and commission income and expense

Fees and commissions are generally recognized on an accrual basis when the service has been

provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with

related direct costs) and recognized as an adjustment to the effective interest rate on the loan. Loan

syndication fees are recognized as revenue when the syndication has been completed and the Bank

retained no part of the loan package for itself or retained a part at the same effective interest rate as the

other participants. Commissions and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party – such as the arrangement of the acquisition of shares or other

securities or the purchase or sale of businesses – are recognized on completion of the underlying

transaction. Portfolio and other management advisory and service fees are recognized based on the

applicable service contracts, usually on a time-apportionate basis. Asset management fees related to

investment funds are recognized ratably over the period the service is provided. The same principle is

applied for wealth management, financial planning and custody services that are continuously

provided over an extended period. Performance linked fees or fee components are recognized when

the performance criteria are fulfilled.

2.6 Dividend income

Dividends are recognized in the income statement when the Bank’s right to receive payment is

established.

2.7 Treasury bills

Treasury bills are debt securities issued by AMCM for which the Bank’s management has the

intention and ability to hold to maturity. Treasury bills are purchased at discount and stated at

amortized cost in the face of the balance sheet. Discounts are accreted up to maturity on a straight-line

basis, which approximates the effective interest rate method, and reported as interest income in the

income statement. Under previous accounting policies, treasury bills were carried in the balance sheet

at their nominal amount.

2.8 Financial assets

The Bank classifies its financial assets in the following categories: assets held for trading, loans and

receivables, held-to-maturity ('HTM') investments and available-for-sale ('AFS') investments. Management determines the classification of its investments at initial recognition.

All financial assets are initially recognized at fair value plus transaction costs. The financial assets are

de-recognized when the rights to receive cash flows from the financial assets have expired or where

the Bank has transferred substantially all risks and rewards of ownership.

2.8.1 Assets held for trading

A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose

of selling in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of recent actual pattern of short-term profit making.

- - 29 -



2.8 Financial assets (continued)

2.8.2 Loans and receivables

Loans and receivables are non-derivative financial assets with fixed and determinable payments and

fixed maturities. Loans and advances to, and placements in, banks (due from banks) and loans and

advances to customers are classified under this category. Loans and advances are carried at amortized

cost using the effective interest method and are reported in the balance sheet net of specific and general provisions.

2.8.3 Held-to-maturity investments

Held-to-maturity investments are assets with fixed or determinable payments and fixed maturities that

the Bank's management has the positive intention and ability to hold to maturity. Held-to-maturity investments are carried at amortized cost using the effective interest method.

2.8.4 Available-for-sale investments

Available-for-sale investments are financial assets that are not classified in any of the above

categories, i.e. investments that the Bank has the intention and ability to hold for an indefinite period,

and may be sold in response to needs for liquidity or changes in interest rates, exchange rates or market prices. Available-for-sale investments are carried at fair value. Gains or losses arising from

changes in the fair value of available-for-sale financial assets are recognized directly in equity, until

the financial asset is de-recognized or impaired. On disposal of a financial investment classified as

available-for-sale the cumulative gain or loss previously recognized in equity is recognized in the

income statement.

2.8.5 Other investments

Miscellaneous investments such as participations in local institutions and capital loans to unlisted

companies are classified as other investments. Other investments are stated at cost less impairment.

2.9 Impairment of financial assets

Impairment of financial assets is governed by Notice 18/93 – AMCM and applies solely to the Bank’s

exposures to non-bank customers.

A financial asset is impaired when the payment of interest or commission thereon or the payment of

principal is past due for more than 3 months.

When a financial asset is impaired, a minimum specific provision needs to be set up. The amount is

determined based on the financial asset carrying amount, net of the realizable value of any existing

and duly formalized tangible collateral, taking also into consideration the time period in which

payments have been delayed, in the following manner:

(i) Delayed over 3 months but less than or equal to 12 months: 40%;

(ii) Delayed over 12 months but less than or equal to 18 months: 80%;

(iii) Delayed over 18 months: 100%.

