Notes to Financial Statements(2017)

I. Company profile

Jiangsu Jingjiang Rural Commercial Bank Co., Ltd. (hereinafter referred to as “JJBANK” or “the Bank”) was approved by SYJF (2009) No. 595 of Jiangsu Office of China Banking Regulatory Commission on November 3, 2009, and obtained the Financial License No. B1042H232120001. On November 6, 2009, the Bank was registered with the Taizhou Administration for Industry & Commerce and received the Business License with a registration number of 321282000003924. The residence of the Bank: No. 66, Nanhuan Road, Jingjiang City; Legal representative: Wang Guoping.

The registered capital of the Bank was 250 million yuan at the time of its establishment. According to the “Reply about the Directional Offering Plan of Jiangsu Jingjiang Rural Commercial Bank Co., Ltd.” (TYJ [2011] No. 106) issued by Taizhou Regulatory Branch of China Banking Regulatory Commission on September 22, 2011 and the resolution about approval of 250 million directional offering of the interim general meeting of shareholders (No. 1) of the Bank on September 2, 2011, the Bank applied for additional share capital of 250 million shares with the par value per share of 1 yuan and the issue price of 2.5 yuan per share. After the change on December 9, 2011, the registered capital was 500 million yuan.

The Bank established the General Meeting of Shareholders, the Board of Directors, the Board of Supervisors and the Office of the Governor in accordance with the provisions of the Company Law, the Law on Commercial Banks and other relevant laws and regulations. The Board of Directors includes the Risk Management and Related-party Transaction Committee, the Nomination and Remuneration Committee, the Audit Committee (consisting of the Internal Control Audit Department) and the Office of the Board of Directors; the Board of Supervisors includes the Supervision and Evaluation Committee and the Office of the Board of Supervisors; the Office of the Governor includes the Loan Review Committee and the Financial Review Committee. The Bank has 18 functional departments, including the Compliance Department, the Retail Finance Department, the Corporate Finance Department, the Financial Market Department, the E-Banking Department, the International Business Department, the Quick Loan Center, the Risk Management Department, the Asset Protection Department, the Audit Department, the Planning and Finance Department, the Operation Management Department (consisting of the Clearing Center and the Subsequent Supervision Center), the Information Technology Department, the Security Department, the Human Resources Department, the Office, the Supervision Office, and the Trade Union.

As of the end of December 2017, the Bank has 33 affiliates, including one Business Department and 32 branches in Xilai, Tuqiao, Guoyi, Xingang Park, Dajue, Jishi, Chang'an, Gushan, Tuanjie, and Baimu, Binjiang, Gongsuoqiao, Bawei, Huifeng, Dongxing, Taihe, Xinqiao, Hongguang, Xinfeng, Shengci, Changli, Jijiang, Maqiao, Houhe, North Renmin Road, Jingcheng, Mulan, Jiangyin Park, Chengbei Park, Chengnan Park, Xincheng and Huangqiao. The Bank implements a management system of Grade-I legal entity, unified accounting, hierarchical management, and authorized operation.

The main business scope of the Bank and its subsidiaries (hereinafter referred to as “the Group”) includes: absorbing public deposits; issuing short-term, medium-term and long-term loans; handling domestic settlement; handling bill acceptance and discounting; agency of issuance, agency of redemption, underwriting government bonds; trading of government bonds and financial bonds; inter-bank lending; engaging in debit card business; agency of receipt and payment and agency of insurance business; provision of safe deposit service; other business approved by China Banking Regulatory Commission.

II. Scope of consolidated financial statements

The consolidated financial statements of the Group include Jiangsu Jingjiang Rural Commercial Bank Co., Ltd. and Nanjing Pukou Jingfa Village Bank Co., Ltd.

III. Basis for preparation of financial statements

 (1) Basis for preparation

This financial statement is prepared in accordance with the Accounting Standards for Business Enterprises - Basic Standard promulgated by the Ministry of Finance of the People’s Republic of China on February 15, 2006 and 38 specific accounting standards, the application guidelines of the Accounting Standards for Business Enterprises, the explanations of the Accounting Standards for Business Enterprises, and other related regulations subsequently promulgated (collectively referred to as the “Accounting Standards for Business Enterprises”).

 (2) Continuing operation

The financial statement is prepared on the basis of continuing operation.

The Group has a history of recent profitable operations and financial resource support, so it is reasonable to prepare financial statements on the basis of continuing operation.

IV. Declaration on compliance with the Accounting Standards for Business Enterprises

This financial statement conforms to the requirements of the Accounting Standards for Business Enterprises, and has faithfully and completely reflected the financial situation of the Group and the Bank as of December 31, 2017 and the operating performance, cash flow and other related information of the Group and the Bank in 2017.

V. Important accounting policies and accounting estimates and corrections of major accounting errors

1. Accounting period

The fiscal year of the Group is based on the Gregorian calendar, i.e. from January 1 to December 31 of every year.

2. Operating cycle

The operating cycle of the Group is 12 months.

3. Standard currency for accounting

RMB is the currency in the main economic environment in which the Group operates. The Group uses RMB as the standard currency for accounting. The currency used by the Group for the preparation of this financial statement is RMB.

4. Accrual basis and valuation principle

The accounting of the Group is based on the accrual basis. Except for financial assets/liabilities held for trading, the financial assets/liabilities which are measured at their fair values and the variation of which is recorded into the profits and losses of the current period, available-for-sale financial assets, etc., which are measured at their fair values, other items are measured based on historical cost or amortized cost. If the assets are impaired, corresponding depreciation reserves are accrued according to relevant regulations.

5. Merger of enterprises and goodwill

The term "Merger of enterprises" refers to a transaction or event bringing together two or more separate enterprises into one reporting entity. The merger of enterprises is classified into the merger of enterprises under the same control and the merger of enterprises not under the same control.

 (1) Merger of enterprises under the same control

A merger of enterprises under the same control is a enterprise merger in which all of the merged enterprises are controlled by the same party or the same parties both before and after the merger and on which the control is not temporary. In a merger of enterprises under the same control, the party which obtains control of other combining enterprise(s) on the combining date is the combining party, and the other combining enterprise(s) is (are) the combined party. The "combining date" refers to the date on which the combining party actually obtains control on the combined party.

