H@ CONTENTS

q@$#s .................. Treasurer's Report

..................................................................... @

Independent Auditor's Report

............................................................................................. ge@zRs 6 - 7

Consolidated Income and Expenditure Statement

*gqj(s#$s ........................................ University Income and Expenditure Statement

j i j g .......................................................................................... 10-11

Consolidated Balance Sheet

............................................................................... j@!gfjijgR@%

University Balance sheet

, .............................................. Consolidated Statement of Changes in Fund Balances

.......................................................................................... k@g&@@s 16 - 17

University Statement of Changes in Fund Balances

.......................................................................................... & 18 - 19

Consolidated Cash Flow Statement

.......................................................................................... *g~&$$@~ 20 - 21

University Cash Flow Statement

MJ$j$#SW$l ......................................... Notes to the Financial Statements

THE HONG KONG UNIVERSITY OF SCIENCE AND TECHNOLOGY

FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2008

ZlBBf8 TREASURER'S REPORT

~ & B g m R Operating Results for the Year

2007/08FRE23k4W-MB@F B4URkS 2007108 is another fruitful year for the University. H & f ~ B @ m @ l ~ ~ w ~ @ ' k % @ f % Q @ Aftercateringfortheincreasedexpenditureforthe 381,400,000 3 10 a EL * (2006107 * B a expandkg activities, the Univemity was able to 487,600,000Z) %#k%%f%@%@@JJ8%#

a 2 0 1 2 ~ ~ ~ m ~ ~ s ~ m ~ ~ ~ maintain a surplus of $381.4 million ($487.6 million for 2006107). This has further strengthened the University's financial position in transition to 2012 when the 4-year undergraduate (UG) system is launched.

%$@h Consolidated Income

$F~%~@.A&2,780,500,0002 (2006107FB Consolidated income for the year was $2,780.5 million 23 2,721,000,000 Z ) 9 $ 3 1,681,100,000 2 ($2,721.1 million in 2006/07), comprising $1,68 1.1 (60.4%)&@%f#im 3 589,500,000%(21.2%)234 million (60.4%) fiom government subventions, $589.5 RB%BJkR 3 118,500,000Z(4.3%)%@J~e0 million (21.2%) fiom tuition and program fees, $1 18.5 I h 3 171,600,000 Z (6.2%) # 8 3 million (4.3%) from interest and investment income, 1 4 0 ~ 0 0 0 ~ 0 0 0 X ( s ~ 0 % ) ~ ~ ~ m ~ @ ~ B 7 9 ~ 8 0 0 ~ 0 0 0 $171.6 million (6.2%) fiom donations, $140.0 million 2(2.9%)?3#@ B @ h

(5.0%) fiom auxiliary services and other income of $79.8 million (2.9%).

2007/08&EE$@h1#@fiU*B% B 8 I e H The increase in consolidated income in 2007108 was f i ' mainly attributable to a supplementary grant fiom the r*~8B~BBB@m*StW?BP1 ' @"* University Grants Committee (UGC) for the cost of EBmRTEB@fiG%@J,e\TH%%#

