1. General
The Office of the Telecommunications Authority (OFTA) Trading Fund was established on 1 June 1995 under the Legislative Council Resolution passed on 10 May 1995 pursuant to sections 3, 4 and 6 of the Trading Funds Ordinance (Cap. 430). By virtue of section 25 of the Communications Authority Ordinance (CAO) (Cap. 616) which came into operation on 1 April 2012, the OFTA Trading Fund was renamed as the Office of the Communications Authority (OFCA) Trading Fund (the Fund) on the same date. The OFCA serves as the executive arm of the Communications Authority (CA), which is a statutory body set up under the CAO to administer and enforce the Broadcasting Ordinance (Cap. 562), the Broadcasting (Miscellaneous Provisions) Ordinance (Cap. 391), the CAO, the Telecommunications Ordinance (Cap. 106) and the Unsolicited Electronic Messages Ordinance (UEMO) (Cap. 593), as well as the Trade Descriptions Ordinance (Cap. 362) and the Competition Ordinance (Cap. 619), and to perform any function under or by virtue of any Ordinance. The Fund, which is under the policy portfolio of the Commerce and Economic Development Bureau of the Government of the Hong Kong Special Administrative Region (the Government), supports the principal activities of the CA, as follows:
- licensing and regulating telecommunications services and broadcasting services;
- managing Hong Kong's radio frequency spectrum;
- providing advisory, planning and support services on telecommunications, broadcasting, anti-spamming matters to the Government;
- overseeing technical standards and representing the Government on international affairs;
- enforcing the UEMO; and
- ensuring the enforcement of fair trading practices and fair competition in relation to telecommunications and broadcasting sectors.
2. Significant accounting policies
(a) Statement of compliance
These financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong and all applicable Hong Kong Financial Reporting Standards (HKFRSs), a collective term which includes all applicable individual HKFRSs, Hong Kong Accounting Standards (HKASs) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). A summary of the significant accounting policies adopted by the Fund is set out below.
The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of the Fund. Note 3 provides information on the changes, if any, in accounting policies resulting from initial application of these developments to the extent that they are relevant to the Fund for the current and prior accounting periods reflected in these financial statements.
(b) Basis of preparation of the financial statements
The measurement basis used in the preparation of the financial statements is historical cost.
The preparation of financial statements in conformity with HKFRSs requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
There are no critical accounting judgments involved in the application of the Fund's accounting policies. There are also no key assumptions concerning the future, or other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next year.
Certain comparative figures for the year ended 31 March 2018 have been reclassified to conform to the current year's presentation of the Fund's financial statements.
(c) Fixed assets
The fixed assets appropriated to the Fund on 1 June 1995 were measured initially at deemed cost equal to the value contained in the Resolution of the Legislative Council passed on 10 May 1995. Fixed assets acquired since 1 June 1995 are capitalised at the actual costs of acquisition or installation.
(i) Property, plant and equipment
The following items of property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses (note 2(d)):
- land classified as held under a finance lease and building held for own use situated thereon; and
- plant and equipment, including telecommunications and broadcasting equipment, computer systems, furniture, fixtures and motor vehicles.
Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, on a straight-line basis over their estimated useful lives as follows:
Gains or losses arising from the disposal of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the statement of comprehensive income on the date of disposal.
(ii) Intangible assets
Intangible assets include acquired computer software licences and capitalised development costs of computer software programs. Expenditure on development of computer software programs is capitalised if the programs are technically feasible and the Fund has sufficient resources and intention to complete development. The expenditure capitalised includes direct labour and cost of materials. Intangible assets are stated at cost less accumulated amortisation and any impairment losses (note 2(d)).
Amortisation of intangible assets is charged to the statement of comprehensive income on a straight-line basis over the assets' estimated useful lives of 5 to 12 years.
(d) Impairment of fixed assets
The carrying amounts of fixed assets, including property, plant and equipment and intangible assets, are reviewed at the reporting date to identify any indication of impairment.
If any such indication exists, an impairment loss is recognised in the statement of comprehensive income whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its fair value less costs to sell and value in use.
(e) Financial assets and financial liabilities
(i) Initial recognition and measurement
The Fund's financial assets comprise placement with the Exchange Fund, trade and other receivables, interest receivables, bank deposits, and cash and bank balances.