The assets and liabilities that the combining party obtains in a merger of enterprises under the same control shall be measured on the basis of their book value in the combined party on the combining date. As for the balance between the book value of the net assets obtained by the combining party and the book value of the consideration paid by it (or the total par value of the shares issued), the capital reserve shall be adjusted. If the capital reserve is not sufficient to be offset, the retained earnings shall be adjusted.

 (2) Merger of enterprises not under the same control

A merger of enterprises not under the same control is an enterprise merger in which all of the merged enterprises are not controlled by the same party or the same parties both before and after the merger. In a merger of enterprises not under the same control, the party which obtains the control on other combining enterprise(s) on the acquisition date is the acquirer, and other combining enterprise(s) is (are) the acquiree. The "acquisition date" refers to the date on which the acquirer actually obtains the control on the acquiree.

The merger cost shall be the fair values of the assets paid, the liabilities incurred or assumed and the equity instruments issued by the acquirer in exchange for the control on the acquiree. The intermediary expenses for audit, legal services and assessment consulting) incurred by the acquirer for a merger of enterprises and other relevant management expenses shall be recorded into the profits and losses of the current period when they are incurred. If a merger of enterprises not under the same control is performed step by step through multiple transactions, the merger cost is the sum of the fair value of the consideration paid on the acquisition date and the fair value of the equity of the acquiree held before the acquisition date on the acquisition date. The equity of the acquiree held before the acquisition date shall be re-measured according to the fair value of the equity on the acquisition date, and the balance between the fair value and its book value shall be recorded in the current investment income; if the equity of the acquiree held before the acquisition date involves other comprehensive income, the relevant other comprehensive income shall be converted into the current investment income on the acquisition date.

In a merger of enterprises not under the same control, the identifiable net assets of the acquiree obtained by the acquirer are measured at the fair value of the identifiable assets, liabilities and contingent liabilities on the acquisition date. If the merger cost of the acquirer is the fair value of the identifiable net assets of the acquiree obtained, the balance is recognized as goodwill, and the goodwill is subsequently measured at cost less accumulated impairment losses; the merger cost of the acquirer is less than the fair value of the identifiable net assets of the acquiree obtained, firstly, the fair value of the identifiable net assets of the acquiree obtained and the measurement of the merger cost are reviewed. If the merger cost is still is less than the fair value of the identifiable net assets of the acquiree obtained after the review, the balance shall be included in the current profit and loss.

6. Method for the preparation of consolidated financial statements

The consolidation scope of the consolidated financial statements is determined on the basis of control, including the Bank and all its subsidiaries (including structured entities).

A subsidiary is a company or entity of the Bank that can exercise control over the investee. Control means that the investor has power over the investee, enjoys variable returns by participating in related activities of the investee, and is able to use the power over the investee to affect its returns.

The structured entity refers to the entity that is designed without taking voting rights or similar rights as the determining factor in determining its controlling party (for example, voting rights are only related to administrative matters). The basis for the activities related to the entity is the contract or the corresponding arrangement.

When the Group acts as an asset manager in a structured entity, the Group will assess whether the Group exercises its decision-making power as the primary responsible person or agent in the context of the structured entity. If the asset manager is merely an agent, it primarily exercises the decision-making power on behalf of the other party (other investors in the structured entity) and therefore does not control the structured entity. However, if the asset manager is judged to exercise the decision-making power on behalf of itself, it is the primary responsible person and thus controls the structured entity.

If the accounting policy or accounting period of the subsidiary is different from that of the Bank during preparation of consolidated financial statements, the financial statements of the subsidiary shall be adjusted according to the accounting policy or accounting period of the Bank.

All major internal transactions, current balances and unrealized profits within the scope of consolidation are offset in the preparation of the consolidated financial statements. The share of the owner's equity of the subsidiary that is not attributable to the parent company and the share of the current net profit or loss, other comprehensive income and total comprehensive income that belong to minority equity are respectively presented in the “minority equity, minority interest income, other comprehensive income attributable to minority shareholders and total comprehensive income attributable to minority shareholders” of the consolidated financial statements.

For subsidiaries acquired through merger of enterprises under the same control, the operating results and cash flows are included in the consolidated financial statements from the beginning of the current merger period. When preparing the comparative consolidated financial statements, adjustments are made to related items in the financial statements of the previous year as if the reporting entity formed after the merger has existed since the final controller began implementing the control.

If the equity of the investee under the same control is obtained step by step through multiple transactions and finally the merger of enterprises is formed, when the consolidated financial statements are prepared, adjustments are made as if the reporting entity has existed in the current status when the final controller begins implementing the control. When the comparative financial statements are prepared, subject to the time when the Company and the combined party are under the control of the final controller, the relevant assets and liabilities of the combined party shall be included into the comparative statements of the consolidated financial statements of the Company, and adjustments shall be made to related items under the owner's equity in the comparative statements in terms of the net assets increased due to the merger. In order to avoid re-valuation of the net assets of the combined party, the long-term equity investment held by the Company before the merger, and changes of the relevant profits and losses, other comprehensive income and other net assets recognized during the period from either the date when the original equity is acquired or the date when the Company and the combined party are under the final control of the same party (whichever is the later) to the merger date, shall respectively write down the opening retained income during the period of comparative statements and the current profits and losses.

For subsidiaries acquired through merger of enterprises not under the same control, the operating results and cash flows are included in the consolidated financial statements from the date when the Company obtains the control. When preparing consolidated financial statements, adjustment is made to the financial statements of the subsidiary company on the basis of the fair values of the identifiable assets, liabilities and contingent liabilities determined on the acquisition date.

If the equity of the investee not under the same control is obtained step by step through multiple transactions and finally the merger of enterprises is formed, when the consolidated financial statements are prepared, the equity  of the acquiree held before the acquisition date shall be re-measured according to the fair value of the equity  on the acquisition date, and the balance between the fair value and its book value shall be recorded in the current investment income; if the equity of the acquiree held before the acquisition date involves other comprehensive income under the accounting of the equity method and changes of other owner’s equity except for the net profits and losses, other comprehensive income and profit distribution shall be converted into the investment profits and losses of the current period to which the acquisition date belongs, except for the other comprehensive income generated from the fluctuation due to re-measurement of net liabilities or net assets of income plan by the investee.