living salary adjustment, a growth in tuition fees fiom the expanding self-financing education programs and activities, but partly offset by a decrease in investment and interest income due to a downturn in the investment market and lowering of bank deposit interest rates.

~~~~ Consolidated Expenditure

~ F R E % ~ ~ 3 & 2 , 4 0 1 , 2 0 0 , 0 0 0 % (2006/07%B Consolidated expenditure for the year was $2,401.2 a 2237,6009000 ) ' 8 9 ' 1,77494009000 % million ($2,237.6 million in 2006/07), comprising ( 7 3 . 9 ~ 2 3 9 ~ ~ ~ 9 e ~ m 3 120,600,00o~(5.0%) $1,774.4 million (73.9%) for learning and research &@BB--&I% 9 361,300,0002(15.1%)23@

BE R w m , 144,900,000 3 (6.0%) a a activities, $120.6 million (5.0%) for management and

El0 general expenditure, $36 1.3 million (1 5.1 %) for premises and related expenses, and $144.9 million (6.0%) for other items.

~ ~ ~ s ~ ~ ~ e ~ ~ ~ ~ ~ ~ f i ~ ~ ~ ~ g ~ ~ g The increase in consolidated expenditure was partly

f i e @ due to an upward cost of living salary adjustment made W 3 7 B$j@t%%B%Efie1b'ifBN?B%# in line with that for the civil servants, and additional B ~ ~ ~ B ~ S A + % ~ H ~ H ~ B ~ ~ J B O expenses for the expanding self-financing programs,

the growing research activities in the Mainland through the Fok Ying Tung Graduate School in Nansha, and the beginning of front-end spending on the 4-year UG system.

@s%#m%SLb UGC-funded Activities

$$BBB@lS&1,656,100,000% 9 f&i@R;)Sfi UGC grants accounted for $1,656.1 million or 98.5% @ @98.5% 7 @%E%@f#lS 1,255,400,000 3, of government subventions. This included recurrent

* * BBx@ ~ ~ ~ @ J R ~ ~ f i block grant of $1,255.4 million; earmarked grants for 3 ~ ~ ~ ~ ~ ~ 2 9 2 ~ 2 0 0 9 0 0 0 3 , aflEH;)Sfim housing, research, capital works and rates and S&-108,500,000% 0 government rent refunds of $292.2 million; and extra

matching grants of $108.5 million.

R2008q6H30El 7 -WftBBEH#@%(~%% As at 30 June 2008, the General and Development BRB%~RBB@)&~,oo~,~oo,ooo~, Reserve (representing accumulated surpluses of

recurrent block grant) stood at $1,00 1.4 million.

E##I&#% Matching Grant Scheme

~ % % D f g l % ~ @ E a @ @ J & % f ~ 7 kbfr;-@% Under the UGC Fourth Matching Grant Scheme, the 7@280,oOO,OoO%~fSR~IE~;)Sfi@& University received donations and related matching (2006/07~B&273,oOO,oOO?Z) grants of some $280.0 million for the year ($273.0

million in 2006107).

l3sm'flH Capital Projects

% E & 2 0 1 2 W 9 W ~ % d M , k4ffa%ft*B With the local tertiary education system changed to a 4- * e @ - s g J m 3 B ' @%%@#A@ year UG program, the University has plans to construct sWBMe ' If ' llilPBB a number of additional facilities in the coming years # % 7 o O ~ B @ m S & % % o B B B B m B & Z g * a i @ ~ , k@7n;Cfiah#%@@B& og including the New Academic Building, the IAS

~ ~ ~ & % ~ @ 7 ~ k @ f E I % i E i % ~ # % * o Academic Building, extension to the existing Academic Building, two new student hostels (total 700 places), etc.. While funding support for these facilities will mainly come from the Government, supplementary funding support are being sought from potential donors. Formal approval for each of these capital projects will be given when the relevant funding has been secured.

Outlook

Preparation work for the construction of the New Academic Building, the IAS building, and extension to the existing Academic Building has been started. The tender for the Enterprise Resources Planning (ERP) information system is approaching the final award stage. These projects will draw on the University's private and General and Development Reserves. With the sizeable donations and matching grants raised under the UGC Matching Grant Scheme, the University has recently embarked on an investment consultancy to review the investment asset allocation strategies to enhance its long-term return. The University will continue to be prudent in managing its finance to ensure adequate funding is available to meet its strategic development needs in transition to 2012 on the one hand; and continue to maintain a healthy reserve on the other.

SIGNED David Tak-Kei SUN Treasurer of the University 14 November 2008

I3BBrn#%S INDEPENDENT AUDITOR'S REPORT

Deloitte. Eal

To : The Council of The Hong Kong University of Science and Technology

We have audited the financial statements of The Hong Kong University of Science and Technology (the "University") and its subsidiaries (collectively referred to as the "Group") set out on pages 6 to 71, which comprise the consolidated and University balance sheets as at 30 June 2008, and the consolidated and University income and expenditure statements, the consolidated and University statements of changes in fund balances and the consolidated and University cash flow statements for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Council's responsibility for the financial statements

@BS@BBBMB%e3@&e@fimB% The Council of the University is responsible for the preparation and the true and fair presentation of these

9 6 1 % 0 # - financial statements in accordance with Hong Kong SBBl~&FMZ3ilJM%RdEIm&%S Financial Reporting Standards issued by the Hong Kong H@MB961S$~~diHR~1@@GIB Institute of Certified Public Accountants (the "HKICPA"). '' - " This responsibility includes designing, implementing and %;BE$HmR-FfiBeBm@%Bao

maintaining internal control relevant to the preparation and the true and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

~ ! ! & l m s E Auditor's responsibility

$~~NB~EA#BBBI!~~%%~~!~?~%$HB% 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, 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 our audit in accordance with Hong Kong Standards on Auditing issued by the HKICPA. Those standards require that we comply with 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fiaud 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 appropriate in the circumstances, but not for the purpose of 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 Council, 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.

Opinion

In our opinion, the financial statements give a true and fair view of the state of affairs of the University and the Group as at 30 June 2008 and their surplus and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards.

SIGNED Deloitte Touche Tohmatsu Certified Public Accountants HONG KONG 14 November 2008

&$rllt3%% ~39008V6B 30 EfkqE

CONSOLIDATED INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED 30 JUNE 2008

mi% 2008 2007 Notes $'OOO $'OOO

#A Income

iAtR#@J Government Subventions

BB-%@R#M&R Tuition, Programmes and Other Fees

*JTjJ1RBl@h Interest and Investment Income

*%#a Donations and Benefactions

#@JJNB Auxiliary Services

RMBh Other Income

Expenditure

B#i3&8f% Learning and Research

B4RliJf3-t Instruction and Research

HB% Library

**%MSO Central Computing Facilities

#MB%RB Other Academic Services

HBbB Institutional Support

BBRd#?S% Management and General

H%RGlR~ Premises and Related Expenses

9*R-#?aBJN% Student and General Education Services

#M%B Other Activities

**BBs%Me Surplus from operation for the year

&*1E5t3%S(@) $8322008q6H30 ElkqB

CONSOLIDATED INCOME AND EXPENDITURE STATEMENT (Cont'd) FOR THE YEAR ENDED 30 JUNE 2008

I%& 2008 2007 Notes $'OOO $lo00

%i&%HBMrnBrn@B%B Share of Result of a Jointly Controlled Entity

%i&mB&am@B%s Share of Result of an Associate

*+EBBtlBB Surplus for the year before transfers

*BE : Transfers to :

mzsi% Restricted Funds

z€msi% Other Funds

AtR38BtS %S2008$6H30 HkqB

UNIVERSITY INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED 30 JUNE 2008

I%& 2008 2007 Notes S'OOO $'OOO

@A Income

iSIRFf35tiB Government Subventions

4R-%#!i!fi#fIB@R Tuition, Programmes and Other Fees

$!!1f i f f t l@A Interest and Investment Income

%RM3 Donations and Benefactions

SiilibJEB Auxiliary Services

#m@n Other Income

lax Expenditure

4RfiR% Learning and Research

%4fiR% Instruction and Research

HB@ Library

+%amsB Central Computing Facilities

#rn%bJEB Other Academic Services

@B3#3 Institutional Support

BBB-JBSB Management and General

@%fiGlRH Premises and Related Expenses

4!kB--JB%BlJEB Student and General Education Services

#L%B Other Activities

eBm=aB& Surplus for the year before transfers

UNIVERSITY INCOME AND EXPENDITURE STATEMENT (Cont'd) FOR THE YEAR ENDED 30 JUNE 2008

2008 2007 Notes $'OOO S'OOO

maits : Transfers to :

WEZBS Restricted Funds

H4i!lBS Other Funds

&W&WER@S 2008~6H30Ef

CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2008

l4iRk 2008 2007 Notes $ ' 000 $ ' 000

*-BE Non-Current Assets

Property and Equipment

@EBJB EIHBBB Held-to-Maturity Financial Assets

RlRmBHBBB Available-for-Sale Financial Assets

W@B&Fl&% Interest in an Associate

Reg&%@% Interest in a Joint Venture

HBEIBB-%2ZBG% Bank Deposits with Maturity over One Year

%#BE Current Assets

@%aBElHBBB Held-to-Maturity Financial Assets

GI3 Stocks

@%%%R@H%g 17 Accounts Receivable and Prepayments

EaBHBBzmH2zmG% Bank Deposits with Original Maturity over Three Months

3!4&7jt8W3!442 Cash and Cash Equivalents

%#a% Current Liabilities

@HE%R@3BM Accounts Payable and Accruals

@BBS*JB% Provision of Staff Benefits

%@a% Deferred Income

SrnBEHE Net Current Assets

RmB8%3lbBm Total Assets Less Current Liabilities

2008q6H30 El CONSOLIDATED BALANCE SHEET (Cont'd)

AS AT 30 JUNE 2008

Notes $'OOO $'OOO

Non-Current Liabilities

~IB%$JBf# Provision of Staff Benefits

SESI NET ASSETS

S]EEBBS& Deferred Capital Funds

mss& Restricted Funds

sfl!!s& Other Funds

s&Ma TOTAL FUNDS

@33@$?2008Fll H 14 H@S$MB%A Approved by the Council on 14 November 2008

E!#B 3.%B&!i kb3B SIGNED

David T.K. SUN Treasurer of the University

E#s? *@a Bi2

SIGNED Paul C.W. CHU

President

E#s? SEfP

PWaBi2(fi@)BmBBBW SIGNED

Philip S.P. WONG Associate Vice-President for Administration and Business

and Director of Finance

fs9BER#S 2008q6R 30 El

UNIVERSITY BALANCE SHEET AS AT 30 JUNE 2008

ISfS 2008 2007 Notes $'OOO $'OOO

#%BBB Non-Current Assets

@%R%# Property and Equipment

@Z3jBJ El%BB@z Held-to-Maturity Financial Assets

PrlYaBHBBB Available-for-Sale Financial Assets

EBRlfiXgBfiq Investment in an Associate

EBRrnMfi8 Investments in Subsidiaries

3JB EIBB-+2ZB@% Bank Deposits with Maturity over One Year

%BBB Current Assets

BEBJBJ H%BB@z Held-to-Maturity Financial Assets

el3 Stocks

El!!R%k&aN%@ 17 Accounts Receivable and Prepayments

E~JBEI~~3~J?l2ZB&R Bank Deposits with Original Maturity over Three Months

S&BSHS& Cash and Cash Equivalents

IaBm Current Liabilities

ENE%&E%BM Accounts Payable and Accruals

aRA@$JB# Provision of Staff Benefits

% ~ R % Deferred Income

Net Current Assets

S m B s m B m Total Assets Less Current Liabilities

2008q6H 30 El UNIVERSITY BALANCE SHEET (Cont'd)

AS AT 30. JUNE 2008

WE& 2008 2007 Notes $'OOO $ ' 000

#%ma# Non-Current Liabilities

@%AB$JB# Provision of Staff Benefits