The Fund's financial liabilities comprise trade and other payables, provision for employee benefits and amounts due to related parties.
The Fund recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instrument. At initial recognition, financial assets and financial liabilities are measured at fair value plus or minus transaction costs that are directly attributable to the acquisition of the financial assets or the issue of the financial liabilities.
(ii) Classification and subsequent measurement from 1 April 2018
After the adoption of HKFRS 9 "Financial Instruments" (note 3(a)), the Fund classifies all financial assets as subsequently measured at amortised cost using effective interest method, on the basis that they are held within a business model whose objective is to hold them for collection of contractual cash flows and the contractual cash flows represent solely payments of principal and interest. The measurement of loss allowances for financial assets is based on the expected credit loss model as described in note 2(e)(v).
The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating and recognising 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 asset or financial liability to the gross carrying amount of the financial asset or to the amortised cost of the financial liability. When calculating the effective interest rate, the Fund estimates the expected cash flows by considering all contractual terms of the financial instrument but does not consider the expected credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
The Fund classifies all financial liabilities as subsequently measured at amortised cost using effective interest method.
The Fund reclassifies a financial asset when and only when it changes its business model for managing the asset. A financial liability is not reclassified.
(iii) Classification and subsequent measurement prior to 1 April 2018
Under HKAS 39 "Financial Instruments: Recognition and Measurement", the Fund's financial assets, which were non-derivative financial assets with fixed or determinable payments that were not quoted in an active market and which the Fund had no intention of trading, were classified as loans and receivables and were carried at amortised cost using the effective interest method less impairment losses, if any (note 2(e)(vi)).
The classification of the Fund's financial liabilities and their subsequent measurement prior to 1 April 2018 were the same as those from 1 April 2018 (note 2(e)(ii)).
(iv) Derecognition
A financial asset is derecognised when the contractual rights to receive the cash flows from the financial asset expire, or where the financial asset together with substantially all the risks and rewards of ownership have been transferred.
A financial liability is derecognised when the obligation specified in the contract is discharged or cancelled, or when it expires.
(v) Impairment of financial assets from 1 April 2018
After the adoption of HKFRS 9 (note 3(a)), the Fund applies a three-stage approach to measure expected credit losses on financial assets (other than trade receivables) measured at amortised cost and to recognise the corresponding loss allowances and impairment losses or reversals, with the change in credit risk since initial recognition determining the measurement bases for expected credit losses:
Stage 1: 12-month expected credit losses
For financial instruments for which there has not been a significant increase in credit risk since initial recognition, the portion of the lifetime expected credit losses that represent the expected credit losses that result from default events that are possible within the 12 months after the reporting date are recognised.
Stage 2: Lifetime expected credit losses – not credit impaired
For financial instruments for which there has been a significant increase in credit risk since initial recognition but that are not credit impaired, lifetime expected credit losses representing the expected credit losses that result from all possible default events over the expected life of the financial instrument are recognised.
Stage 3: Lifetime expected credit losses – credit impaired
For financial instruments that have become credit impaired, lifetime expected credit losses are recognised and interest income is calculated by applying the effective interest rate to the amortised cost rather than the gross carrying amount.
Loss allowances for trade receivables are always measured at an amount equal to lifetime expected credit losses.
Determining significant increases in credit risk
At each reporting date, the Fund assesses whether there has been a significant increase in credit risk for financial instruments since initial recognition by comparing the risk of default occurring over the remaining expected life as at the reporting date with that as at the date of initial recognition. The assessment considers quantitative and qualitative historical information as well as forward-looking information. A financial asset is assessed to be credit impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred.
The Fund assesses whether there has been a significant increase in credit risk since initial recognition on an individual or collective basis. For collective assessment, financial instruments are grouped on the basis of shared credit risk characteristics, taking into account investment type, credit risk ratings and other relevant factors.
Placements with banks with an external credit rating of investment grade are considered to have a low credit risk. Other financial instruments are considered to have a low credit risk if they have a low risk of default and the counterparty or borrower has a strong capacity to meet its contractual cash flow obligations in the near term. The credit risk on these financial instruments is assessed as not having increased significantly since initial recognition.
When a financial asset is uncollectible, it is written off against the related loss allowance. Such assets are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are recognised in the statement of comprehensive income.
