2. Basis of preparation and accounting policies (cont’d) 

2.3 Summary of significant accounting policies (cont’d) 

(l) Financial instruments – initial recognition and subsequent measurement (cont’d) 

## Financial liabilities (cont’d) 

## Derecognition 

## NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(RMB AND US$ AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA) 

A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the statement of profit or loss. 

## Offsetting of financial instruments 

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously. 

## Derivative financial instruments 

## Initial recognition and subsequent measurement 

The Group uses derivative financial instruments, such as forward currency contracts, to hedge its foreign currency risks. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. 

Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss. 

## (m) Inventories 

Inventories are valued at the lower of cost and net realizable value. 

Costs incurred in bringing each product to its present location and condition are accounted for as follows: 

l Raw materials: purchase cost on a weighted average basis 

l Finished goods and work in progress: cost of direct materials and labor and a proportion of manufacturing overheads based on the normal operating capacity, but excluding borrowing costs 

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. 