BSBB NET ASSETS

%B%#%& Deferred Capital Funds

I43ZS& Restricted Funds

RNBP Other Funds

B&Bm TOTAL FUNDS

E&S&SrnS CONSOLIDATED STATEMENT OF CHANGES IN FUND BALANCES

SE&% bS&

Deferred Capital Funds $'OOO

& #%B& Restricted Other

Funds Funds S'OOO $'OOO

S&#iBr Total Funds $'OOO

200N78 1 El Balance as at 1 July 2006

**BB% Surplus for the year

W*B&@h Endowment Funds received

RqAaBMBI&*B%XB*J Unrealised gain on Available-for-Sale Financial Assets

~EfflBMB1&2*1%B*JRfiB@%@SEBBS@3%A Recognition of unrealised gain on disposal of Available-for-Sale Financial Assets transferred to income and expenditure statement

R*mE@El@b%aBa%W@IIB%Ea# Subventions and donations received and receivable during the year for Property and Equipment

BUUbEM%IIBB%E3#%%EBX%;ryi~B@E@d %b Amount transferred to income and expenditure statement representing the depreciation charge on Property and Equipment funded by subventions and donations

R@B~4%i,!i%zQ#Xsa Change in share of statutory reserves of an Associate

mraxsa Change in exchange reserve

B&#& Inter-fund transfer

2007F68 30 El2Ze Balance as at 30 June 2007

CONSOLIDATED STATEMENT OF CHANGES IN FUND BALANCES (Cont'd)

I%I!itICgO S&

Deferred EZS& ##IS& ~~ Capital Restricted Other Total Funds Funds Funds Funds $'OOO S'OOO S'OOO S'OOO

2007q7H 1 El2%& Balance as at 1 July 2007

$+EBB Surplus for the year

eaaam Endowment Funds received

RWALtlBHBf B?kl%2B$J Unrealised gain on Available-for-Sale Financial Assets

Rm~~ALtlBHBld@E*XBB*@BE@dIs Loss realised upon disposal of Available-for-Sale Financial Assets transferred to income and expenditure

E+mE@m@@NumBM%M#@im%m3# Subventions and donations received and receivable during the year for Property and Equipment

BHUBB~%BI~~%B3#&%HSX%~~@BE&d PBiS Amount transferred to income and expenditure statement representing the depreciation charge on Property and Equipment funded by subventions and donations

R % B & 4 & i & % Z @ # 2 S B Change in share of statutory reserves of an Associate

E%B#ZB@ Change in exchange reserve

B & @ B Inter-fund transfer

2008+6830 EIX%& Balance as at 30 June 2008

UNIVERSITY STATEMENT OF CHANGES IN FUND BALANCES

ag;$iiB BE&

Deferred Capital Funds $'OOO

RSQSI 3Ifell& Restricted Other

Funds Funds 5'000 $'OOO

l&aa Total Funds $'OOO

2006&7B 1 El 2E% Balance as at 1 July 2006

*&BE%& Surplus for the year

ea*&k%RA Endowment Funds received

Eqi?!fflBH%BE*I%X%+J Unrealised gain on Available-for-Sale Financial Assets

qEaBH%BB2%RBBflR@BR#@1BBIElIItdBA Recognition of unrealised gain on disposal of Available-for-Sale Financial Assets transferred to income and expenditure statement

E+helIItBBlIItm#mBa%m*~B@~&3# Subventions and donations received and receivable during the year for Property and Equipment

%HU~&H%AIW~%&SM&S%St%@EaABR3 16 Amount transferred to income and expenditure statement representing the depreciation charge on Property and Equipment funded by subventions and donations

Inter-fimd transfer

2007&6830 82%% Balance as at 30 June 2007

UNIVERSITY STATEMENT OF CHANGES-IN FUND BALANCES (Conttd)

#ESQ S&

Deferred BZJ&& SMS& J&iam Capital Restricted Other Total Funds Funds Funds Funds $'OOO $'OOO S'OOO S'OOO

2007&7!4 1 El 2%& Balance as at 1 July 2007

*&BPI% Surplus for the year

I*S&@€A Endowment Funds received

B?qKBEB%B&%BB2P$J Unrealised gain on Available-for-Sale Financial Assets

B?B@q#B@H%RdRd+28S##BE@€XIA Loss realised upon disposal of Available-for-Sale Financial Assets transferred to income and expenditure

B?*~E%WE@€~%mW#%H#ms@%B~m 74,73 1 0 0 74,73 1 Subventions and donations received and receivable during the year for Property and Equipment

% (126,950) 0 0 (126,950) $%% Amount transferred to income and expenditure statement representing the depreciation charge on Property and Equipment funded by subventions and donations

S&@@ Inter-fund transfer

2008&6!4 30 El k,%& Balance as at 30 June 2008

ee%mBs BS2008$6H 30Elk$l!S

CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2008

BB%B Operating Activities

$+BSP@ Net Surplus for the year

)fig Depreciation

@E#B Bad debt written off

t t r B B % B B # t E B / (%iT;IJ) Loss / (gain) on disposal of Property and Equipment

iT;IJ,E,BBBlllth Interest and Investment Income

%EBIirJfgJ EIm%eTZ%@Bm()fiB) 1 W@ Amortisation of (discount) / premium on Held-to-Maturity Financial Assets

%4ARBfiH %rnrnB&%BS% Share of results of an Associate / a Jointly Controlled Entity

82128R%BB#S& Transfer from Deferred Capital Fund

~#B#B$2SBrn2BB~&%B Operating cash flow before movement in working capital

@Rt@I?; 1 (WJU) Decrease / (increase) in Stocks

~ l l l t ~ 3 ~ ~ ~ 3 a t ~ m 1 Increase in Accounts Receivable and Prepayments

EflESBE3WM2#BU Increase in Accounts Payable and Accruals

%aa&twmI Increase in Deferred Income

iY?RWBiT;IJB#tmm /(@I?;) Increase / (decrease) in Provision of Staff Benefits

SB%WMIaA Net Cash from Operating Activities

&&B&%Bs(a) ##&Z2008q6B 30 El kqL!S

CONSOLIDATED CASH FLOW STATEMENT (Cont'd) FOR THE YEAR ENDED 30 JUNE 2008

2008 2007 S'OOO S'OOO

Bf 3;Fm Investing Activities

E%rn%B%# Payment for purchase of Property and Equipment

Z#@GR2@BU Increase in Bank Deposits

E%REamHM%lb Purchase of Held-to-Maturity Financial Assets

%tBEqtEfflBMBBB2@M Increase in Available-for-Sale Financial Assets

@BS3J#dHMBlb%%2MR@A Proceeds from redemption of Held-to-Maturity Financial Assets

ttlBlSJ%B%#2@A Proceeds from disposal of Property and Equipment

*J1W%tB@A Interest and investment income received

lals3;Fmsami~ I ( ~ t t l ) Net Cash From / (Used in) Investing Activities

Bfsm Financing Activities

%$B&@h Endowments received

HHI%&%B%#2#@BB%@A Subventions and donations received for purchase of Property and Equipment

i#Pf%!@SSMh Net Cash from Financing Activities

S&BSHS&XS@1 Net Increase in Cash and Cash Equivalents

+l;tS&BBAS& Cash and Cash Equivalents at the Beginning of the Year

~WB@t%S Effect of Foreign Exchange Rate Changes

+SXS&BSHS& Cash and Cash Equivalents at the End of the Year

*bS&l#Bb aS2008q6H30 EIkqB

UNIVERSITY CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2008

f S%B Operating Activities

**bHB& Net Surplus for the year

R A Q 4 E f l % @ 2 S E Allowance for amounts due from subsidiaries

#mi Depreciation

t4?3C%ljt3#2BB 1 (SjBJ) Loss / (gain) on disposal of Property and Equipment

jBJlBlft#@A Interest and Investment Income

ssam EIMBBES~(SS) aa Amortisation of (discount) / premium on Held-to-Maturity Financial Assets

#Ba%@%#S& Transfer from Deferred Capital Fund

%8S121P$X4!!BHXBS.&Z.B Operating cash flow before movement in working capital

B B t S 9 1 (Wm) Decrease / (increase) in Stocks

E @ E % l j t a f l a @ 2 W m Increase in Accounts Receivable and Prepayments

I f l E % W E # R m t m m Increase in Accounts Payable and Accruals

~ ~ a a 2 ~ m Increase in Deferred Income

RBR&iBJBBtfiiit41m I(&&$) Increase / (decrease) in Provision of Staff Benefits

f S % W I W A Net Cash from Operating Activities

kbs&sBs(a) #&Z200886H30 Elk+B

UNIVERSITY CASH FLOW STATEMENT (Cont'd) FOR THE YEAR ENDED 30 JUNE 2008

iQ*BSib Investing Activities

IBC%RS.llir Payment for purchase of Property and Equipment

%MG%2*tm Increase in Bank Deposits

%H8EBIMEIB%I$ Purchase of Held-to-Maturity Financial Assets

EI%?VR~BBSldX*B Increase in Available-for-Sale Financial Assets

BRE9JM H%S~d&@XHB&A Proceeds from redemption of Held-to-Maturity Financial Assets

%BC%B3.llirfirfllftA Proceeds from disposal of Property and Equipment

8J;IJOBB%&A Interest and investment income received

RS~B#)rRmh 1 (%a) Net Cash From / (Used in) Investing Activities

BBBIDll Financing Activities

W$B&&h Endowments received

FHN%B%%RS#2%BBB%&A Subventions and donations received for purchase of Property and Equipment

WaSB3Lb#BmA Net Cash from Financing Activities

BBbi$BSMB&2#@M Net Increase in Cash and Cash Equivalents

&IX)rR&BSliaB& Cash and Cash Equivalents at the Beginning of the Year

&bBXB&BSA)rR& Cash and Cash Equivalents at the End of the Year

%B#%rnS 2008q6B 30 El

NOTES TO TIZE FINANCIAL STATEMENTS 30 JUNE 2008

1. PRINCIPAL ACTIVITIES

The principal activities of the University are offering programmes leading to the award of first degrees and postgraduate qualifications particularly in science, technology, engineering, management and business studies; and collaborating closely with government, business, industry as well as other higher education institutions to assist the economic and social development of Hong Kong. The principal activities and other particulars of the subsidiaries are set out in note 15.

The registered address and principal place of operation is Clear Water Bay, Hong Kong.

The financial statements are presented in Hong Kong dollars, which is the same as the functional currency of the University.

2. PRINCIPAL ACCOUNTING POLICIES

The financial statements have been prepared on the historical cost basis except for available-for- sale financial assets which are measured at fair value. The financial statements have been prepared in accordance with the Hong Kong Financial Reporting Standards ("HKFRSs") issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA"). The principal accounting policies adopted are as follows:

2.1 Basis of Consolidation

The consolidated financial statements incorporate the financial statements of the University and entities controlled by the University made up to 30 June each year. Control is achieved where the University has the power to govern the financial and operating policies of an entity so as to obtain benefits fiom its activities.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income and expenditure statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the fmancial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

All significant transactions and balances between group entity are eliminated on consolidation.

Investments in Subsidiaries

Investments in subsidiaries are included in the University's balance sheet at cost less any identified impairment loss.

Interest in an Associate

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture.

The results and assets and liabilities of an associate are incorporated in the consolidated fmancial statements using the equity method of accounting. Interest in an associate is carried in the consolidated balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment loss.

Where a group entity transacts with an associate of the Group, profits or losses are eliminated to the extent of the Group's interest in the relevant associate.

Interest in a Joint Venture

A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control, that is when the strategic financial and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control.