- - 30 -



2.9 Impairment of financial assets (continued)

For the remaining assets representing exposure to non-bank customers not included above, i.e. which

are not past due for more than 3 months, a general provision of not less than 1% of the aggregated

value needs to be set aside. General provisions also apply to certain off-balance sheet instruments such

as bank guarantees and similar contracts.

Specific and general provisions are recognized in the income statement and deducted from loans and advances to customers in the balance sheet.

The Bank assesses at each balance sheet date whether there is objective evidence that its AFS and

HTM securities are impaired. These financial assets are considered to be impaired and impairment

losses are incurred only if there is objective evidence of impairment as a result of one or more events

that occurred after the initial recognition of the financial asset. As a practical expedient, the Bank may

measure the impairment on the basis of an instrument’s fair value using an observable market price.

If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as

the difference between the acquisition cost and the current fair value, less any impairment loss on that

financial asset previously recognized in income statement – is removed from equity and recognized in

the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt

instrument classified as available-for-sale increases and the increase can be objectively related to an

event occurring after the impairment loss was recognized in the income statement, the impairment loss

is reversed through the income statement.

2.10 Financial liabilities

Financial liabilities are initially recognized at fair value net of transaction costs incurred and

subsequently stated at amortized cost; any difference between proceeds net of transaction costs and the

redemption value is recognized in the income statement over the period of the financial liabilities using the effective interest method.

2.11 Derivative financial instruments

The Bank enters into some derivative transactions in the foreign exchange and interest rate markets,

namely foreign exchange contracts and interest rate swaps (‘IRS’), with the principal aim of hedging other transactions, either assets or liabilities. These are off-balance sheet financial instruments, with

interest receivable or payable recorded in the income statement. The interest income and expenses on

IRS are settled on a net basis. Accordingly interest income and expense has been presented on a net

basis in the income statement. Interest receivable and payable has also been presented on a net basis

in the balance sheet. In previous years the interest element has been presented in the income statement

and balance sheet on a gross basis.

Comparative figures have been restated to reflect current year presentation.

Unrealized gains or losses on transactions which are marked to market, namely currency forwards, are

recognized in the income statement and included, respectively, in other assets or other liabilities in the

balance sheet.

- - 31 -



2.12 Repossessed assets

Collateral assets repossessed on customers’ default in respect to loans and advances granted by the

Bank are classified as ‘held for sale’ and reported in ‘Other assets’ at relevant loan’s carrying amount

at repossession or market value, whichever is lower, with loan derecognized upon foreclosure. In

previous years repossessed assets have been reported in ‘Loans and advances and other accounts’.


2.13 Premises and other fixed assets

Premises and other fixed assets are stated at historical cost less accumulated depreciation and

accumulated impairment losses.

Cost includes expenditure that is directly attributable to the acquisition of the items of property and

equipment. Subsequent costs are included in the asset’s carrying amount or are recognized as a

separate asset as appropriate, only when it is probable that future economic benefits associated with

the item will flow to the Bank and the cost of the item can be measured reliably. Repairs and

maintenance are charged to operating expenses during the financial period in which they are incurred.

Depreciation of premises and other fixed assets is calculated using the straight-line method to allocate

their cost over their estimated useful lives, as follows:

Buildings 2% (50 years)

Heavy repairs and improvements 33.33% (3 years)

Computer equipment (hardware) 25% (4 years)

Motor vehicles 20% (5 years)

Furniture and office equipment 20% (5 years)

No depreciation is charged in respect of freehold land and items of property and equipment under

development.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance

sheet date. Assets that are subject to amortization are reviewed for impairment whenever events or

changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s

carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount

is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset’s

fair value less costs to sell and value in use.

Gains or losses on disposal are determined by comparing proceeds with carrying amount. These are

recognized in the income statement in other operating expenses.

2.14 Intangible assets

Acquired computer software is capitalized based on the costs incurred to acquire and bring them to

use.