Measurement of expected credit losses
Expected credit losses of a financial instrument are an unbiased and probability-weighted estimate of credit losses (i.e. the present value of all cash shortfalls) over the expected life of the financial instrument. A cash shortfall is the difference between the cash flows due to the Fund in accordance with the contract and the cash flows that the Fund expects to receive. For a financial asset that is credit impaired at the reporting date, the Fund measures the expected credit losses as the difference between the asset's gross carrying amount and the present value of estimated future cash flows discounted at the asset's original effective interest rate.
(vi) Impairment of financial assets prior to 1 April 2018
The carrying amount of financial assets was reviewed at each reporting date to determine whether there was objective evidence of impairment. If any impairment evidence existed, an impairment loss was recognised in the statement of comprehensive income as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the asset's original effective interest rate. If in a subsequent period, the amount of such impairment loss decreased and the decrease could be linked objectively to an event occurring after the impairment loss had been recognised, the impairment loss was reversed through the statement of comprehensive income.
(f) Deferred income
If a customer pays consideration, or the Fund has an unconditional right to consideration, before the Fund transfers a service to the customer, the Fund recognises its contract liability as deferred income. The Fund derecognises the deferred income and recognises revenue when the Fund transfers the service and, therefore, satisfies its performance obligation.
(g) Notional profits tax
The Fund has no tax liability under the Inland Revenue Ordinance (Cap. 112). However, prior to 27 December 2017, the Government had required the Fund to pay to the Government an amount in lieu of profits tax (i.e. notional profits tax) calculated on the basis of the provisions of the Inland Revenue Ordinance. The accounting policies adopted by the Fund for notional profits tax were as follows:
- Notional profits tax expense for the year comprised current tax and movements in deferred tax assets and liabilities.
- Current tax was the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
- Deferred tax assets and liabilities arose from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arose from unused tax losses and unused tax credits.
All deferred tax liabilities, and all deferred tax assets to the extent that it was probable that future taxable profits would be available against which the assets could be utilised, were recognised.
The amount of deferred tax recognised was measured based on the expected manner of realisation or settlement of the carrying amounts of the assets or liabilities, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities were not discounted.
The carrying amount of a deferred tax asset was reviewed at each reporting date and was reduced to the extent that it was no longer probable that sufficient taxable profit would be available to allow the related tax benefit to be utilised. Any such deduction was reversed to the extent that it became probable that sufficient taxable profit would be available.
However, the Fund is no longer required to pay notional profits tax with effect from 27 December 2017. The balance of notional profits tax payable and the balance of deferred tax liabilities as at 27 December 2017 were derecognised, with corresponding income recognised in the statement of comprehensive income for the year ended 31 March 2018 (note 6).
(h) Revenue recognition
From 1 April 2018, after the adoption of HKFRS 15 "Revenue from Contracts with Customers" (note 3(b)), the Fund recognises revenue from contracts with customers when it satisfies a performance obligation by transferring a promised service to a customer, at the amount of consideration to which the Fund expects to be entitled in exchange for the service. Prior to 1 April 2018, licence fees received were credited to deferred income and amortised to profit and loss over the validity period of the licences. Service income was recognised when services had been provided.
Interest income is recognised as it accrues using the effective interest method.
Other income is recognised on an accrual basis.
(i) Employee benefits
The employees of the Fund comprise civil servants and contract staff. Salaries, staff gratuities, and annual leave entitlements are accrued and recognised as expenditure in the year in which the associated services are rendered by the staff. For civil servants, staff on-costs, including pensions and housing benefits provided to the staff by the Government, are charged as expenditure in the year in which the associated services are rendered.
For civil servants employed on pensionable terms, their pension liabilities are discharged by reimbursement of the staff on-cost charged by the Government. For other staff, contributions to the Mandatory Provident Fund Scheme are charged to the statement of comprehensive income as incurred.
(j) Related parties
The Fund is a separate accounting entity within the Government established under the Trading Funds Ordinance. During the year, the Fund has entered into transactions with various related parties, including government bureaux and departments, other trading funds and financially autonomous bodies controlled or significantly influenced by the Government, in the ordinary course of its business.
(k) Foreign currency translation
Foreign currency transactions during the year are translated into Hong Kong dollars using the spot exchange rates at the transaction dates. Monetary assets and liabilities denominated in currencies other than Hong Kong dollars are translated into Hong Kong dollars using the closing exchange rate at the reporting date. All foreign currency translation differences are recognised in the statement of comprehensive income.