A joint venture arrangement that involves the establishment of a separate entity in which venturers have joint control over the economic activity of the entity are referred to as a jointly controlled entity. The results and assets and liabilities of a jointly controlled entity are incorporated in the consolidated fmancial statements using the equity method of accounting. Interest in a jointly controlled entity is carried in the consolidated balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the jointly controlled entity, less any impairment loss.

Where the Group transacts with its jointly controlled entity, profits or losses are eliminated to the extent of the Group's interest in the jointly controlled entity.

2.5 Property and Equipment

Property and equipment, other than construction in progress, are stated at cost less accumulated depreciation and accumulated impairment losses.

Depreciation is provided to write off the cost of property and equipment, other than construction in progress, over their estimated useful lives and after taking into account their estimated residual value, using the straight-line method.

Construction in progress is stated at cost less any identified impairment loss and is not depreciated until completion of construction. Cost of completed construction works is transferred to appropriate categories of property, plant and equipment.

An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected to arise fiom the continued use of the asset. The gain or loss arising fi-om derecognition of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income and expenditure statement.

Expenses on property and equipment funded by government subventions and specific donations are capitalised and credited to Deferred Capital Funds. Each year, an amount equal to the depreciation charges for the respective property and equipment is transferred £tom Deferred Capital Funds and credited to the income and expenditure statement.

Financial Instruments

Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities are added to or deducted fiom the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.

Eflective interest method

The effective interest method is a method of calculating the mortised cost of financial assets and financial liabilities and of allocating interest income and interest expense over the relevant period respectively. The effective interest rate is the rate that exactly discounts estimated future cash receipts and cash payments through the expected life of the respective financial assets and financial liabilities, or, where appropriate, a shorter period.

Interest income and interest expense are recognised on an effective interest basis.

2.6 (a) ERmRWB&3EM%a 2.6(a) Accounts receivable and amounts due from subsidiaries

Accounts receivable and amounts due from subsidiaries are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. When accounts receivable or amounts due from subsidiaries is considered uncollectible, it is written off against the allowance account. The allowance recognised is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Subsequent recoveries of amounts previously written off are credited to income and expenditure statment.

2.6 (b) Investments

Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under a contract which terms require delivery of the investment within the timefiame established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs.

At subsequent reporting dates, debt securities that the Group has the expressed intention and ability to hold to maturity (held-to-maturity debt securities) are measured at amortised cost using the effective interest rate method, less any impairment loss recognised to reflect irrecoverable amounts. An impairment loss is recognised in income and expenditure statement when there is objective evidence that the asset is impaired, and is measured as the difference between the investment's carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the investment's recoverable amount can be related objectively to an event occurring after the recognition of the impairment loss, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised.

Investments other than held-to-maturity debt securities are classified as either investments held for trading or as available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in income and expenditure statement for the period. For available-for-sale investments, gains and losses arising fi-om changes in fair value are recognised directly in fund balances, until the security is disposed of or is determined to be impaired, at which time the cumulative gains or losses previously recognised in fund balances are included in the income and expenditure statement for the period.

For available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery such unquoted equity instruments, they are measured at cost less any identified impairment losses at each balance sheet date subsequent to initial recognition. An impairment loss is recognised in income and expenditure statement when there is objective evidence that the asset is impaired. The amount of the impairment loss is measured as the difference between the carrying amount of the asset and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset.

Impairment losses recognised in income and expenditure statement for equity investments classified as available-for-sale are not subsequently reversed through income and expenditure statement. Impairment losses recognised in income and expenditure statement for debt instruments classified as available-for- sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss.

2.6 (c) @fl@%~t7j2g%#jg . ~jgaa~t7j21~if 2.6 (c) Accounts payable and accruals, deferred Jii#&a@1Ik%a income and amounts due to subsidiaries

Ii$%%RI%RJH SE@8RlW Accounts payable and accruals, deferred income

M&ElE&%@+l@BB%B3?3 9 and amounts due to subsidiaries are initially

~@B@~~~BR@Js%%B@EB# measured at fair value, and are subsequently J%$PJ% measured at mortised cost, using the effective

interest rate method.

2.6 (d) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits with an original maturity of three months or less at prevailing market rate.

2.6 (e) Provisions

Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the management's best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material.

2.7 #?la 2.7 Stocks

B%BS%B%##E2GB@&$ Stocks held for resale in respect of self-financing f~ZRBBH%EE%hEoR$ operations are valued at the lower of cost and net HmBFR%%B o realisable value. Cost is calculated using the

weighted average method.

2.8 %Mi 2.8 Impairment

E@F-i%BE~!%lE!l@%BBEm@ At each balance sheet date, the Group reviews the

fiiiZ*@ZBSGB~B%SB&B carrying amounts of its assets to determine S%oZi&#RkmB&l3lS%QE whether there is any indication that those assets imi&E* Hfl%%Em@fi@sB@ have suffered an impairment loss. If the H&%om%E*ft9s@eaR@3 BWS o recoverable amount of an asset is estimated to be

less than their carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

2.9 ItkA 2.9 Income

B&BJf @&@ll%B%RZm&mU Government subventions and donations BbE#%@p?i%~%a@%%AB@ containing a condition for refund of any unspent @&@Sy%@Bm%@@&@@E balance are initially credited to the Deferred @H-F*&@B : Income Account when the amounts are received

or receivable. Amounts are then transferred from the Deferred Income Account in the following manner:

in respect of the recurrent block grant: all grants received in respect of the year are transferred to the Income and expenditure account unless the accumulated surpluses from block grants exceeded the maximum limit permitted by UGC. In that event, the transfer to the Income and Expenditure Account will be reduced by any amount refundable to the government.

in respect of grants or donations intended for other expenditure: amounts equivalent to the expenditure incurred during the year are transferred to the Income and Expenditure Account.

in respect of grants or donations intended for capital expenditure: amounts incurred in relation to capital expenditure on related property and equipment are transferred to Deferred Capital Funds Account. Subsequently, amounts are transferred each year from the Deferred Capital Funds Account to the Income and Expenditure Account as Government Subventions or Donations & Benefactions equivalent to the depreciation charges of the related property and equipment for the year.

Endowments are credited to restricted funds in the year in which they are received. Income generated fiom endowments are recognised in the income and expenditure statement. Endowments are transferred from restricted funds and credited to the income and expenditure statement when the condition for maintenance of the principal amounts has expired or been waived by donors.

Other subventions, grants and donations received are recognised as income when received or receivable.

@W-UllbBBBB&RABR%& Tuition fees, auxiliary services and rental income ,tlw!%&@%A@ are recognised when services are provided.

HBB&IF18J4'i3.@AH@mB@B% Interest income £ram a financial asset is accrued e~mimf#j$%?8 aM$J$m on a time basis, by reference to the principal BH~BBs%Ra@m*B~@a 2#3*%ss%aEBs3BBE outstanding and at the interest rate applicable,

iili%B2@J$ which is the rate that exactly discount the estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount.

%B~~~%2JRAB~~i3f0~3t Income fiom contract research is recognized on a I?im%%TM@% percentage of completion basis when the fee notes

are issued.

2.10 i!HBL& 2.10 Operating Leases

2.10 (a) 28mafimf 2.10 (a) The Group as lessor

%EiHB@fimB&&A&RlBfi Rental income fiom operating leases is recognised FB~~JBB@B%@%O on a straight-line basis over the term of the

relevant lease.

2.10 @) %Ha=% 2.10 @) The Group as lessee

@BBBR%EH2R&Mg%S@ Rentals payable under operating leases are - -

BRMRfi2*BE&3%SrnPJ charged to income and expenditure statement on a

Bl&8J#A *BIz%BbERla straight-line basis over the term of the relevant

fi+R53I lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.

2.11 %#aaAs 2.11 Retirement Benefits Costs

&%ZE%B##afi3N2%@9 Payments to defined contribution retirement RER#BE%fiB2MB@9J&3 benefit plans are charged as an expense when B 0 employees have rendered service entitling them to

the contribution.

Foreign Currencies

In preparing the financial statements of the individual entity, transactions in currencies other than the entity's functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income and expenditure statement for the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the income and expenditure statement for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in fund balances. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in fund balances.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group's operations outside Hong Kong are translated into the presentation currency of the Group (i.e. Hong Kong dollars) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year. Exchange differences arising, if any, are recognized as a separate component of fund balances (the translation reserve). Such exchange differences are recognized in the income and expenditure statement in the period in which the foreign operation is disposed of.