In case of partial disposal of long-term equity investments in subsidiaries without loss of control, in the consolidated financial statements, as for the balance between the disposal price and the share of net assets of the subsidiaries that has been calculated since the acquisition date or the merger date and is enjoyed due to the disposal of long-term equity investments, the capital premium or the equity premium shall be adjusted. If the capital reserve is not sufficient to be offset, the retained earnings shall be adjusted.

If the Group loses control over the investee due to the disposal of part of the equity investment or other reasons, in the preparation of the consolidated financial statements, the residual equity shall be re-measured based on its fair value on the date of losing control. The balance calculated by deducting the share of the net assets of the original subsidiary calculated in the original proportion of shareholding continuously starting from the acquisition date or the merger date from the sum of the consideration received from disposal of equity and the fair value of the residual equity shall be recorded as the current investment profits and losses to the date of losing control, meanwhile shall be written down the goodwill. Other comprehensive income related to the equity investment of the original subsidiary shall be converted into current investment profits and losses at the date of losing control.

For the disposal of the equity investment in the subsidiary realized by steps by the Group through multiple transactions until losing control, if the transactions belong to one package transaction, each transaction shall be accounting treated as a transaction of disposal of subsidiary and losing control; however, the balance between each disposal price before losing control and the portion of the net assets of this subsidiary to be held by disposal of the investment shall be recognized as other comprehensive income in the consolidated financial statements, and be converted along with all the others into the current profits and losses of the losing control at the time of losing control.

7. Cash and cash equivalent

Cash refers to cash on hand and due from banks and due from the Central Bank of China available for payment at any time for the Group. Cash equivalents refer to short-term and highly liquid investments held by the Group that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.

8. Foreign currency translation

For initial recognition of foreign currency transaction, convert the amount of foreign currency into the standard currency for accounting at the spot exchange rate on the transaction date.

On the balance sheet date, foreign currency monetary items are translated into the standard currency for accounting according to the spot exchange rate on the balance sheet date. Because of the difference between the spot exchange rate on the balance sheet date and the spot exchange rate at the initial recognition or on the previous balance sheet date, the resulting currency exchange balance shall be included in the current profits and losses, except that: (1) exchange balance on hedging instruments for hedging foreign exchange risk is treated by hedge accounting method; (2) exchange balance arising from change in book balance other than amortized cost of the available-for-sale monetary items is recognized as other comprehensive income.

Exchange gains or losses include exchange balance income related to the self-operated foreign exchange business, exchange gains and losses resulting from the translation of foreign currency monetary assets and liabilities, realized gains and losses arising from foreign exchange derivative financial instruments and unrealized gains and losses from changes in fair value.

The foreign currency non-monetary items measured at the historical cost shall still be translated at the spot exchange rate on the transaction date. Foreign currency non-monetary items measured at fair value shall be translated at the spot exchange rate on the date when the fair value is determined. The resulting exchange balance shall be recorded in the current profits and losses or other comprehensive income.

9. Financial assets

 (1) Categories of financial assets

At the time of initial recognition, financial assets of the Group are classified into four categories depending on the investment purpose and economic substance: ① financial assets measured according to fair value and the variation of which is recorded in the profits and losses of the current period; ② held-to-maturity investments; ③ loans and receivables; ④ available-for-sale financial assets.

①Financial assets measured at their fair values and the variation of which is recorded into the profits and losses of the current period

The financial assets which are measured at their fair values and the variation of which is recorded into the profits and losses of the current period, include transactional financial assets and the financial assets which are measured at their fair values and the variation of which is included in the current profits and losses upon initial recognition.

Transactional financial assets refer to those satisfying one of the following conditions: a) the financial asset obtained with the purposed of selling or repurchase within a short term; b) being part of the identifiable financial instrument under centralized control and objective evidences show that the Group manages this portfolio by way of short-term earning; c) being a derivative instrument, excluding the designated derivative instruments which are effective hedging instruments, or derivative instruments to financial guarantee contracts, and the derivative instruments which are connected with the equity instrument investments for which there is no quoted price in the active market, whose fair value cannot be reliably measured, and which are settled by delivering the said equity instruments.

The Group can designate a financial asset as being measured at its fair values and the variation of which is included in the current profits and losses upon initial recognition, when one of the following conditions is met: a) the designation is able to eliminate or obviously reduce the discrepancies in the recognition or measurement of relevant gains or losses arisen from the different basis of measurement of the financial assets; b) the official written documents on risk management or investment strategies have recorded that the combination of said financial assets will be managed and evaluated on the basis of their fair values and be reported to the key management personnel; c) a mixed instrument that includes one or more embedded derivative instrument(s), unless the embedded derivative instrument does not significantly change the cash flow of the mixed instrument, or the embedded derivative instrument shall obviously not be separated from the relevant mixed instrument.

② Held-to-maturity investments

The term "held-to-maturity investments" refers to a non-derivative financial asset with a fixed date of maturity, a fixed or determinable recovery amount, which the Group holds for a definite purpose or the Group is able to hold until its maturity, and which, at the time of initial recognition, is not designated as being measured at the fair values and the variation of which is recorded into the profits and losses of the current period, or as available-for-sale financial asset.

If the Group sells or reclassifies the undue held-to-maturity investments into the amount of available-for-sale financial assets in the current fiscal year, and such amount is considerably large as compared with the total amount of the held-to-maturity investments, the remainder of this type of investments is reclassified by the Group as available-for-sale financial assets, and in the current fiscal year and the following two fiscal years, the Group can no longer classify any financial asset as the held-to-maturity investments, except for the sale or reclassification meeting one of the following conditions: a) the date of sale or re-classification is quite near to the maturity date or the redemption date of the said investment (e.g., within 3 months prior to the maturity date) that any change of the market interest rate will produce little impact upon the fair value of the said investment; b) after almost all the initial principal of the investment has been drawn back by way of repayment at fixed intervals or repayment ahead of schedule according to the provisions of the contract, the remaining part of the investment will be sold or re-classified; c) the sale or re-classification is caused by any independent event that the Group cannot control, and that is predicted not to occur again and is hard to be reasonably predicted.

③ Loans and receivables

 “Loans and receivables" refers to the non-derivative financial assets for which there is no quoted price in the active market and of which the redemption amount is fixed or determinable, which the Group has no intention to sell immediately or in a short term, and which are not designated at the time of initial recognition as being measured at the fair value and the variation of which is included in the current profits and losses or as being available for sale.