(l) Cash and cash equivalents
Cash and cash equivalents include cash and bank balances, and other short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value, having been within three months of maturity when placed or acquired.
(m) Provisions and contingent liabilities
Provisions are recognised for liabilities of uncertain timing or amount when there is a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made.
Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events, are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
3. Changes in accounting policies
The HKICPA has issued certain new or revised HKFRSs that are effective for the current accounting period. None of them impact on the accounting policies of the Fund except for the adoption of HKFRS 9 and HKFRS 15 as set out below.
The Fund has not applied any new standard or interpretation that is not yet effective for the current accounting period (note 22).
(a) HKFRS 9 "Financial Instruments"
HKFRS 9 replaces HKAS 39. It sets out the requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.
The Fund has applied HKFRS 9 retrospectively to items that existed as at 1 April 2018 in accordance with the transition requirements without restating comparative information. The carrying amounts of the items as at 1 April 2018 have not been impacted by initial application of HKFRS 9. The nature and effect of the changes to previous accounting policies are set out below.
Classification of financial assets
HKFRS 9 classifies financial assets into three principal categories: measured at (i) amortised cost; (ii) at fair value through other comprehensive income, and (iii) at fair value through profit or loss. These supersede HKAS 39's categories of held-to-maturity investments, loans and receivables, available-for-sale financial assets and financial assets at fair value through profit or loss. The classification of financial assets under HKFRS 9 is based on the business model under which the financial asset is managed and its contractual cash flow characteristics.
The Fund's financial assets previously classified as loans and receivables (carried at amortised cost) were reclassified to financial assets measured at amortised cost (note 2(e)(ii)). The carrying amounts as at 31 March 2018 were the same as those as at 1 April 2018.
Impairment of financial assets
HKFRS 9 replaces the "incurred loss" model in HKAS 39 with the "expected credit loss" model. The expected credit loss model requires an ongoing measurement of credit risk associated with a financial asset and therefore recognises expected credit losses earlier than under the "incurred loss" accounting model in HKAS 39. The Fund applies the new expected credit loss model to the financial assets measured at amortised cost (note 2(e)(v)). The initial application of the new impairment requirements had no impact on the carrying amounts of the financial assets as at 1 April 2018.
(b) HKFRS 15 "Revenue from Contracts with Customers"
HKFRS 15 establishes a comprehensive framework for recognising revenue and some costs from contacts with customers, replacing HKAS 18 "Revenue" and HKAS 11 "Construction contracts". HKFRS 15 also introduces additional disclosure requirements which aim to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
In accordance with the transition requirements, the Fund has elected to apply HKFRS 15 retrospectively only to contracts that were not completed before 1 April 2018 without restating comparative information. The initial application of HKFRS 15 has not impacted the carrying amounts of any items as at 1 April 2018.
The accounting policies for revenue adopted under HKFRS 15 (note 2(h)) has not affected the amounts of any items in the year ended 31 March 2019 compared to the previous accounting policies.
4. Revenue from contracts with customers
The Fund supports the CA to administer and enforce various ordinances including the Broadcasting Ordinance and the Telecommunications Ordinance. The Fund's performance obligations in contracts with customers mainly involve licensing and regulating telecommunications services and broadcasting services. A licensee is required to pay service fee in advance. The Fund satisfies its performance obligation as the service is rendered and recognises the fee over time on a straight-line basis.
For advisory and project, and frequency assignment and protection services provided to related parties, the Fund satisfies its performance obligation as the service is rendered and recognises a service fee over time on a full cost recovery basis.
5. Operating costs
6. Other income
Prior to 27 December 2017, the Government had required all trading funds to pay notional profits tax and dividends to the Government. On 27 December 2017, the Court of Final Appeal handed down its judgment in a judicial review case concerning the Fund. According to the judgment, it was an error of law to construe the Trading Funds Ordinance as permitting the inclusion in budgets of the Fund of projections for notional tax or dividends.
Subsequent to the judgment, the Government made a change in financial arrangement whereby all trading funds are no longer required to pay notional profits tax and dividends to the Government with effect from 27 December 2017. The balances of notional profits tax payable of HK$4,239,000 and deferred tax liabilities of HK$473,000 as at 27 December 2017 were derecognised, with corresponding income recognised in the statement of comprehensive income for the year ended 31 March 2018.