2.13 EM~SJB~B2J8SBb~%@BJ APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

%HE*FBh8%@HTH&@%@3mfi@@%2%PIU-B3&3@( r#B%%B%%$FIU~ ) 7%@%%B%%S !$&3E8%HE2007F7B 1 €lH&&%iBrFB%&ft In the current year, the Group has applied, for the first time, the following new standard, amendment and interpretations ("New HKFRSs") issued by the HKICPA, which are effective for the Group's financial year beginning 1 July 2007.

B%@#@fl%l% ( E D HKAS 1 (Amendment)

B%VlB%@fl%7% HKFRS 7

B*B@ Capital disclosures

4 @ 1 B : Bl Financial instruments: Disclosures

B%(HE%%%%Pfl8@@B@) - %@I0 91gl%B%%&@t HK(IFR1C) - INT 10 Interim Financial Reporting and Impairment

B%(HE%B%%@RlSfl@Re) - 8 8 1 1 B%%%%%@WU%2% - %RB@B11StIB3@3 HK(IFR1C) - INT 11 HKFRS 2 - Group and Treasury Share Transactions

~~%f%H%%%~fl~*@~FEdW&@iil-FEA~AM%IW%2I%e&BPJ7ti~@%~~ff~SA%~~~~7%~ #ttrffmriirmaE

The adoption of these New HKFRSs had no material effect on how the results and financial position of the Group for the current or prior accounting periods have been prepared and presented. Accordingly, no prior period adjustment has been required.

The Group has applied the disclosure requirements under HKAS 1 (Amendment) and HKFRS 7 retrospectively. Certain information presented in prior year under the requirements of HKAS 32 has been removed and the relevant comparative information based on the requirements of HKAS 1 (Amendment) and HKFRS 7 has been presented for the first time in the current year.

*%B%%@VEHTHE@%B%*B~%E@B~PHIIS~~O The Group has not early applied the following new and revised standards, amendments or interpretations that have been issued but are not yet effective.

~ a e a * r m % i u ( E r n HKAS 1 (Revised)

B%@#Pfl%23% ( E a ) HKAS 23 (Revised)

@%@3@!3@%27% (@3) HKAS 27 (Revised)

%%%s2gPJ1 Presentation of Financial statements'

M3BRaj.l Borrowing costs'

%+$E~*%%%A~ Consolidated and Separate Financial statements2

3 2 ( % @ 1 ~ @ & @ ~ B ~ ~ @ @ 2 ~ f E 1 s ( E 3 ) HKAS 32 & HKAS 1 (Amendments) Puttable Financial Instruments and Obligations Arising on ~i~uida t ion '

B%HJ%%Pm%2% (@XI 1~lt5c&&a@' HKFRS 2 (Amendment) Vesting conditions and cancellations1

B l % % l % @ a % 3 % (E3-I 8BeM2 HKFRS 3 (Revised) Business combinations2

B%%%%%@a%8% HKFRS 8

8 1 5 3 1 ' Operating segments1

2-13 mmRuBBBa%%MB%smn(a) APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (Cont'd)

B%(MRWB%%SRY3B@B@) - BB12 1161%@~@%#~ HK(IFR1C) - INT 12 Service Concession Amngements3

@B(BRWB%%$RJ%RBBQ) - 3 B 1 3 %FdYB#B14 HK(IFR1C) - INT 13 Customer Loyalty ~ r o ~ r a m m e t

B%(BEWB%%$RYBB@B@) - B B I 4 B%@#@HY%l9% - Z%%NBB2E!$!l BBBS%!~BM82ZEfi5 Rfi3

HK(IFR1C) - INT 14 HKAS 19 - The Limit on a Defined Benefit Assets, Minimum Funding

Requirements and their Interaction3

BB(BEWB%%$H!MB@El@) - 3 B 1 5 EmS2 BBe& HK(IFR1C) - INT IS Agreements for the Construction of Real state'

@B(BRWBsZl%$RJLBS?BQ) - 3 B 1 6 I % % B 2 B f B I P J @ HK(IFRIC) - INT 16 Hedges of a Net Investment in a Foreign erati ti on^

' E200951R 1 E l ~ H B B E 2 s B m I & B Effective for accounting periods beginning on or after January 1,2009.

R2009F78 1 B d H @ B E 2 F B B I & B Effective for accounting periods beginning on or after July 1,2009.

E2008FlH 1 E l S H B B E 2 F B f g l I % B Effective for accounting periods beginning on or after January 1,2008.

E2008F7H 1 E l I H B M E 2 F B l g g I * B o

Effective for accounting periods beginning on or after July 1,2008.

E2008$10H 1 ElE!!?,H@aE2%BMB&% Effective for accounting periods beginning on or before October 1,2008.

The adoption of HKFRS 3 (Revised) may affect the accounting for business combination for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. HKAS 27 (Revised) will affect the accounting treatment for changes in a parent's ownership interest in a subsidiary that do not result in a loss of control, which will be accounted for as equity transactions. The Council anticipate that the application of the other new or revised standards, amendments or interpretations will have no material impact on the results and the financial position of the Group.

3. aB#N GOVERNMENT SUBVENTIONS

Be Consolidated

apfrlcum Subventions from University Grants Committee (UGC)

!ti!?%%%%% 1 WEB% Recurrent Block Grant / Supplementary Grants

BZB% Earmarked Grants

H% Research

EE@$1 Housing Benefits

Brn Others

3l3S%rnB*B Rates and Government Rent Refunds

B ~ B R ~ ~ B B B - naBmasmzmsm Capital Grants and Alterations, Additions & Improvements Block Allocation

EHB% Matching Grants

@R6MBB@3 Grants fiom Government Agencies

M.s : Note :

~#82,626,aoO~(z007 : 81,938,000Z)#&G~~~#~& o

Included $82.626 million (2007:$81.938 million) transferredfrom Deferred Capital Funds.

3. aRMm(m) GOVERNMENT SUBVENTIONS (Cont'd)

A 3 Universitv

%B@HB Subventions fiom University Grants Committee (UGC)

ESB*B% 1 #MBft Recurrent Block Grant 1 Supplementary Grants

%Z@% Earmarked Grants

48% Research

E@S*J Housing Benefits

sft!I Others

BBZrnB@% Rates and Government Rent Rehnds

@3@%E@*&@ * 75UEBi%2$1~2%4B% Capital Grants and Alterations, Additions & Improvements Block Allocation

EBB% Matching Grants

rgrmeB8maft Grants fiom Government Agencies

,@&$ :

Note :

Big82 626; 0002(z007 : 81,938,0002)#%&i7%@3#JP o

Included $82.626 million (2007:$81.938 million) transferredfiom Deferred Capital Fun&.

4- @B - #@BSrnJIPR TUITION, PROGFWWUES AND OTHER FEES

ee Consolidated

QBCBrnBB UGC-Funded Programmes

@B Tuition Fees

h@@%BEf&@R Application and Other Fees

#QBCBB%B Non UGC-Funded Programmes

aBCBrnfiffe UGC-Funded Programmes

9B Tuition Fees

A@@SRSM@B Application and Other Fees

#QBClrn%B Non UGC-Funded Programmes

3c3 University

5. *!I4BEBB@A INTEREST AND INVESTMENT INCOME

Be Consolidated

IX!2!BB@EB@A Interest and other investment income

~REiBHBBE2EBBdP@lBEB@A Realised gains and investment income on Available-for-Sale Financial Assets

$JB@ h Interest income

RfR&EHBBE2EBBPIXlBEB@A Realised gains and investment income on Available-for-Sale Financial Assets

?-@R%B&~2E4~.&A Dividend received from an Associate

%9 University

6- %RMa DONATIONS AND BENEFACTIONS

B%R%$Ia Consolidated and Universitv

@3@H Capital Projects

%@&Ems& Scholarships and Bursaries

9%EH%%rn Learning and Research Activities

ms :

Note :

.$B44,324,000it:(z007 : 44,433,aaO.)#&G~@%#~& o

Included $44.324 million (2007:$44.433 million) transferredfr.om Deferred Capital Funds.

7- r%itirnrn% AUXILIARY SERVICES

@*@& Residence Halls

BBJJ6iB Catering Services

Souvenir Shop

N&%h Rental Income

a@H&@5JX@& Rental Contribution fkom Staff

Rff4 Others

@&@& Residence Halls

BBJJ6iB Catering Services

,it!&&% Souvenir Shop

N&@A Rental Income

R@A1@2N& Rental Contribution fkom Staff

RM Others

2008 2007 $ ' 000 $'OOO

Be Consolidated

54,095 50,937

A* University

54,095 50,937

8- BrnJIStA OTHER INCOME

2008 2007 $loo0 $loo0

%& Consolidated

H%*m Contract Research

BM Others

H%*m Contract Research

#M Others

University

6,059 9,064

9- m3i EXPENDITURE

dlBH% Learning and Research

BbRlaf% Instruction and Research

fa%@ Library

+&S@%# Central Computing Facilities

RMBbrnB Other Academic Services

f J \ 3 Subtotal

E%X@ Institutional Support

BBR-BSB Management and General

#%RRWBBJ Premises and Related Expenses

b*R-BBBPB Student and General Education Services

BiI!lBB Other Activities

fJ\# Subtotal

2008$B#BJft: Total Expenditure for Year 2008

2007%%#B* Total Expenditure for Year 2007

RilR?ajBJ Salaries and

Benefits $'OOO

BBSlfl Operating Expenses

5'000 (H$39.1) (Note 9.1)

Depreciation $'OOO

Be Consolidated

2008 iR2t Total $'OOO

2007 I2t Total $'OOO

%MR%$JBt&SHREl+b%%#&3WK*W;t#k%122,400,0003(2007 : 116,300,0003) o

Included in Salaries and Benefits was a total sum of $122.4 million (2007: $1 16.3 million) representing the Group's contributions towards retirement benefits schemes for the respective accounting period.

9- M3(M> EXPENDITURE (Cont'd)

]Rimk%ifl f!?1$mil 2008 2007 Salaries and Operating e% #!#at ##%

Benefits Expenses Depreciation Total Total S'OOO $'OOO $'OOO 8'000 $'OOO

(mf39.1) (Note 9.1)

kQ University

*#Btrn Learning and Research

aBRNaf"3;: Instruction and Research

lam3 Library

i+YWm%# 52,404 12,367 3,202 67,973 64,281 Central Computing Facilities

?#&%%m% 42,035 3,416 777 46,228 46,224 Other Academic Services

d\M 1,192,518 432,237 48,793 1,673,548 1,584,061 Subtotal .................................................................................................................................................

aaxa Institutional Support

BBR-&PB Management and General

@*W'f?MRH Premises and Related Expenses

%%E-&%BmB 44,167 64,176 686 109,029 95,400 Student and General Education Services

R@B8 Other Activities

fJ\3 Subtotal

2008FL!Z#!&% Total Expenditure for Year 2008

2007&L!Z#!Fd5!i 1,372,779 648,968 140,643 Total Expenditure for Year 2007

I&E%N.$~k%~'f?IF~~B~&~~Wi5!iW2~~%121,3OO,OOOZ(2OO : 115,600,000Z) o

Included in Salaries and Benefits was a total sum of $121.3 million (2007: $1 15.6 million) representing the University's contributions towards retirement benefits schemes for the respective accounting period.

9.1 eS%mfi# ANALYSIS OF OPERATING EXPENSES

2008 2007 $I000 $'OOO

S?e Consolidated

~ M E @ f % Learning and Research

--EBBS 1 a@EHHBM 1 General Office 1 Teaching and Research Expenses 1 Equipment

M f R3BErnPJ Library Books and Periodicals

~3zw~44

[ 153,851 15 1,699

Postgraduate Studentships 495,405 453,549

'tSBE--1BEtS;P85 Management and General

&@rnl& Auditors' Remuneration

H%PiPH Financial Charges

-$w%R General Insurance

-%l!&%BBJ l3.ftr5 General Office Expenses 1 Equipment

EBWM Legal Fee

9.1 BS3rnB#(rn) ANALYSIS OF OPERATING EXPENSES (Cont'd)

ee Consolidated

@*aemmf Premises and Related Expenses

-128BfiSBH 1 SQ General Office Expenses 1 Equipment

B%RR Property Insurance

Z@&%B Rates and Government Rent

%BBRX I fJ@!!I@ Repair and Maintenance I Minor Works

&%zB%*B%&R%3a Utilities, Cleaning and Security Services Expenses

8!kB--%@B11 Student and General Education Services

-@BfiSBH 1 %Q General Office Expenses I Equipment

t*R%&%HRB Medical and Dental Care for Students

@* Residence Halls

ft9f &HI942 Scholarships and Bursary

@&%B Student Activities

RBSB Other Activities

9.1 SB%BBfi(B) ANALYSIS OF OPERATING EXPENSES (Cont'd)

2008 2007 $'OOO S'OOO

k* University

*%BH% Learning and Research

-@#!a 1 a9RNwBM 1 %#+'a General Office 1 Teaching and Research Expenses 1 Equipment

M3@B%BM+J Library Books and Periodicals

w%*@b& Postgraduate Studentships

BSB-@Sf Management and General

BBrnBRI& Auditors' Remuneration

M%RM Financial Charges

-@R@ General Insurance