For the non-derivative financial assets that the Group is hard to take back almost all of the initial investment due to any reason other than the worsening of the credit of the debtor, the Group shall not classify such assets as the loans and receivables.

The Group presents financial statements for financial assets classified as loans and receivables based on the nature of the business, including customer loans and advances, due from the Central Bank of China, due from banks, interest receivables, receivable investments, etc.

④ Available-for-sale financial assets

The "available-for-sale financial assets" refer to the non-derivative financial assets which are designated as available for sale when they are initially recognized as well as the financial assets other than the above-described three categories.

 (2) Initial recognition of financial assets

The Group recognizes a financial asset when it becomes one party of an financial instrument contract. Financial assets are measured at fair value on initial recognition. For the financial assets that are measured according to fair values and whose variation shall be recorded as current profits and losses, related transaction fees are directly included into current profits and losses; for other kinds of financial assets, related transaction fees are included into initially recognized amount.

 (3) Subsequent measurement of financial assets

① Financial assets measured at their fair values and the variation of which is recorded into the profits and losses of the current period

The Group adopts the fair value of the financial assets for subsequent measurement. The fair value changes are included in the current profits and losses. The interest calculated according to the contract during holding period of the assets is included in the interest income.

② Held-to-maturity investments

For such financial assets, the subsequent measurement is made with the effective interest rate method according to the amortized cost. The interest income calculated with the effective interest rate method is included in the interest income. The gains or losses arising from de-recognition, impairment or amortization of financial assets are all recorded in the current profits and losses.

③ Loans and receivables

For such financial assets, the subsequent measurement is made with the effective interest rate method according to the amortized cost. The interest income calculated with the effective interest rate method is included in the interest income. The gains or losses arising from de-recognition, impairment or amortization of financial assets are all recorded in the current profits and losses.

④ Available-for-sale financial assets

In such financial assets, the equity instrument investments for which there is no quotation in the active market and whose fair value cannot be measured reliably, and the derivative financial assets which are connected with the said equity instrument and must be settled by delivering the said equity instrument shall be measured subsequently on the basis of their costs. Other assets for which there is quotation in the active market or whose fair value can be measured although there is no quotation in the active market shall be measured at their fair value and the fair value changes shall be included in other comprehensive income. For such financial assets using the fair value for the subsequent measurement, except for impairment losses and exchange gains and losses resulting from foreign currency monetary financial assets, changes in fair value of available-for-sale financial assets are directly recognized in shareholders' equity. When the financial assets are derecognized, the accumulated amount of changes in fair value that are directly recognized in equity is recorded in current profits and losses. The interest on the available-for-sale debt instrument investment in the holding period calculated with the effective interest method is included in the current interest income, and the cash dividends related to the available-for-sale equity instrument investment declared by the investee are included in the current profits and losses as investment income.

 (4) Recognizing basis and measurement method of financial asset transfer

Financial assets (a financial asset or a group of similar financial assets in whole or in part) will be derecognized when one of the following conditions is met: ① the contractual rights for collecting the cash flow of the said financial asset are terminated; ② the Group transfers the right to receive cash flow from financial assets to the third party other than the financial asset issuer, and substantially transfers almost all risks and rewards associated with the financial assets, or the control of the financial assets are renounced although almost all risks and rewards affiliated to the ownership of the financial assets are neither transferred nor retained.

If the Group transfers the right to receive cash flow from financial assets to the third party other than the financial asset issuer, does not transfer or retain almost all risks and rewards affiliated to the ownership of the financial assets, and does not renounce the control of the financial assets, the Group will recognize relevant financial assets in accordance with the degree of the continued involvement in the transferred financial assets.

For the transfer of assets with repurchase conditions, the Group determines whether the relevant financial assets are derecognized based on the economic substance of the transaction.

 (5) Impairment of financial assets

Except for the financial assets measured at their fair values and of which the variation is recorded into the profits and losses of the current period, the Group will evaluate whether there is objective evidence of impairment of financial assets on the balance sheet date. If there is objective evidence proving that the financial assets have been impaired, the Group determines that the financial assets have been impaired and a provision for impairment shall be accrued.

The expression "objective evidence proving that the financial assets have been impaired" refers to the actually incurred events which, after the financial asset is initially recognized, have an impact on the predicted future cash flow of the said financial asset that can be reliably measured by the Group. Objective evidence of impairment of financial assets includes serious financial difficulties with the debtor, breach of contract terms, failure to obey the contract to pay principal or interest or overdue payment of interest or principal, likelihood of bankruptcy or other financial restructuring, and observable data showing that the expected future cash flow of financial assets has indeed been reduced and can be measured.

① Financial assets measured at amortized cost

The Group conducts a single assessment of loans and receivables with a single significant amount or held-to-maturity investments to determine whether there is objective evidence of impairment. If there is objective evidence showing that the financial asset has been impaired, the Group recognizes the balance between the book value of the financial asset and the present value of the expected future cash flow as the impairment loss. In calculating the present value of the expected future cash flow, the value of the relevant collateral shall be taken into account, excluding the loss of future credit not yet occurred. The discount rate shall be the original effective interest rate of the financial asset. The original effective interest rate is the effective interest rate as determined when the financial asset was initially recognized. With regard to the floating interest rate loans and receivables, and the held-to-maturity investments, the current effective interest rate as stipulated in the contract shall be adopted.

For other financial assets with insignificant single amounts, determine whether there is the objective evidence of impairment by single assessment or combination assessment. For a single financial asset that has undergone a single assessment but no objective evidence of impairment, regardless of whether the amount is significant, it must be combined with other financial assets with similar credit risk characteristics to make a combined assessment to determine the impairment loss. Financial assets that have been individually tested and confirmed for impairment losses shall no longer have a combination assessment.

When examining the impairment of financial asset portfolio by means of combination assessment, the estimation of future cash flow needs to be determined by reference to historical loss empirical data of financial assets with similar credit risk characteristics as the asset portfolio, including necessary adjustments and corrections of the historical empirical data according to the current situation.