Costs associated with developing or maintaining computer software programmes are recognized as an

expense as incurred. Costs that are associated with the development of identifiable and unique

software products controlled by the Bank, and that will probably generate economic benefits

exceeding costs beyond one year, are recognized as intangible assets. Direct costs include the employee costs incurred as a result of developing software.

Computer software development costs recognized as intangible assets are amortized over 3 years.

- - 32 -



2.15 Employee benefits

The Bank sponsors a defined contribution pension plan, which is funded by payments by the Bank and

its employees to an insurance company, which administers the plan. The plan is registered under and

supervised by AMCM. The plan was established and is governed in accordance with Macau Decree-

Law 6/99/M of 8 February 1999. Contributions to the plan are expensed as incurred.

Upon an employee’s resignation the Bank’s payments to the defined contribution pension plan may be forfeited by the employee depending on their length of service with the Bank. Any amounts forfeited

by the employees are maintained in a residual account with the pension provider and are used to offset

the Bank’s future contributions. In previous years, these forfeited amounts in the Bank’s residual

account were not recognized in the Bank’s financial statements.

The Bank also offers healthcare insurance-based benefits to its employees who are providing service

to the Bank. Healthcare benefits are prepaid annually when renewing the insurance policy and

expensed over the next 12 months.

The Bank previously sponsored a defined benefit plan. The liability recognized in the opening balance

sheet in respect of this defined benefit pension plan is based on actuarial valuation. The liability is

reduced when payments are made to the retired employee.


2.16 Provisions

Provisions are recognized when there is a present legal or constructive obligation as a result of past

events; it is more likely than not that an outflow of resources will be required to settle the obligation;

and the amount has been reliably estimated.

When there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized

even if the likelihood of an outflow with respect to any one item included in the same class of

obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the

obligation using a pre-tax rate that reflects current market assessments of the time value of money and

the risks specific to the obligation. The increase in the provision due to the passage of time is

recognized as interest expense.

2.17 Deferred income tax

Deferred income tax is provided in full, using the liability method, on temporary differences arising

between the tax bases of assets and liabilities and their carrying amounts in the financial statements.

The principal temporary differences arise from the revaluation and impairment of AFS investments.

Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially

enacted by the balance sheet date and are expected to apply when the related deferred income tax is

realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will

be available, against which the temporary differences can be utilized.

- - 33 -



2.17 Deferred income tax (continued)

The tax effects of income tax losses available for carry forward are recognized as an asset when it is

probable that future taxable benefits will be available against which these losses can be utilized.

2.18 Leases

2.18.1 Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor

are classified as operating leases. Payments made under operating leases (net of any incentives from

the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

Where the Bank is a lessor under operating leases, assets leased out are included in property and

equipment section in the balance sheet and depreciated over their expected useful lives on a basis

consistent with similar owned property and equipment. Rental income (net of any incentives given to

lessees) is recognized on a straight-line basis over the lease term.

2.18.2 Finance leases

Leases of assets where the Bank has substantially all the risks and rewards of ownership are classified

as finance leases. Finance leases are capitalized at the lease’s commencement at the lower of the fair value of the leased item and the present value of the minimum lease payments.

Each lease payment is allocated between the liability and finance charges so as to achieve a constant

rate of the finance balance outstanding. The corresponding rental obligations, net of finance charges,

are included in other liabilities.

Assets held under finance leases are depreciated over the shorter of their estimated useful lives or the lease term.

When assets are leased out under a finance lease, the present value of the lease payments is recognized

as a receivable. The difference between the gross receivable and the present value of the receivable is

recognized as unearned finance income.

Lease income is recognized over the term of the lease using the net investment method, which reflects

a constant periodic rate of return.

2.19 Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents comprise cash, balances with

banks and AMCM, items in course of collection from other banks, AMCM treasury bills with less than

3 months’ maturity from the date of acquisition and placements with banks with less than 3 months’

maturity from the date of acquisition.

- - 34 -


2 Summary of significant accounting policies (continued) 2.20 Financial guarantee contracts

Financial guarantee contracts are contracts that require the issuer to make stipulated payments to

reimburse the holder for an incurred loss because a third party failed to fulfill its obligations through

either specified payments or the warrant of specific projects.