--BlB2RM BQ General Office Expenses I Equipment

%BBM Legal Fee

9.1 BBZaB%(a) ANALYSIS OF OPERATING EXPENSES (Cont'd)

*3 University

B*BeIOIam Premises and Related Expenses

--&#&SBM I%# General Office Expenses / Equipment

BSRR Property Insurance

ErnRtfrS Rates and Government Rent

%@RRB N3!!1@2 Repair and Maintenance / Minor Works

&zs%-msmwsfi Utilities, Cleaning and Security Services Expenses

b*B-MBrn% Student and General Education Sewices

-%lBBSWM 1 '5tQ General Office Expenses / Equipment

4&!SBB%NRB Medical and Dental Care for Students

B% Residence Halls

%@&R@4& Scholarships and Bursary

@*%at Student Activities

ffrn%rnrn) Other Activities(Note)

/%'st : Note :

~Q~~~#/%'S&3IM~@2SB~ZO,OOO,W00(Z007 : tF8) o

The amount included an allowance for amounts duefi-om subsidiaries of $20 million (2007: Nil).

10- BJRhAX REMUNERATION OF HIGHER PAID STAFF

Number of Em~lovees

EeWAb Consolidated and Universitv

%%%#I Annual Equivalent Remuneration

##.$&#&~#~w&/BH&~NRa*BBd#M@~o@A@B#&&~~#BEBNH~ M&SBB##B#&&~E~~MB~BO Remuneration includes salagJ, contribution to gratuity /retirement schemes, housing and other benefts. For staff who are provided with quarters, their housing beneJits are calculated by reference to the rateable values assessed by the Rating and Valuation Department.

11. BSRtRrn PROPERTY AND EQUIPMENT

&&!!I8 #tRBt@# S F Construction F i tures and #Bf#

Buildings in progress equipment Total 5'000 5'000 5'000 S'OOO

R& Consolidated

km COST

200&7fl 1 Elt%f& 4,269,452 91,180 1,638,750 5,999,382 Balance as at 1 July 2006

Bi3 2,920 38,327 64,038 105,285 Additions

#!@ 125,567 (125,567) 0 0 Transfers

B#tS 0 0 112 112 Exchange translation difference

ffl% 1 a l l 0 0 (84,478) (84,478) Disposals 1 Written Off

2007&6830El2%& 4,397,939 3,940 1,618,422 6,020,301 Balance as at 30 June 2007

sf3 4,460 42,868 71,579 11 8,907 Additions

iiE#Z@ 0 0 74 1 741 Exchange translation difference

fflB/.LBt# 0 0 (41,427) (41,427) Disposals I Written Off

2008&6fl3082%& 4,402,399 46,808 1,649,315 6,098,522 Balance as at 30 June 2008

m DEPRECIATION

2 W 7 H 1 q 2 % ~ 1,119,663 0 1,564,690 2,684,353 Balance as at 1 July 2006

*&E359f %is 88,134 0 54,764 142,898 Provided for the year

rS#Zsni 0 0 14 14 Exchange translation difference

fflB/a#j 0 0 (84,428) (84,428) Disposals 1 Written Off

2007+6830EIf St& 1,207,797 0 1,535,040 2,742,837 Balance as at 30 June 2007

* & b # g f % B 88,137 0 56,346 144,483 Provided for the year

8#g@ 0 0 209 209 Exchange translation difference

fflBlm8 0 0 (40,762) (40,762) Disposals I Written Off

2008&6H3082~& 1,295,934 0 1,550,833 2,846,767 Balance as at 30 June 2008

simB CARRYING VALUES

2008q6830 E l t % l 3,106,465 46,808 98,482 3,251,755 Balance as at 30 June 2008

pp

2007&683082%& 3,190,142 3,940 83,382 3,277,464 Balance as at 30 June 2007

k@B%ifRBR8604# i t f a 9 hB%aRsB%StiI&%tt19 &tgiS8& * E2047&6H308d The University campus located in Sai Kung of approximately 60 hectares was granted by the Hong Kong Government at a nominal rent for 58 years through 30 June 2047.

R~llmBtRsB%%tiIl%3ftr%IX~-RWII43[IHkBf%AS(RtnI)f R48] - I7 ,484ThXf WF&RBErj rBINlXH A piece of land situated at Shenzhen of approximately 7,484 square meters was granted at a nominal amount to HKUST R&D Corporation (Shenzhen) Limited, a subsidiary of the Group, by the Shenzhen Municipal Government for the construction of an Industry-Education- Research base.

Nktl%BsQ%HEm%EM7;fi&tHPZ%B: The above items of property and equipment are depreciated on straight-line basis at the following rates per annum:

BF @&2% Buildings 2% per annum

n a a s ~ B&ZO% - 25 % Fixtures and equipment 20% - 25% per annum

48

11. aSB'$#(#) PROPERTY AND EQUIPMENT (Cont'd)

s?!m@ 4911BtErn a8 Comtruction F i r e s and mi#

Buildings in progress equipment Total S'OOO S'OOO S'OOO 5'000

kigr University

B* COST

2006&7H 1 ElXskBk 4,269,452 91,180 1,629,059 5,989,691 Balance as at 1 July 2006

%i 2,920 38,327 58,920 100,167 Additions

@?B 125,567 (125,567) 0 0 Transfers

aB/AIBri% 0 0 (84,478) (84,478) Disposals /Written Off

2007&6H3082%& 4,397,939 3,940 1,603,501 6,005,380 Balance as at 30 June 2007

%i 4,460 40,417 62,014 106,891 Additions

m f 0 0 (41,423) (41,423) Disposals I Written Off

2008&6H3OElZZ% 4,402,399 44,357 1,624,092 6,070,848 Balance as at 30 June 2008

m DEPRECIATION

2006&7H 1 El t a f % 1,119,663 0 1,559,406 2,679,069 Balance as at 1 July 2006

* & B a % t ~ % 88,134 0 52,509 140,643 Provided for the year

fflB/AIBr@ 0 0 (84,428) (84,428) Disposals /Written Off

2007168 30 HZ%% 1,207,797 0 1,527,487 2,735,284 Balance as at 30 June 2007

*&8ti%fff %% 88,137 0 53,075 141,212 Provided for the year

t t rf / i i% 0 0 (40,759) (40,759) Disposals I Written Off

2008&6fl30 HZ%% 1,295,934 0 1,539,803 2,835,737 Balance as at 30 June 2008

@ifiiMi CARRYING VALUES

2008$6fl30Elt%Bk 3,106,465 44,357 84,289 3,235,111 Balance as at 30 June 2008

d-

2007&6830Elf Ei% 3,190,142 3,940 76,014 3,270,096 Balance as at 30 June 2007

k@tRE?Kf $960firSi2kM &llaStRSf4i%3SE4&%tt( Blgl581 * E2047&6H30 Elk The University campus located in Sai Kung of approximately 60 hectares was granted by the Hong Kong Government at a nominal rent for 58 years through 30 June 2047.

CAkt%%ESRGBf4iB%%ERT%%*%SEE: The above items of property and equipment are depreciated on straight-line basis at the following rates per annum:

tBF @Q2% Buildings 2% per annum

fm&s# @*20% - 25 % Fixtures and equipment 20% - 25% per annum

12- HiBSE FINANCIAL ASSETS

&$Bkb Consolidated and University

%Earn ElH%BEE Held-to-Maturity Financial Assets

E-*I%BJBJ Maturing within one year

W-*@z!Irn Maturing after one year

Consolidated

i3rRBEHBBS Available-for-Sale Financial Assets

*k*HBBSZBfiB(rn31) Unlisted, at fair value (Note 1)

#ksfiHBBEEZR$(rn32) Unlisted, at cost (Note 2)

k*HBBBZ*B Listed, at market value

9Fk%HBB&2BfiB(W31) Unlisted, at fair value (Note 1)

k*HBBS2*B Listed, at market value

kg University

m . :

Notes :

(1. #~S~~WBBHB~P~~B~~:IB@~#@SI~$FP@~#BIRO The unlisted available-for-sale financial assets at fair value were determined by reference to bid prices quoted in active markets or by find managers.

The unlisted available-for-sale financial assets at cost represents investment in an unlisted equity security issued by a private entity. It is measured at cost less impainnent at each balance sheet date. Z%e range of reasonable fair value of the asset is quite wide. Management of the Group is of the opinion that its fair value cannot be measuredreliably.

50

13. R#B&@#& INTEREST IN AN ASSOCIATE

9FLi5EBR%t Unlisted shares, at cost

%4&&%@%3! , l#BrnDE&R>@. Share of post-acquisition profits, reserves and net of dividends received

%1kSBb Share of net assets

*ki5EBR$I Unlisted shares, at cost

2008 2007 S'OOO $'OOO

rn Consolidated

9,430 9,430

AS University

Im #a# %HWB 1 Proportion of

%###& ~~~ Nominal Value of Form of Place of Incorporation I Issued Capital ma$#f8

Jl#f@q Business Principal Place Directly Held by Class of %s%!m Associate Structure of Operation the University Shares Held Principal Activity

PKU-HKUST Limited People's Republic of Shenzhen-Hong Liability China Kong Institution Company

Capital To foster the development contribution of high technologies in

Shenzhen and to cultivate highquality human resources

2008 2007 S'OOO S'OOO

T*@PJ&lf !&FltH%BN#S : The summarised financial information in respect of an Associate is set out below:

SBE Total assets

@RH Total liabilities

B E S l Net assets

%HEi&mB!&atBB@E Group's share of net assets of the associate

BSrn Turnover

&+f3B%$!! Profit for the year

%H~~E1k%~&CI%B Group's share of results of the associate for the year

14. EeB&s#a INTEREST IN A JOINT VENTURE

#WBBI1CB Jointly controlled entity

*k*BR&*Ei Unlisted shares, at cost

%t&t!lB@(lM) 11Cf113QfA4 Share of post-acquisition (losses) I profits and reserves

%t&@BE Share of net assets

s!?fmM$ Form of

#FmfPI~~ Business Name of Entity Structure

ZE%Mk%%SlH *%SB %%%Rfi4 Zhejiang Advanced Sino-foreign Manufacturing joint venture Institute of HKUST Co. Ltd. ("ZAMI")

gig Consolidated

#Bn!ia 1 91t*Igt;R ~~ Proportion of j & l j H z f a

Country of Nominal Value I# Incorporation I of Issued Percentage of mfkH

and Class of Capital Held by Voting Power Nature of Operation Shares Held the Group of the Board Business

People's Capital Republic of contribution

China

Promotion of manufacturing research

The Group holds 51% of the share capital of ZAMI and has appointed 3 out of 5 directors in the Board representing 60% of voting power of the Board. However, under the memorandum and articles and shareholders' agreement of ZAMI, all significant events including financial and operating policies must be mutually agreed by the Group and the other significant shareholder. Therefore, ZAMI is classified as a jointly controlled entity of the Group.

tws: Note :

The Univwsiry holh, prima facie, apartial interest in Hong Kong R&D Centre for Logistics and Supply Chain Management Enabling Technologies Limited ("LSCjLf% a company incorporated in Hong Kong, limited by guarantee and not having a share capital. However, pursuant to the Memorandum and Articles of Association of LSCM the University has no control or significant influence over the opwating andfinancial policies of LSCMand has no entitlement to share in its proJits and assets.

15. BBRISifB23 INVESTMENTS IN SUBSIDIARIES

2008 2007 S'OOO S'OOO

9bkstiBRa$IiT Unlisted shares, at cost

WMBl Subsidiaries

B%H@k@BaBB@EGR&3 HKUST College of Lifelong Learning Limited

B%Hkif!!tQR&3 HKUST Properties Limited

B%HkH%AIGR&3 Hong Kong University of Science and Technology R and D Corporation Limited ("RDC")

@MBSHkH%IIQR&3 HKUST R and D Corporation (Guangzhou) Limited

%HkH%lB(%#II)QR&d HKUST R and D Corporation (Shenzhen) Limited

1 taa Place 1 Country

of Incorporation

8% Hong Kong

B% Hong Kong

B% Hong Kong

EPSAWBMM People's

Republic of China

+SAW#aM People's

Republic of China

mratm Proportion of

Nominal Value of Issued I Registered Capital

Held by the University

B M IBlam Direct Indirect

A+ University

%4ssIb Principal Activity

wasammago To promote lifelong learning and continuing education.

wa5 Dormant

To engage in technology commercialisation including industrial contracting, licensing, incubation of start-up companies and other technical services in the Pearl River Delta Area.

RMstiB%HkS%%H%E Guangzhou HKUST Fok Ying Tung Research Institute

EPSAE#NP People's

Republic of China

S B R P * W W R % * H E W I FfimmHW%mmWB,%IH EA8BBB!AHB%10 To engage in basic scientific research, technology innovation and associated research and development activities, as well as training of management and advanced technology personnel.

MZ: Note :