Where a financial asset measured on the basis of amortized cost is impaired, the group will write down the book value of the said financial asset to the current value of the expected future cash flow, and the amount as written down shall be recognized as provision for the impairment of the asset and shall be recorded into the profits and losses of the current period. The originally recognized impairment losses are reversed and accounted into current profits and losses if the values of the financial asset have been objectively proved to be recovered and objectively related to matters occurring after the recognition of such impairment losses. However, the reversed book value shall not be more than the amortized costs of the said financial asset on the day of reverse under the assumption that no provision is accrued for the impairment.

If the loans and receivables or the held-to-maturity investments cannot be recovered, the Group will write down the corresponding provision for impairment and verify and write off the financial assets after all necessary procedures have been completed and the amount of the losses has been determined. The amount recovered after the verification and write-off of financial assets is included in the current profits and losses and the provision for impairment accrued in the current period is written down.

② Available-for-sale financial assets

Where objective evidences show the impairment of such financial asset, the accumulating loss that is originally accounted into other comprehensive income and capital reserve is transferred out and accounted into current profits and losses. The accumulating loss that is transferred out is the amount obtained from the initially obtained cost of the available-for-sale financial asset after deducting the principal recovered, the amortized amount, the current fair value and the balance after the impairment loss having been recorded into the current profits and losses.

As for the available-for-sale debt instrument investment, if, within the accounting period after the impairment is confirmed, the fair value has risen and are objectively related to the subsequent events that occur after the originally impairment-related losses were recognized, the originally recognized impairment-related losses are reversed and recorded into the profits and losses of the current period.

For available-for-sale equity instrument investment, the objective evidence of its impairment also includes severe (20% or above) or non-transitory (the fair value continues to be lower than its cost for six months or longer) decline of the fair value of the investment. The impairment losses of such equity instrument investment shall not be reversed through profits and losses.

The impairment loss incurred of the available-for-sale financial assets measured by cost shall not be reversed.

Financial liabilities

 (1) Categories of financial liabilities

At the time of initial recognition, financial liabilities of this Group are classified into two categories depending on the economic substance: ① financial liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period; and ② other financial liabilities.

① Financial liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period

The financial liabilities which are measured at their fair values and of which the variation is included in the current profits and losses, include financial liabilities held for transaction as well as the financial liabilities designated by the Group as being measured at their fair values and of which the variation is included in the current profits and losses.

② Other financial liabilities

Other financial liabilities refer to the financial liabilities other than those classified as being measured according to their fair values and whose variation is recorded as current profits and losses.

The Group presents financial statements for other financial liabilities based on the nature of the business, including Central Bank borrowing, inter-bank borrowing, customer deposit, interest payable, etc.

 (2) Initial recognition of financial liabilities

The Group recognizes a financial liability when it becomes one party of an financial instrument contract. Financial liabilities are measured at their fair value on initial recognition. For the financial liabilities that are measured according to fair values and whose variations are recorded as current profits and losses, related transaction fees are directly included into current profits and losses; for other financial liabilities, related transaction fees are included into initially recognized amount.

 (3) Subsequent measurement of financial liabilities

① Financial liabilities measured at their fair values and of which the variation is recorded into the profits and losses of the current period

The Group adopts the fair value of the financial liabilities for subsequent measurement. The fair value changes are included in the current profits and losses. The interest calculated according to the contract is included in the interest expense.

② Other financial liabilities

For other financial assets, the subsequent measurement is made according to the amortized cost. The interest calculated with the effective interest rate method is included in the interest expense. The gains or losses arising from de-recognition or amortization of financial liabilities are all recorded in the current profits and losses.

 (4) Derecognition of financial liabilities

When a financial liability obligation has been fulfilled, revoked, terminated or expired, the financial liability shall be derecognized. If an existing financial liability is replaced by another financial liability that is substantially different in the terms by the same creditor, or if the terms of the existing liability are completely and substantially modified, such replacement or modification is deemed as derecognition of the original liability and recognition of the new liability, for which the balance is recorded into the current profits or losses.

10. Determination of the fair values of financial assets and liabilities

The Group measures the fair value of relevant financial assets and financial liabilities at the prices of staple markets. If there is no staple market, the fair value of financial assets and financial liabilities is measured at the most advantageous market price and by using the valuation techniques that are applicable in the current circumstances and have sufficient available data and other information support. The input value used for fair value measurement can be divided into three levels. The input value at the first level is the unadjusted price in the active market for obtaining the same asset or liability on the measurement date; the input value at the second level is the direct or indirect observable input value of the relevant asset or liability other than those at the first level; the input value at the third level is the unobservable input value of the relevant asset or liability. The Group uses the input value at the first level in priority and finally uses the input value at the third level. The level to which the fair value measurement result belongs is determined by the lowest level to which the input value that is significant to the overall fair value measurement belongs.

11. Purchase for resale and sale for repurchase transactions

If the Group sells assets according to the agreement and promises to repurchase the assets in a fixed amount or sales amount plus fixed return on a certain date in the future, the sold assets will continue to be recognized in the balance sheet. The proceeds from the sale of assets are listed in the balance sheet as “financial assets sold for repurchase”. The balance between the selling price and the repurchase price is recognized by the effective interest rate method during the term of the agreement and is included in the interest expense.

If the Group purchases assets according to the agreement and agrees to resell the assets in a fixed amount or purchase amount plus fixed return on a certain date in the future, the purchased assets will not be recognized in the balance sheet. The proceeds from the purchase of assets are listed in the balance sheet as “financial assets purchased for resale”. The balance between the purchase price and the resale price is recognized by the effective interest rate method during the term of the agreement and is included in the interest income.

12. Long-term equity investments

The long-term equity investments of the Group mainly include the investments in subsidiaries, the investments in associated enterprises and investments in joint ventures.

The judgment of the Group on joint control is based on the collective control of the arrangement by all parties or the group of parties, and the policies of the relevant activities of the arrangement must be unanimously agreed by the parties who collectively control the arrangement.

When the Group owns 20% or more but less than 50% of the voting rights of the investee directly or indirectly through a subsidiary, it is generally considered to have a significant impact on the investee. If the Group owns less than 20% voting rights of the investee, it shall also carry out overall consideration about whether there is a significant influence on the investee according to the following facts and situations: dispatch representative(s) to the Board of Directors or similar authority of the investee; participate in the making process of the financial and operating policies of the investee; make significant transaction(s) with the investee; dispatch management personnel to the investee; or provide key technical documents to the investee.