These financial instruments, initially recognized at fair value on the date the guarantee was given, are

carried off-balance sheet. Commissions earned on guarantees given are amortized on a straight- line basis over the life of the contract and recorded in the income statement in ‘Fees and commissions’.

2.21 Loan commitments

A loan commitment is an agreement under which a lender agrees to lend a specified amount of money,

at stipulated conditions, to a potential borrower, within a specified period.

The Bank enters into loan commitment agreements with customers, which are recognized off-balance

sheet. Commitment fees are amortized on a straight-line basis over the life of the commitment and

recognized in the income statement as fee and commission income.

3 Critical accounting estimates and judgments

The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities

within the next financial year. Estimates and judgments are continually evaluated and are based on

historical experience and other factors, including expectations of future events that are believed to be

reasonable under the circumstances.

3.1 Provisions on bad and doubtful debts

The Bank periodically reviews its loan portfolios to identify and assess bad and doubtful debts at least

on a quarterly basis. In determining whether a provision should be recorded in the income statement,

the Bank makes judgments as to whether there is any observable data indicating that there is a

measurable decrease in the estimate future cash flows. This evidence may include observable data

indicating that there has been an adverse change in the payment status of borrowers in a group, or

national or local economic conditions that correlate with defaults on assets in the group. Management

estimates the provision based on the expectation of future cash flows from the borrower or from

realizing collateral.

3.2 Externally managed investments impairment

The Bank has invested in leveraged/structured investment vehicles managed by third party portfolio managers, which are included in the Bank’s AFS investment portfolio. These vehicles typically invest

in medium term high-grade bonds using short to medium term financing to provide an enhanced yield

to investors. During the year, the Bank observed that these vehicles experienced more difficult funding

conditions, and were reliant to varying extents on their managers or banking sponsors for funding

support. Falls in the prices of bonds during the year, coupled with the leverage effect on the Bank’s

holdings has resulted in a decrease in their values. As a result, the Bank has assessed that there are

objective indications that the vehicles have suffered impairment. As there is no active market for

these investments, management has assessed the fair value with reference to valuations received from

the managers. Accordingly, an impairment loss of MOP81,264,922 has been recognized for these

investments.