7. Rate of return on fixed assets
The rate of return on fixed assets is calculated as total comprehensive income divided by average net fixed assets and expressed as a percentage. Total comprehensive income is adjusted by excluding interest income and interest expenses. Fixed assets include property, plant and equipment and intangible assets. The Fund is expected to meet a target rate of return on fixed assets of 5.5% per year (2018: 5.5%) as determined by the Financial Secretary.
8. Property, plant and equipment
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9. Intangible assets
10. Placement with the Exchange Fund
The balance of the placement with the Exchange Fund amounted to HK$510,322,000 (2018: HK$487,880,000), being the principal sum of HK$480,000,000 plus interest paid but not yet withdrawn at the reporting date of HK$30,322,000 (2018: HK$7,880,000). The term of the placement is six years from the date of placement, during which the amount of principal sum cannot be withdrawn.
Interest on the placement is payable at a fixed rate determined every January. The rate is the average annual investment return of the Exchange Fund's Investment Portfolio for the past six years or the average annual yield of three-year Government Bonds for the previous year subject to a minimum of zero percent, whichever is the higher. The interest rate has been fixed at 2.9% per annum for the year 2019 and at 4.6% per annum for the year 2018.
11. Trade and other receivables
The movement in the allowance for impairment loss during the year is as follows:
The loss allowance of HK$5,097,000 on an amount due from a company in financial difficulties was reversed during the year when the amount was received by the Fund, with corresponding income included under sundry income (note 6).
12. Contract balances with customers
(a) Receivables and contract assets
For services provided to licensees, the balance of receivables at the reporting date is presented as trade receivables in note 11. The Fund does not have any contract assets.
(b) Contract liabilities
The Fund's obligations to provide services to licensees for which the Fund has received advance payments from the licensees are presented as deferred income in the statement of financial position. Licensees are required to pay annual licence fees upon issue of the licence, and on each anniversary thereafter during the validity period of the licences. Licence period for each type of licence varies, ranging from 1 to 15 years. When a licensee does not pay licence fee on an anniversary date, the licence may be suspended or revoked and the contract with the licensee would become unenforceable. The balances of deferred income represent the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially satisfied) at the reporting date. The Fund expects to recognise the deferred income as revenue within one year. No consideration from contracts with customers is not included in the transaction price.
Significant changes in the balances of deferred income during the year are shown below:
13. Provision for employee benefits
This represents the estimated liability for employees' annual leave and obligations on contract-end gratuities payable to contract staff for services rendered up to the reporting date (see note 2(i)).
14. Trading fund capital
This represents the Government's investment in the Fund.
15. Development reserve
This is a reserve serving as a regulating mechanism to meet the target return as well as to reduce the need for future fee increases.
16. Retained earnings
While the target returns are entrusted to be retained in the Fund, they belong to the Government pursuant to section 6(6)(c) of the Trading Funds Ordinance and are not subject to the Fund's disposal. The Government will direct the transfer of the sum into general revenue when appropriate.
With effect from 27 December 2017, the Fund is no longer required to pay dividends to the Government (see note 6). Accordingly, the balance of proposed dividend as at 27 December 2017 of HK$59,835,000 was transferred back to the retained earnings during the year ended 31 March 2018.
17. Cash and cash equivalents
18. Capital commitments and other commitments
At 31 March 2019, the Fund had capital commitments, so far as not provided for in the financial statements, as stated below:
To help resolve billing disputes in deadlock between telecommunications service providers and their customers outside the judicial system, a voluntary Customer Complaint Settlement Scheme (the scheme) was set up in November 2012 by the Communications Association of Hong Kong, the industry association. By a Memorandum of Understanding signed on 30 April 2015, the Fund will provide recurrent funding for the long term operation of the scheme in the amount not exceeding HK$2,000,000 per annum. During the year, the Fund had contributed HK$954,000 to the scheme (2018: HK$855,000).
19. Related party transactions
Apart from those separately disclosed in the financial statements, the other material related party transactions for the year are summarised as follows:
- fees income for services provided to related parties included advisory and project services amounting to HK$19,628,000 (2018: HK$14,032,000) and frequency assignment and protection services amounting to HK$13,993,000 (2018: HK$14,001,000);
- expenses for services received from related parties included accommodation, repairs and maintenance, legal advice, central administration and auditing. In total, the Fund incurred HK$27,818,000 on these services (2018: HK$25,305,000); and
- fixed assets acquired from related parties included motor vehicles and furniture. The total amount of these fixed assets amounted to HK$778,000 (2018:HK$301,000).