The Universiv holds, prima facie, 100% interest in Nano and Advanced Materials Institute Limited ("NAMI'), a compary incorporated in Hong Kong, limited by guarantee and not having a share capital. However, pursuant to the Memorandum and Articles of Association of NAM, the University has no control over the operating andfinancial policies of NAMI and has no entitlement to share in its profits and assets.

16. STOCKS

2008 2007 $'OOO $'OOO

R&Ekb Consolidated and Universitv

E2dfalrtGR Stocks held by Souvenir Shop

R$lh91fTbfflXG1&393,1312 (2007q : 383,6112) The amount of stocks recognised as an expense during the year was $393,131 (2007: $383,611).

IllkmEMHSQ ACCOUNTS RECEIVABLE AND PREPAYMENTS

2008 2007 %'OOO $'OOO

Be Consolidated

19,485 15,771 @W%aljtBs Prepayments and Deposits

BB@@H%Q Amount due from UGC

I@%% Accounts Receivable

BW%@&B& Prepayments and Deposits

BBB@M%a Amount due from UGC

@@%% Accounts Receivable

s: wW23@fl%a2sE Less: Allowance for amounts due from subsidiaries

kg University

16,639 13,268

I ~ ~ % ~ R ~ ~ B B B % ~ ~ @ % o Accounts receivable are repayable on demand.

Before accepting any new customers, the Group assesses the potential customer's credit quality and defines credit limits by customers. Recoverability of the existing customers is reviewed by the Group regularly.

*%BZ%%%%~&RGff~%f i~ In determining the recoverability of accounts receivable, the Group considers any change in the credit quality of the accounts receivable from the date credit was initially granted up to the financial statements' report date. The accounts receivable past due but not provided for were either subsequently settled as at the date of this report or without historical default of payments by the respective customers. Accordingly, the Council believes that there is no further credit provision required on these accounts receivable as at the balance sheet date. The Group does not hold any collateral over these balances.

18. Bd&R@BBd& CASH AND CASH EQUIVALENTS

Re Consolidated

EB!M l3%3ili!fHf NT2ZMG3 Bank Deposits with Original Maturity within Three Months

rrzs2at3ise Cash at Banks and in Hand

JZiBJMl3&ZMHSNT2ZMG% Bank Deposits with Original Maturity within Three Months

BESB@B%@ Cash at Banks and in Hand

University

gL@fiBB&B%B%BBrSeB*%BXdS E?2008+6830 El RlE%BH%SfE(2007 : a%) Other bank and cash balances included cheques issued but not yet presented for payment. There was no physical overdraft at 30 June 2008 (2007: Nil).

19- mflE%BE*Bm ACCOUNTS PAYABLE AND ACCRUALS

Be Consolidated

Srn@HER&@8BM Other Accounts Payable and Accruals

SrnlHERR@3BM Other Accounts Payable and Accruals

AEB Universitv

20. amHa$!lB# PROVISION OF STAFF BENEFITS

#tit3 Consolidated

BIB42 Gratuities

I-eEF;ifS;J&BSM Leave Pay and Others

@I$R : Payable:

-*I% Within 1 year

-*@ After 1 year

BIB42 Gratuities

I-eRB42BSM Leave Pay and Others

A* University

E13R : Payable:

-*h Within 1 year

-*@ After 1 year

21. HBr(lf& DEFERRED INCOME

2006F7fl1 Eli2%@# Balance as at 1 July 2006

iprtRGlrnl BR

@S@#@J Grants from UGC Government @a

Subventions Agencies Donations Total $'OOO $'OOO $ ' 000 $'OOO

BeRk$ Consolidated and University

EJR 1 @#z%@ 1,561,861 32,642 34,459 1,628,962 Amount received / receivable

%iil-h@3t%% (1,399,257) (32,075) (1 1,461) (1,442,793) Credited to income and expenditure statement

@A%E%#BS (73,596) (2,4 16) (17,187) (93,199) Transferred to Deferred Capital Funds

2007F6H 30 El 2%@# 339,066 17,6 16 29,403 386,085 Balance as at 30 June 2007

eJR 1 @ % 2 8 @ 1,55 1,067 22,408 17,917 1,591,392 Amount received / receivable (Ffm)

(Note)

#A@ft%% (1,447,730) (21,939) (12,971) (1,482,640) Credited to income and expenditure statement

SA%EB#SS (65,430) (2,819) (6,482) (74,73 1) Transferred to Deferred Capital Funds

2008&6H 30 El 223% 376,973 15,266 27,867 420,106 Balance as at 30 June 2008

r$W& :

Note :

4338 Courtesy acknowledgement

.$#&@19p'9p'#~Bbd%~PH*@dfBX E41E4B3f4 ~OI,~I~;~Z(~&~ZOI~~~O;~Z)~~~@~QAB~I#R#S~JL~ o

Included in the amount received / receivable was a donation of $4,701,819 (cash basis $7,014,490) frDm the Hong Kong Jockey Club Charities Trust for construction andfurnishing of the University's Enterprise Center.

22. BBB#S& DEFERRED CAPITAL FUNDS

Consolidated and University

7HlEI2%& Balance as at 1 July

I P Buildings

i%B&%# Fixtures and equipment

R+BE@&I&WUB&#RB#BIB%&S# Subventions and donations received and receivable during the year for Property and Equipment

83% Buildings

ERE%# 60,398 56,135 Fixtures and equipment

74,73 1 93,199

&H#BBBRBiWB%&%%Bi%EB23d~#EE&3%%(B15%1) Amount transferred to income and expenditure statement representing the depreciation charge on Property and Equipment funded by subventions and donations (Note 1)

I P Buildings

i%B&%# Fixtures and equipment

6H30 EI2%& Balance as at 30 June

I* Buildings

QB&%# Fixtures and equipment

,q&Y : Notes.

Deferred Capital Funds represent subventions and donations used specificalb for the acquisition of properv and equipment. The amounts are recognised as income to match the depreciation charge on the property and equipment acquired.

Out of $126.95 million (2007: $126.371 million) transferred to income and expenditure statement, $82.626 million (2007: $81.938 million) has been included in Government Subventions and $44.324 million (2007: $44.433 million) in Donations and Benefactions.

59

23- RZS& RESTRICTED FUNDS

2006&78 1 El 2%ff$ Balance as at 1 July 2006

*&E%ff$ Surplus for the year

1$SSJ&A Endowment Funds received

RqAfflBHBB&~I%2B8J Unrealised gain on Available-for-Sale Financial Assets

Recognition of unrealised gain on disposal of Available-for-Sale Financial Assets transferred to income and expenditure statement

b&Bl Inter-fund transfer

2007q6830 El 2i%$f@ Balance as at 30 June 2007

*%Ball% Surplus for the year

@*SSrtkA Endowment Funds received

R q K f f l @ % B B d f f B R 2 % 3 ! Unrealised gain on Available-for-Sale Financial Assets

Loss realised upon disposal of Available-for-Sale Financial Assets transferred to income and expenditure statement

O&Bl Inter-fund transfer

2008&68 30El X%f% Balance as at 30 June 2008

BI RXI&

f!i?&!&& Investment Other Endowment Revaluation Restricted aifl-

Funds Resewe Funds Total $'OOO $'OOO $'OOO $'OOO

&8 Consolidated

213,091 53,856 1,077,468 1,344,415

23- msB&(a) RESTRICTED FUNDS (Cont'd)

2006q7fl1 El X%t% Balance as at 1 July 2006

&FBBft& Surplus for the year

@$B&%A Endowment Funds received

B?@JBaBHBBB*RsXB$J Unrealised gain on Available-for-Sale Financial Assets

Recognition of unrealised gain on disposal of Available-for-Sale Financial Assets transferred to income and expenditure statement

B%BB Inter-fund transfer

2007q6fl 30 El X%ft& Balance as at 30 June 2007

Surplus for the year

WrrpB&llkA Endowment Funds received

B?@JAaBHBB&%IsXB$J Unrealised gain on Available-for-Sale Financial Assets

Loss realised upon disposal of Available-for-Sale Financial Assets transferred to income and expenditure statement

B&SB Inter-fund transfer

2008q6fl30 El X%& Balance as at 30 June 2008

BI ##!i s#a# EZS&

W*6S& Investment Other Endowment Revaluation Restricted

Funds Reserve Funds Total S'OOO S'OOO S'OOO S'OOO

A* University

213,091 53,856 1,077,468 1,344,415

24. zmsa OTHER FUNDS

2006q7fll El 2i%& Balance as at 1 July 2006

2vl%@3& Surplus for the year

RIB23%i&%SU#XBI Change in share of statutory reserves of an Associate

-11ZtRSBII BCBOl52 ZEm General & --j!w&

Development Other m'- Resewe Fund General Funds Total

$'OOO $'OOO $'OOO

ee Consolidated

920,921 858,029 1,778,950

EBU#fBI Change in exchange reserve

BaRB Inter-fund transfer

2007&6H 30 El 2%& Balance as at 30 June 2007

$FSB& Surplus for the year

RPB&3%i&%S%#fBI Change in share of statutory reserves of an Associate

E#l#fBI Change in exchange reserve

B&#B Inter-fund transfer

2008F6H 30 El fE% Balance as at 30 June 2008

2006&7H 1 Elf Balance as at 1 July 2006

Surplus for the year

3ei2BB Inter-fund transfer

2007q6fl30 El2S& Balance as at 30 June 2007

$*BB& Surplus for the year

PS#B Inter-fund transfer

2008$6fl30 El f%& Balance as at 30 June 2008

A@ University

920,921 822,886 1,743,807

MATCHING GRANTS AND RELATED DONATIONS

The University Grants Committee (UGC) has arranged Matching Grant Schemes under which qualified donations raised by institutions are matched by UGC grants. The amounts of grants and donations raised and expenses incurred under the Schemes have been included in the income and expenditure statement and unspent balances of grants and donations have been retained in the respective funds. In compliance with UGC's requirement for separate disclosure of the matching grants and related donations, details of income and expenditure are extracted and set out below:

7H 1 E I ~ & % % Balance as at 1 July

&A Income

%I% I #B Grants / Donations

&B /$J;IJl&A Investment / Interest Income

Expenditure

B l B f R H % Teaching and Research Enhancement

@Z@ik&RaQSSB Academic Strength and Niche Area Development

MRfi&@*2&%%l~*SB1%9&/Bf& Internationalization and Student Exchange Activities / Student Development / Scholarship / Bursary

6H3OSZEB Balance as at 30 June

~ P P C as* Bmmk Bm%

UGC ES#i?k UGC f!f!s#% Matching Matched Matching Matched

Grant Donations Grant Donations $'OOO $'OOO $'OOO $'OOO

ee Consolidated

5 10,348 748,126 381,341 595,363

26 RRBAkO93l RELATED PARTY TRANSACTIONS

All transactions including procurement of goods and services as well as donations involving members of the University Council or key management personnel or organisations in which they may have an interest are conducted during the normal course of operation in accordance with the University's regulations and procedures. For the purpose of these financial statements, transactions between the University and Government departments, agencies or Government entities, other than those transactions such as payment of rates and fees e t . that arise in the normal dealings between the Government and the University, are considered as related party transactions. Significant related party transactions during the year principally included Government Subventions as disclosed in notes 3 and 21. In addition, the University and the Group have entered into the following transactions with other related parties:

(a) W5WfiZJ Subsidiaries

(9 %IV5IfiZJt?ZB Transactions with subsidiaries :

3flPWAfiat%sRM Program fee paid to subsidiaries

ftflTtFMfi~XI& Rental paid to subsidiaries

rHIfiZJ3fl2BBB Management fee charged to subsidiaries

mM&ZJ*flf I% Rental income I occupancy fee charged to subsidiaries

mIfiZJbflta€lL%lb Project overhead charged to subsidiaries

ISSWfiZJBBZbB Tuition fee refimded through subsidiaries

&1SWBZJ%BR3tBLRM Other expenses recharged to subsidiaries

University

7,671 6,474

(ii) wJMfiZJ@fl%~Zi 74,116 54,047 Amounts due 6om subsidiaries -- - -

(iii) WBilfiZJE@%d 13,891 16,208 Amounts due to subsidiaries -

MWfiZJ@flI @It(rftd3&#Bfls 7f;3b!!3., RIt(rltlB@t%3liP%B 0 E%@E.$%EWSS17E19ZIgP 0