- - 35 -


4 Net interest income

Interest and similar income

Interest earned on: 2007 2006

Restated

Loans and advances to customers 332,552 281,989

Account with local regulatory authority 4,871 4,065

Treasury bills 72,913 58,767

Due from banks and other financial institutions 112,254 136,069

Investments 35,752 9,947

Other interest income 639 342

Total interest income 558,981 491,179

Interest expense

Interest paid on: 2007 2006

Restated

Due to banks and other financial institutions 2,974 1,008

Customer deposits 314,797 272,238

Other interest payable 573 3,822

Total interest expense 318,344 277,068

Net interest income 240,637 214,111

5 Net fee and commission income

Fee and commission income from: 2007 2006

Restated

Banking guarantees granted 4,919 6,546 Trade finance 4,869 5,350

Securities trading and custody 2,739 1,204

Commitment fees 2,969 4,770

Credit card operations 11,077 7,207

Cheques and payment orders issued 1,896 2,016

Other fee and commission income 1,053 1,327

Total fee and commission income 29,522 28,420

Fee and commission expense on: 2007 2006

Restated

Custodian services 79 36 Car lending 512 461

Correspondent banks 282 228

Securities trading 1,211 668

Total fee and commission expense 2,084 1,393

Net fee and commission income 27,438 27,027

- - 36 -


6 Dividend income

Dividend income from other investments 2007 2006 Restated

Unlisted investments 1,010 803

1,010 803

7 Net trading income

Net trading income 2007 2006

Restated

Foreign exchange 15,407 10,685

Interest rate instruments

- listed - -

- unlisted 183 152

Equities 2,490 3,443

18,080 14,280

8 Other operating income

Other operating income 2007 2006

Restated

Insurance sales 3,785 1,942

Services rendered to third parties 430 600

Property rental 1,150 1,082

Other operating income 11,643 5,946

Other operating income 17,008 9,570

9 Operating expenses

Operating expenses 2007 2006

Restated

Staff costs - Directors’ remuneration 7,540 6,324

- Wages, salaries and bonus 62,707 56,822

- Pension costs 4,719 4,050

- Others 5,936 7,045

Property costs

- Rental of premises 2,424 1,860

- Other property costs 1,900 2,309

Amortization and depreciation

- Amortization of intangible assets 3,576 4,494

- Depreciation for premises and other fixed assets 7,914 7,576

- Amortization for leasehold land and land use rights 47 47

(Gains)/Losses on the disposal of fixed assets (38) 48

Advertising and promotion expenses 6,369 4,699

Audit services remuneration 500 574

Computer expenses 11,270 10,009

Others 26,664 22,542

Operating expenses 141,528 128,399

- - 37 -


10 Provisions for bad and doubtful debts

2007 2006 Restated

Specific provisions

- Charge to income statement 2,634 5,349

- Recoveries (2,228) (620)

Net charge to income statement 406 4,729

General provisions

New provisions 8,185 4,648

Total bad and doubtful debts expenses 8,591 9,377

11 Income tax expense

Current tax comprises of Macau complimentary tax. Macau complementary tax is assessed at

progressive rates ranging from 3% to 9% on the taxable income not exceeding MOP 300,000 and at a

fixed rate of 12% on the taxable income in excess of MOP300,000. For the year 2007, a tax incentive

is provided under the Policy Address that there is no tax charge on the taxable income below or

equivalent to MOP200,000. A fixed rate of 9% on the taxable income in the range of MOP200,001 to

MOP300,000 and 12% on the taxable income in excess of MOP300,000.

2007 2006

Restated

Current income tax 19,314 16,472

Deferred income tax charged to the income statement (Note 28) (9,752)

-

Total tax expense 9,562 16,472

Current income tax 2007 2006

Profit before tax 76,472 133,101

Tax calculated at 12% (2006: 12%) 9,177 15,951

Under provision in prior years - 577

Effect of the progressive tax rate before 12% (27) (32)

Income not subject to tax (138) (130)

Expenses not deductible for tax purposes 550 106

Current tax expense 9,562 16,472

12 Cash and balances with banks

Cash and balances with banks at 31 December 2007 2006

Cash 79,210 62,601

Balance with AMCM – liquidity account (Note) 143,512 130,905

Balances with other banks 52,622 34,856

Items in course of collection from other banks 151,729 39,593

427,073 267,955

- - 38 -


12 Cash and balances with banks (continued)

Note: In accordance with AMCM notice no. 006/93, the Bank is required to maintain a minimum regulatory deposit balance with AMCM for liquidity purposes. The required weekly average of the

MOP deposit account should not be less than 70% of the aggregate of the following:

(a) 3% on all liabilities repayable on demand

(b) 2% on all liabilities repayable within 3 months (inclusive), except for those already counted in (a)

(c) 1% on liabilities repayable beyond 3 months

13 AMCM treasury bills

AMCM treasury bills at 31 December 2007 2006

AMCM treasury bills maturing between 1 and 12 months 1,237,120 1,320,961

AMCM treasury bills maturing beyond 12 months - -

1,237,120 1,320,961

14 Placement with and loans and advances to banks

Placements with and loans and advances to banks at 31

December

2007 2006

Placements with and loans and advances to banks maturing

between 1 and 12 months 2,457,292

3,044,492

Placements with and loans and advances to banks maturing

beyond 12 months -

-

2,457,292 3,044,492

15 Loans and advances to customers

Loans and advances to customers at 31 December 2007 2006

Restated

Loans and advances to customers 5,508,773 4,655,464

Specific provisions (7,444) (9,806)

General provisions (61,379) (53,194)