If the Group has control over the investee, the investee shall be a subsidiary of the Group. For the long-term equity investment obtained by the merger of enterprises under the same control, take the portion of the book value of net assets acquired on the merger date of the combined party reflected in the consolidated financial statement of the final controller as the initial investment cost of the long-term equity investment. If the book value of the net assets of the combined party on the merger date is negative, the long-term equity investment cost shall be determined as zero.

If the equity of the investee under the same control is obtained step by step through multiple transactions and finally the merger of enterprises is formed, the method of handling the long-term equity investment in the financial statements of the parent company shall be supplemented in the reporting period in which the control is obtained. For example, if the equity of the investee under the same control is obtained step by step through multiple transactions and finally the merger of enterprises is finally formed and the transactions constitute a package transaction, the Group will make accounting by treating all transaction as a transaction of obtaining the control. If the transaction does not constitute a package transaction, on the merger date, the portion of the book value of net assets enjoyed after the merger of the combined party reflected in the consolidated financial statement of the final controller is taken as the initial investment cost of the long-term equity investment. Adjust the capital reserve on the basis of the balance between the initial investment cost and the sum of the book value of the long-term equity investment before the merger and the book value of the consideration newly paid for further shares obtained on the merger date. In case the capital reserve is insufficient for the write-down, the retained earnings shall be written down.

For long-term equity investments acquired through merger of enterprises not under the same control, the merger cost shall be taken as the initial investment cost.

If the equity of the investee not under the same control is obtained step by step through multiple transactions and finally the merger of enterprises is formed, the method of handling the long-term equity investment cost in the financial statements of the parent company shall be supplemented in the reporting period in which the control is obtained. For example, if the equity of the investee not under the same control is obtained step by step through multiple transactions and finally the merger of enterprises is finally formed and the transactions constitute a package transaction, the Group will make accounting by treating all transaction as a transaction of obtaining the control. If the transaction does not constitute a package transaction, the sum of the book value of the originally-held equity investment plus the new investment cost shall be taken as the initial investment cost calculated by the cost method. If the equity held before the purchase date is accounted with the equity method, other comprehensive income originally accounted with the equity method shall not be adjusted temporarily. In disposal of such investment, accounting shall be made using the same basis as the basis used by the investee for direct disposal of the relevant assets or liabilities. If the equity held before the purchase date is accounted at the fair value in the available-for-sale financial assets, the accumulated fair value changes that are originally recognized in other comprehensive income are transferred to current investment gains and losses on the merger date.

In addition to the above-mentioned long-term equity investment obtained by merger of enterprises, the long-term equity investment obtained by paying cash shall be taken as the investment cost based on the actual purchase price paid; the long-term equity investment obtained by issuing the equity securities shall be taken as the investment cost based on the fair value of the issued equity securities; and the long-term equity investment invested by the investor shall be taken as the investment cost according to the value agreed in the investment contract or agreement.

The Group uses the cost method for accounting of the investment in the subsidiary and uses the equity method for accounting of the investment in the associated enterprises and the joint ventures.

If the long-term equity investment is accounted by the cost method in the subsequent measurement, when there is an additional investment, the book value of the long-term equity investment cost shall be increased based on the fair value of the cost of the additional investment and the related transaction cost incurred. The dividends or profits declared to be distributed by the investee are recognized as the current investment income according to the amount to be enjoyed.

If the long-term equity investment is accounted by the equity method in the subsequent measurement, the book value of the long-term equity investment shall be accordingly increased or decreased with changes in the owner's equity of the investee. For verifying the portion of the net profit or loss of the investee, on the basis of the fair value of recognizable assets of the investee when the investment is obtained, the portion belonging to the investor is calculated according to the accounting policies and accounting period of the Group by offsetting the profit and loss of internal transactions incurred with the associated enterprise and joint venture based on the proportion of shareholding, which will be recognized after the adjustment of the net profit of the investee.

In disposal of a long-term equity investment, the balance between its book value and the actual purchase price is included in the current investment income. If the long-term equity investment calculated by the equity method is included in the owner’s equity due to any change of the owner’s equity of the investee other than the net profits and losses, the portion previously included in the owner's equity shall, in disposal of the long-term equity investment, be transferred to the current profits and losses according to a certain proportion.

In case of the loss of common control of or significant influence on the investee due to the disposal of some equity investment, the residual equity after the disposal shall be accounted according to the available-for-sale financial assets. The balance between the fair value and the book value of the residual equity on the date of losing common control or significant influence shall be accounted into current profits and losses. The other comprehensive income recognized by accounting with the equity method for the original equity investment shall accept accounting treatment on the same basis as that used by the investee for the direct disposal of related assets or liabilities when the equity method is not used for accounting.

In case of the loss of control over the investee due to the disposal of a part of long-term equity investments, the equity method shall be used for the accounting if the residual equity after the disposal can be used to exert common control over or significant influence on the investee. The balance between the book value of the equity disposed and the consideration shall be included in the investment income, and it shall be deemed that the residual equity has been adjusted by the equity method since its acquisition. If the residual equity disposed cannot be used exert common control over or significant influence on the investee, accounting shall be made according to relevant provisions of the available-for-sale financial assets and the balance between the book value of the equity disposed and the consideration shall be included in the investment income. The balance between the fair value and the book value of the residual equity on the date of losing common control shall be accounted into current investment profits and losses.

13. Investment real estates

The term "investment real estates" refers to the real estates held for generating rent or capital appreciation or the combination. The investment real estates of the Group mainly include leased buildings and corresponding land use rights.

Investment real estates are only recognized when their related economic benefits are likely to flow into the Group and their costs can be reliably measured. If the subsequent expenses related to the investment real estates meet the recognition conditions described above, they shall be included in the cost of investment real estates and the book value of the substituted part shall be derecognized; otherwise, they shall be included in the current profits and losses.

The Group makes initial measurement of the investment real estates by cost and makes subsequent measurement using cost pattern. Depreciation is determined using the straight-line method over the expected useful life and is included in current profits or losses.

14. Fixed assets

The fix assets of the Group refer to tangible assets held for labor provision, rental or operating management with the useful life over one fiscal year, including houses and buildings, machinery and equipment, transportation equipment and other equipment.