Amounts due &om / to subsidiaries are unsecured, non-interest bearing and are repayable on demand. The balances are included in notes 17 and 19 respectively.

(b) S f fi4 An Associate

(i) EBBBdIt(rBtP!3. Dividend received from an Associate

(ii) %l%eSfiZJt2I Transactions with an Associate

3flFBBfiKI2I& 1 BLIM Rental / other fee paid to an Associate

(c) %%BBAHWBRIS Key management personnel compensation

%&BBL@BQABfl Salaries and other short-term employee benefits

Ell; lrJ Post employment benefits

S&?kkSr Consolidated and University

27- @a COMMITMENTS

(a) B*SB Capital Commitments

L X T ~ ~ % ~ ~ % ~ ~ ~ ~ ~ # ~ B * ~ B : Outstanding capital commitmenls not provided for in the financial statements were as follows:

EB% Contracted for

EB@@B&jkBfi Authorised but not contracted for

rnRtk+ Consolidated and University

(b) f B a % t % B Operating Lease Commitments

2008 2007 5'000 3'000

gte Consolidated

6) B%%HZtH&~%MR+NiBBBBfitM%7;Wi%RfEl@i.183flI~S~EPa 7;: As at 30 June, the Group had future aggregate minimum lease payments under non- cancellable operating leases as follows:

S&?3 In the first year

%23%5$?3 In the second to fifth years inclusive

(ii) ~ E % H 3 + s k ~ ~ ~ ~ ~ ~ ~ ~ ~ B ~ B I X B B B . 1 8 B I ~ A ~ ~ P a 7 ; : As at 30 June, the Group had future aggregate minimum lease income under non- cancellable operatiing leases as follows:

w+?3 In the first year

%23%5&?3 In the second to fifth years inclusive

27. B@(#Q COMMITMENTS (Cont'd)

(b) %BBBf FB(S) Operating Lease Commitments (Cont'd)

k8 University

0) ashflz+Bk~k9E$fli#BBaB2R%7;m~WtEl@i~aI~%e%4m 7;: As at 30 June, the University had future aggregate minimum lease payments under non- cancellable operating leases as follows:

2Wft In the first year

%23%5?3% In the second to fifth years inclusive

(ii) k9H~BB~@ft@%TfiR~B3hflZ+Elk~k9B~~~H#%BBI2H@ %BBI~J~!~AB%?UIT: The University leases surplus on-campus accommodations to outsiders at commercial market rent. As at 30 June, the University had future aggregate minimum lease income under non-cancellable operating leases as follows:

tFk In the first year

%2E%5&ft In the second to fifth years inclusive

28- %?a TAXATION

~ ~ ~ ~ ~ s s ~ ~ ~ ~ ~ ~ ~ t ~ ~ ~ ~ ~ a ~ s a ~ ~ a s l ; ~ a t t l ~ ~ o No taxation is provided as the University is exempt from taxation by virtue of Section 88 of the Inland Revenue Ordinance.

29. B*HRBB CAPITAL RISK MANAGEMENT

The Group's and the University's finds consist of Deferred Capital Funds , Restricted Funds and Other Funds, which are set up for various designated purposes as described in notes 22 to 24. It is the Group's and the University's objective to maintain sufficient fund balance to support the Group's and the University's current and future operating expenditure requirements. The Group's and the University's overall strategy remains unchanged from prior year.

30. &@IS FINANCIAL INSTRUMENTS

30(a) SH7tSBM CATEGORIES OF FINANCIAL INSTRUMENTS

%+? Consolidated

H%Bb Financial Assets

B % E E @ a ( a % @ & E % m s & ) Loans and Receivables (including Cash and Cash Equivalents)

NRttrBH%BE Available-for-Sale Financial Assets

BSBl?iJlHB%BE Held-to-Maturity Financial Assets

H%BR Financial Liabilities

%#&;zls Amortised cost

H%Bb Financial Assets

B%EEB%(a)i4s&B%mBd&) Loans and Receivables (including Cash and Cash Equivalents)

fl@&BH Jlb Available-for-Sale Financial Assets

8EEIJB ElHJBb Held-to-Maturity Financial Assets

HJFilR Financial Liabilities

i # & r r p ; Amortised cost

30. FINANCIAL INSTRUMENTS (Cont'd)

30@) FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group's and the University's major financial instruments include accounts receivable, bank deposits, investments, cash and cash equivalents and accounts payable. Details of these financial instruments are disclosed in the respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Price risk

The Group and the University are exposed to equity price risk mainly for its investments in equity funds managed by fund managers. This risk is monitored and managed by overall asset allocation.

Foreign currency risk

The Group and the University are exposed to foreign currency risks primarily arising from its equity and fixed income investments that are denominated in United States dollars ("USD") and managed by fund managers. As USD is pegged to the Hong Kong dollars ("HKD"), the Group and the University considers risk of movements in exchange rates between the HKD and USD to be insignificant.

In respect of investment and bank balances denominated in other currencies, the fund managers monitor and manage foreign currency exposure by entering into forward foreign currency contracts to reduce exposure where necessary.

As at 30 June 2008, the percentage of financial assets denominated in currencies other than HKD and USD to total assets is 1% (2007: 2%).

Interest rate risk

The Group and the University are exposed to fair value interest rate risk in relation to its fixed deposits and fixed income investments. As the fixed deposits usually mature within 3 months, the risk exposure is considered not material. For fixed income investments, the fund manager employs a relative value strategy to determine the tradeoff between risk and return and monitors the risks by maintaining the portfolio ' s duration within a narrow band to the benchmark.

FINANCIAL INSTRUMENTS (Cont'd)

Sensitvity analysis

The sensitivity analysis below have been determined based on the Group ' s and the University's exposure to interest rates for its fmed deposits and fixed income investments at the balance sheet date.

If interest rates had been 50 basic points higher 1 lower, with all other variables were held constant:

the Group's and the University's surplus for the year ended 30 June 2008 would increase I decrease by approximately $15.4 million and $15.2 million respectively (2007: $12.7 million and $12.6 million). This is mainly attributable to the Group's and the University's exposure to interest rates on its fixed deposits; and

the Group's and the University's investment revaluation reserve would increase 1 decrease by approximately $18.3 million (2007: $18.2 million), mainly as a result of the changes in the fair value of available-for-sale futed income investments.

Credit risk

The Group's and the University's principal financial assets are cash and cash equivalents, bank deposits, accounts receivable, held-to-maturity financial assets and available-for-sale financial assets, which represent the Group's and the University's maximum exposure to credit risk in relation to financial assets.

The Group's and the University's credit risk are primarily attributable to its accounts receivable. The amounts represented in the consolidated balance sheet are net of allowances for doubtful receivables, estimated by the Group ' s and the University's management based on past experience and their assessment of the current economy.

The credit risk on cash and cash equivalents and bank deposits is limited because the counterparties are banks with high credit-ratings assigned by international credit- ratings agencies. All held-to-maturity financial assets and available-for-sale financial assets are of investment grade and investments are managed by experienced fund managers who are selected and monitored by the Finance Committee.

The Group and the University have no significant concentration of credit risk, with exposure spread over a large number of counterparties.

30. &i&r-B(B) 30. FINANCIAL INSTRUMENTS (Cont'd)

823%%2@. Liquidity risk

*%lRktff9B@H#lB8%SHB+ The Council considers that liquidity risk is limited as the

%fi~i!&~@~@%&%a~&~~@~ Group's and the University's liabilities are within six % t % 3 0 $ ! H ! % @ ~ & ~ ~ % ~ y * % ~ ~ months from respective balance sheet dates. To manage k9lB@W#t3%&&%&8Ei@HR the liquidity risk, the Group and the University monitor EHW%BRWm*T~MIHHWBB %%~*NS~%&%S%~Z%BO and maintain a level of cash and cash equivalent to fulfill

the normal liquidity needs.

3o(c) M'lsi 30(c) FAIR VALUE

&E!kBBB&E&B@m&fiEXIBB% The fair value of financial assets and financial liabilities !lrF : are determined as follows:

Re#!IaXR%@%B$#HB2 the fair value of financial assets with standard terms

&iwf&ff9&fiEiyn@%$@%B and conditions and traded on active liquid markets

il%z; R are determined with reference to quoted market bid prices; and

#fi!l%A&i%Hus@fi@~&fiEiy the fair value of other financial assets and financial ?!&i%%%%%fZ%@g&bR@ liabilities are determined in accordance with @ @ % % ~ ~ # $ # ~ ~ ~ # @ Z o generally accepted pricing models based on

discounted cash flow analysis or using prices from observable current market transactions.

~ ~ I ~ % & ~ @ ~ # R $ % % & ~ ~ % ~ The Council considers that the carrying amounts of Z!Ef&%lBB&aBBWE~BRS financial assets and financial liabilities recorded at &fc@m% amortised cost in the financial statements approximate

their fair value.

31. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS

In determining the carrying amounts of some assets and liabilities, the Group and the University make assumptions of the effects of uncertain future events on those assets and liabilities at the balance sheet date. These estimates involve assumptions about such items as risk adjustment to cash flows or discount rates used, future changes in salaries and future changes in prices affecting other costs. The Group's and the University's estimates and assumptions are based on historical experience and expectations of future events and are reviewed periodically. In addition to assumptions and estimations of future events, judgments are also made during the process of applying the Group's and the University's accounting policies.

Held-to-maturity Jinancial assets

Non-derivative financial assets with fmed or determinable payments and fixed maturity are classified as held-to-maturity financial assets if the Group and the University have the intention and ability to hold them until maturity. In evaluating whether the requirements to classify a financial asset as held-to-maturity are met, management make significant judgements. Failure in correctly assessing the Group's and the University's intention and ability to hold specific investments until maturity may result in reclassification of the whole portfolio as available-for-sale financial assets.

Allowances for bad and doubtfir1 debts

The provision policy for bad and doubtful debts of the Group and the University are based on the evaluation of collectibility and aging analysis of accounts and on management's judgment. A considerable amount of judgment is required in assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of each customer. If the financial conditions of customers of the Group and the University were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.