5,439,950 4,592,464

Loans and advances to customers maturing between 1 and 12

months 1,082,606

1,372,887

Loans and advances to customers maturing beyond 12

months 4,357,344

3,219,577

5,439,950 4,592,464

- - 39 -


16 Reconciliation of allowance accounts for losses on loans and advances to customers

Specific

provisions

General

provisions

Total

provisions

Balance at 1 January 2006 14,584 48,546 63,130

Amounts written-off (9,507) - (9,507)

Net charge for the year 4,729 4,648 9,377

Balance at 31 December 2006 9,806 53,194 63,000

Balance at 1 January 2007 9,806 53,194 63,000

Amounts written-off (2,768) - (2,768)

Net charge for the year (for loans and advances) 406 8,185 8,591

Balance at 31 December 2007 7,444 61,379 68,823

17 Derivative financial instruments

Foreign exchange derivatives at 31 December 2007 2006

Currency forwards (purchase) 951,609 93,298

Currency forwards (sale) (945,242) (92,608)

Currency forward position 6,367 690

Interest rate swaps (notional amount) 1,286,667 719,789

18 Available-for-sale investments

Available-for-sale investments at 31 December 2007 2006

Debt securities, unlisted 681,448 64,224

Impairment of available-for-sale investment securities (81,265) -

600,183 64,224

Equity securities, unlisted 5,659 39,712

605,842 103,936

Available-for-sale debt securities maturing between 1 and 12

months 120,204

-

Available-for-sale debt securities maturing beyond 12 months 479,979 64,224

600,183 64,224

19 Held-to-maturity investments

Held-to-maturity investments at 31 December 2007 2006

Debt securities, unlisted 109,546 248,743

Market value of debt securities above 108,132 245,179

Held-to-maturity securities maturing between 1 and 12

months 109,546

139,453

Held-to-maturity securities maturing beyond 12 months - 109,290

109,546 248,743

- - 40 -


20 Other investments

Other investments at 31 December 2007 2006

Equity, unlisted 11,482 11,571

21 Intangible assets

At 1 January 2006 Software and

banking systems

Cost 34,386

Accumulated amortization (26,436)

Accumulated impairment -

Net book amount 7,950

Year ended 31 December 2006

Opening net book amount 7,950

Additions 4,646

Amortization expense (4,494)

Closing net book amount 8,102

At 31 December 2006

Cost 39,032

Accumulated amortization (30,930)




Opening net book amount 8,102

Additions 1,501

Write-offs/Disposals (20)

Amortization expense (3,576)

Amortization written-off 20

Closing net book amount 6,027

At 31 December 2007

Cost 40,533 Accumulated amortization (34,506)



- - 41 -


22 Premises and other fixed assets

At 1 January 2006 Premises

Restated Premises

improvements

Restated

Furniture/

equipment

Restated

Total

Restated

Cost 84,658 35,367 68,913 188,938

Accumulated depreciation (16,206) (34,418) (57,208) (107,832)

Net book amount 68,452 949 11,705 81,106


Opening net book amount 68,452 949 11,705 81,106

Additions - 65 3,128 3,193

Write-offs/Disposals - (265) (914) (1,179)

Depreciation expense (1,707) (591) (5,326) (7,624)

Depreciation written-off - 237 870 1,107

Closing net book amount 66,745 395 9,463 76,603

At 31 December 2006

Cost 84,658 35,432 72,041 192,131


Net book amount 66,745 395 9,463 76,603


Opening net book amount 66,745 395 9,463 76,603

Additions - 8,241 6,139 14,380 Write-offs/Disposals - (1,215) (2,479) (3,694)

Depreciation expense (1,705) (1,276) (4,979) (7,960)