Fixed assets are only recognized when their related economic benefits are likely to flow into the Group and their costs can be reliably measured. If the subsequent expenses related to the fixed assets meet the recognition conditions described above, they shall be included in the fixed asset cost and the book value of the substituted part shall be derecognized; otherwise, they shall be included in the current profits and losses.

Initial measurement shall be made for the fixed assets of the Group by the cost when such assets are obtained. The cost when the fixed assets are obtained consists of the purchase price, the relevant taxes, freights, loading and unloading fees, installation fees, professional service fees and other expenses that bring the fixed asset to the expected conditions for use and that may be relegated to the fixed asset. Fixed assets shall be presented at the net amount obtained by deducting the accrued depreciation and provision for impairment from the cost.

The fixed asset depreciation is determined using the straight-line method over the expected useful life and is included in current profits or losses. The expected useful life, the expected net residual rate and the depreciation rate of various types of fixed assets are listed as follows:

The Group reviews the expected useful life, expected net residual value and depreciation method of the fixed assets at the end of each year and makes adjustment when necessary. For the fixed assets not used and not required other than houses and buildings, the fixed assets leased by operating lease, the fixed assets that have been fully depreciated and continue to be used, and the land that is accounted separately as the fixed asset according to regulations, the Group shall not accrue the depreciation.

In disposal of fixed assets, the balance between the amount obtained by deducting relevant taxes from the disposal income and the book value shall be included in the current profits and losses.

15. Construction in progress

The cost of construction in progress is determined based on actual cost, which includes all necessary project expenditures incurred during construction and other related expenses. Construction in progress shall not accrue depreciation. Construction in progress may be carried forward to fixed assets, intangible assets or long-term deferred expenses, etc., according to the nature after reaching the expected usable status.

16. Intangible assets

The term "intangible assets" refers to the identifiable non-monetary assets possessed or controlled by the Group which have no physical shape.

When the intangible assets of the Group are acquired, they are accounted at the cost based on the actual payment and other related expenses. The intangible assets with limited service life shall be amortized within the service life while the intangible assets with uncertain service life shall not be amortized. No matter whether there is any sign of impairment for the intangible assets with uncertain service life, such assets shall be subject to impairment test at least at the end of each year.

17. Long-term deferred expenses

The long-term deferred expenses of the Group refer to the expenses that have occurred and the period of amortization is more than one year (excluding one year), mainly including the lease fee, the improvement expenses of fixed assets rented in the form of operating lease, etc.

The period of amortization for the long-term deferred expenses shall be determined by the contract period or the benefit period, whichever is the shorter, and such expenses shall be evenly amortized. If any item of long-term unamortized expense can’t make the future accounting period benefit from it, the item’s amortized value which has not been amortized shall be fully accounted into current profits and losses.

18. Impairment of assets

Except for financial assets and mortgage debt assets, the impairment of assets of the Group is determined as follows:

On the balance sheet date, the Group determines whether there is any evidence indicating the impairment of assets. The Group makes impairment test on the assets with any sign of asset impairment and estimates the recoverable amount. No matter whether there is any sign of possible assets impairment, the goodwill formed by the merger of enterprises and intangible assets with uncertain service life are subject to impairment test at least at the end of each year. Impairment test shall also be performed annually for intangible assets that have not reached their usable status.

Signs used by the Group to determine impairment of assets: (1) the current market price of assets falls, and its decrease is obviously higher than the expected drop over time or due to the normal use. (2) The economic, technological or legal environment in which the Group operates, or the market where the assets are situated will have any significant change in the current period or in the near future, which will cause adverse impact on the assets. (3) The market interest rate or any other market investment return rate has risen in the current period, which will result in great decline of the recoverable amount of the assets. (4) Any evidence shows that the assets have become obsolete or have been damaged substantially. (5) The assets have been or will be left unused, or terminated for use, or disposed ahead of schedule. (6) Any evidence shows that the economic performance of the assets has been or will be lower than the expected performance. (7) Other evidence indicates that the impairment of assets has probably occurred.

The recoverable amount is determined in light of the higher one of the net amount of the fair value of the assets minus the disposal expenses and the current value of the expected future cash flow of the assets. The Group estimates the recoverable amount of assets based on the single asset; where it is difficult to do so, it determines the recoverable amount of the asset on the basis of the asset group or the asset group portfolio to which the asset belongs.

When the recoverable amount of the asset is less than its book value, the Group writes down its book value to the recoverable amount while the written-down amount is recorded in the profits and losses of the current period. In addition, corresponding impairment provision is accrued.

For the goodwill formed due to merger of enterprises, its book value will, as of the purchase date, be apportioned to the relevant asset group by a reasonable method. Where it is difficult to do so, it will be apportioned to the relevant asset group portfolio. The related asset group or portfolio of asset groups will be the asset group or portfolio of asset groups that can benefit from the synergy effect of enterprise merger, and will be no larger than the reporting portion determined by the Group. When making an impairment test on the relevant asset groups or portfolio of asset groups containing goodwill, if any evidence shows that the impairment of asset groups or portfolio of asset groups is possible, an impairment test on the asset groups or portfolio of asset groups not containing goodwill will first be made, then the recoverable amount will be calculated and the corresponding impairment loss will be recognized. After that, perform an impairment test on the asset group or portfolio of asset groups including goodwill and compare the book value and recoverable amount. If the recoverable amount is lower than the book value, the amount of the impairment loss will first offset the book value of the goodwill which are apportioned to the asset group or portfolio of asset groups, then offset the book value of other assets in proportion according to the weight of other assets in the asset group or portfolio of asset groups other than the goodwill.

Once the impairment loss of the above-mentioned assets is recognized, it will not be reversed in future accounting periods.

19. Mortgage debt assets

The mortgage debt assets are initially recognized at their fair value. The balance between the fair value and the related loan principal and the recognized interest and impairment provision is included in current profits or losses. On the balance sheet date, the mortgage debt assets are measured at the smaller of the book value and the net realizable value. If the book value is higher than the net realizable value, the balance is included in the current profits and losses, and falling price reserve of the mortgage debt assets is accrued.