Services provided by or to related parties were charged at the rates payable by the general public where such services were also available to members of the public, or on a full cost recovery basis where such services were only available to related parties. Fixed assets supplied by related parties were charged at full cost.
Balances with related parties as at 31 March 2019 are set out in the statement of financial position.
20. Contingent liabilities
As at 31 March 2019, there were several outstanding litigation cases filed with the court by licensees under the Telecommunications Ordinance, claiming for restitution of excessive licence fees paid by them since 1995. The Government intends to vigorously contest these claims and will be responsible for claims for those amounts related to notional profits tax and dividends which have been paid to the Government by the Fund. In October 2018, the Government and the CA decided that the other retained earnings of the Fund of HK$82,959,000, being the total amount of notional profits tax and dividend retained in the Fund after deduction of target returns required by the Government, as at 31 March 2018 (see note 16) would be set aside for refund of licence fees to the licensees, pending resolution of the claims for restitution. The Fund considers that, based on the legal advice obtained, the overall financial effect of the claims cannot be estimated reliably.
21. Financial risk management
(a) Investment policy
To provide an ancillary source of income, surplus cash is invested in a portfolio of financial instruments. The portfolio includes fixed deposits and placement with the Exchange Fund. It is the Fund's policy that all investments in financial instruments should be principal-protected.
(b) Currency risk
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in currency exchange rates.
The Fund does not have significant exposure to currency risk as substantially all of its financial instruments are denominated in Hong Kong dollars.
(c) Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.
The Fund's credit risk is primarily attributable to placement with the Exchange Fund, trade and other receivables, interest receivables, bank deposits and bank balances. The Fund has a credit policy in place and the exposure to these credit risks is monitored on an ongoing basis.
To minimise credit risks, all fixed deposits are placed with licensed banks in Hong Kong. These financial assets are considered to have a low credit risk. The loss allowances are measured at amounts equal to 12-month expected credit losses, which are assessed to be immaterial by the Fund.
The credit quality of bank deposits and bank balances, analysed by the ratings designated by Moody's or their equivalent, is shown below:
While other financial assets are subject to the impairment requirements, their expected credit losses were minimal.
The maximum exposure to credit risk of the financial assets of the Fund at the reporting date is equal to their carrying amounts.
(d) Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.
The Fund manages liquidity risk by forecasting the amount of cash required and monitoring the working capital of the Fund to ensure that all liabilities due and known funding requirements could be met. As the Fund has a strong liquidity position, it has a very low level of liquidity risk.
(e) Interest rate risk
Interest rate risk refers to the risk of loss arising from changes in market interest rates. This can be further classified into fair value interest rate risk and cash flow interest rate risk.
Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. Since all of the Fund's bank deposits bear interest at fixed rates, their fair values will fall when market interest rates increase. However, as they are all stated at amortised cost, changes in market interest rates will not affect their carrying amounts and the Fund's profit and reserves.
Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Fund's exposure to cash flow interest rate risk is small as it has no major floating-rate investments.
(f) Other financial risk
The Fund is exposed to financial risk arising from changes in the interest rate on the placement with the Exchange Fund which is determined every January (note 10). It was estimated that, as at 31 March 2019, a 50 basis point (2018: 50 basis point) increase / decrease in the interest rates for 2018 and 2019, with all other variables held constant, would increase / decrease the profit for the year and reserves by HK$2,552,000 (2018: HK$2,439,000).
(g) Fair values
The fair values of financial instruments quoted in active markets are based on their quoted prices at the reporting date. In the absence of such quoted market prices, fair values are estimated using present value or other valuation techniques, using inputs based on market conditions existing at the reporting date.
All financial instruments are stated in the statement of financial position at amounts equal to or not materially different from their fair values.
22. Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended 31 March 2019
Up to the date of issue of these financial statements, the HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended 31 March 2019 and which have not been early adopted in these financial statements.
The Fund is in the process of making an assessment of what the impact of these amendments, new standards and interpretations expected is expected to be in the period of initial adoption. So far it has concluded that the adoption of them is unlikely to have a significant impact on the Fund's results of operations and financial position.