Depreciation written-off - 1,215 2,444 3,659

Closing net book amount 65,040 7,360 10,588 82,988

At 31 December 2007

Cost 84,658 43,673 78,180 206,511


Net book amount 65,040 7,360 10,588 82,988

The net book value comprises: 2007 2006

Leaseholds held in Macau on medium-term lease

(between 10 to 50 years) 60,168

61,767

Freeholds held in Macau 4,872 4,978

65,040 66,745

- - 42 -


23 Other assets

At 31 December 2007 2006 Restated

Repossessed assets 3,063 4,887

Accounts receivable and pre-payments 13,339 17,071

Others 15,232 14,169

31,634 36,127

24 Balances and deposits from other banks

At 31 December 2007 2006

Balances and deposits from other banks maturing between 1

and 12 months 156,496

4,851

Balances and deposits from other banks maturing beyond 12

months -

-

156,496 4,851

25 Deposits from customers


Demand deposits and current accounts 1,211,440 1,075,879

Savings deposits 1,518,233 1,353,224

Time deposits 6,487,808 6,063,767

9,217,481 8,492,870

Deposits from customers maturing between 1 and 12 months 8,286,917 8,492,278

Deposits from customers maturing beyond 12 months 930,564 592

9,217,481 8,492,870

26 Certificates of deposit issued


Certificates of deposit issued maturing between 1 and 12

months 154,154

469,659

Certificates of deposit issued maturing beyond 12 months 92,803 -

246,957 469,659

27 Other liabilities


Restated

Others payables 11,144 6,512

Deferred income 1,361 1,299

Others 52,523 38,416

65,028 46,227

- - 43 -


28 Deferred income tax

Deferred income tax assets at 31 December 2007 2006

Restated

Deferred income tax assets to be recovered after more than 12

months 13,963

36

Deferred income tax assets to be recovered within 12 months 1 -

13,964 36

The net movement on the deferred income tax account is as

follows:

2007 2006

At the beginning of the year 36 -

Recognized in the income statement 9,752 -

Charged to equity 4,176 36

At the end of the year 13,964 36

The movement in deferred income tax assets and liabilities during the year is as follows:

Deferred income tax assets Revaluation

losses

Total

At 1 January 2006 - -

Charged to equity 36 36

At 31 December 2006 36 36

Deferred income tax assets Impairment

charge

Revaluation

losses

Total

At 1 January 2007 - 36 36

Recognized in the income statement 9,752 - 9,752

Charged to equity - 4,176 4,176

At 31 December 2007 9,752 4,212 13,964

The deferred income tax charged to equity during the year is as follows:

2007 2006

Available-for-sale investments revaluation 4,176 36

4,176 36

- - 44 -


29 Contingent liabilities and commitments

Capital commitments

At 31 December 2006 and 2007, the Bank did not have any capital commitments.

Credit commitments 2007 2006

Banking guarantees 540,008 689,243

Trade related contingencies 156,379 158,966 Other commitments 937,776 1,188,821

1,634,163 2,037,030

Operating lease commitments

At 31 December, the Bank had future aggregate minimum lease payments under non-cancelable

operating leases as follows:

Operating lease commitments 2007 2006

- Less than 1 year 3,010 1,656

- Between 1 and 5 years 4,304 2,303

7,314 3,959

30 Share capital

2007 2006

Authorized 900,000 shares of MOP 250 each 225,000 225,000

2007 2006

Issued and fully paid:

Ordinary shares of

MOP 250 each

Number of

shares

(thousands)

Share

capital

Number of

shares

(thousands)

Share

Capital

At 1 January 900 225,000 900 225,000

At 31 December 900 225,000 900 225,000

31 Reserves

Movements in reserves are included in the statement of changes in equity on page 8 of the financial

statements.

The legal reserve represents the amount set aside from retained earnings and is not distributable to the

Bank’s shareholders. The article 60º of the Macau Financial System Act requires that credit

institutions incorporated in Macau transfer at least 20% of their net annual profits to their legal

reserve account until that fund amounts to half of the share capital. Once the amount referred to in the

preceding paragraph has been reached, credit institutions shall transfer at least 10% of their net annual

profits to the legal reserve account until the reserve fund is equal to the share capital.

- - 45 -


32 Approval of financial statements

The financial statements have been approved by the Board of Directors on 27 February 2008.

Documents

BANCO COMERCIAL DE MACAU, S. A. · The directors of Banco Comercial de Macau, S. A. (‘the Bank’ or ‘BCM’) submit their report together with the audited financial statements