20. Held-for-sale

The Group classifies non-current assets (including fixed assets, intangible assets and long-term equity investments, etc.) or disposal groups that meet the following conditions as the held-for-sale category:

 (1) According to the practice of selling such assets or disposal groups in similar transactions, the assets can be sold immediately under current conditions;

 (2) The sale is highly probable, that is, a resolution has been made on a sale plan and a confirmed purchase commitment has been obtained, and the sale is expected to be completed within one year. If relevant regulations require approval of the relevant authority or regulatory authority for sale, relevant approval shall be obtained.

The Group measures the book value of various assets and liabilities in non-current assets or disposal groups in accordance with the relevant accounting standards before the non-current assets or disposal groups are first classified by the Group as the held-for-sale category. In the initial measurement or re-measurement of the non-current assets or disposal groups held for sale on the balance sheet date, if the book value is higher than the net value of the fair value minus the sale amount, the book value is written down to the net value of the fair value less the sale amount. The amount of the write-down is recognized as the asset impairment loss, which is included in the current profits and losses, and the provision for impairment of assets held for sale is accrued.

If the non-current assets or disposal groups acquired by the Group for resale meet the requirement that “the sale is expected to be completed within one year” on the acquisition date, and are likely to meet other conditions for classification as the held-for-sale category within a short term (usually three months), they shall be classified as the held-for-sale category on the acquisition date. At the time of initial measurement, compare the initial measurement amount and the net amount of the fair value minus the sale amount assuming that they are not classified as the assets held for sale, whichever is the smaller, measurement shall be made. Except for the non-current assets or disposal groups acquired in a merger of enterprises, the net amount of the fair value of the non-current assets or disposal groups minus the sale amount is taken as the balance of the initial measurement amount and is included in the current profits or losses.

If the Group loses control over the subsidiary due to the sale of investment in the subsidiary, etc., regardless of whether the Group retains part of the equity investment after the sale, when the investment in the subsidiary to be sold meets the conditions for classification as the held-for-sale category, the investment in the subsidiary is divided into the held-for-sale category in the individual financial statements of the parent company, and all assets and liabilities of the subsidiary are classified as the held-for-sale category in the consolidated financial statements.

If the net amount of the fair value of the non-current assets held for sale on the subsequent balance sheet date minus the sale amount is increased, the previously-written-down amount shall be recovered and reversed within the asset impairment loss amount recognized after classification as the held-for-sale category. The amount of the reversal is included in the current profits and losses. The impairment losses on assets recognized before classification as the held-for-sale category shall not be reversed.

For the amount of impairment loss of assets recognized for the disposal group held for sale, the book value of the goodwill in the disposal group is first written down, and then the book value is written down in proportion according to the weight of the book value of each non-current asset.

If the net amount of the fair value of the disposal groups held for sale on the subsequent balance sheet date minus the sale amount is increased, the previously-written-down amount shall be recovered and reversed within the asset impairment loss amount recognized for non-current assets applicable to relevant measurement regulations after classification as the held-for-sale category. The amount of the reversal is included in the current profits and losses. The book value of goodwill written down and the impairment losses on assets recognized before the non-current assets are classified as the held-for-sale category shall not be reversed.

For the subsequent reversal amount of the asset impairment loss recognized for the disposal group held for sale, the book value shall be increased in proportion according to the weight of the book value of various non-current assets in the disposal groups other than goodwill.

Non-current assets held for sale or non-current assets in the disposal groups held for sale are not depreciated or amortized, and interest and other expenses on liabilities in disposal groups held for sale continue to be recognized.

If the non-current assets or disposal groups held for sale no longer continue to be classified as the held-for-sale category or the non-current assets are removed from the disposal groups held for sale because of failure to meet conditions for classification as the held-for-sale category, measurement shall be made at the smaller of the following: (1) the amount of the book value before classification as the held-for-sale category, which is adjusted on the basis of depreciation, amortization or impairment that should be recognized under the premise of non-classification as the held-for-sale category; (2) recoverable amount.

When the non-current assets or disposal groups held for sale are derecognized, the unrecognized gains or losses are included in the current profits or losses.

21. Employee compensation

The term “employee compensation" refers to all kinds of payments and other relevant expenditures given by Group in exchange of the services offered by the employees.

The employee compensation of the Group includes short-term compensation, post-employment benefit, dismissal benefit, etc.

The short-term compensation mainly includes employee wage, bonus, employee welfare, medical, maternity and employment injury insurance, public accumulation fund for housing construction, labor union fund, education fund, etc. During the accounting period in which the service is provided by the employee, the actual short-term compensation is recognized as liabilities and included in the current profits or losses or the cost of the relevant assets depending on the beneficiary. The post-employment benefit mainly includes basic pension insurance premium, enterprise annuity plan, supplementary retirement benefit paid to specific personnel, etc., and is classified into defined contribution plan and defined benefit plan according to the risks and obligations assumed by the company. For the defined contribution plan, the deposits paid to the individual entity in accordance with the services provided by the employees in the accounting period on the balance sheet date are recognized as liabilities, and are included in the current profits and losses or related asset cost depending on the beneficiary.

If the Group cancels the labor relationship with any employee prior to the expiration of the relevant labor contract or brings forward any compensation proposal for the purpose of encouraging the employee to accept a layoff, and the Group has formulated a formal plan on the cancellation of labor relationship or has brought forward a proposal on voluntary layoff and will execute it soon, and the Group is not allowed to unilaterally withdraw the plan on the cancellation of labor relationship or the layoff proposal, the Group shall recognize the expected liabilities incurred due to the compensation for the cancellation of the labor relationship with the employee, and shall simultaneously record them into the profits or losses in the current period.

The internal retirement plan for employees shall be treated in the same way as the above-mentioned dismissal benefits. The Group will recognize the salary of the internally-retired staff and the social insurance premiums to be paid during the period from the employee's cessation of service to the normal retirement date in the current profits and losses (dismissal benefits) when the conditions for the recognition of the estimated liabilities are met.

22. Estimated liabilities

The current obligation arising from pending litigation, restructuring and onerous contract is likely to result in the outflow of economic benefits. When the amount of such obligation can be reliably measured, it is recognized as an estimated liability. The future operating loss shall not be recognized as estimated liability. The estimated liability will be initially measured in accordance with the best estimate of the necessary expenses for the performance of the current obligation, comprehensively considering the risks, uncertainty, time value of money, and other factors pertinent to the contingencies. If the time value of money is of great significance, the best estimate shall be determined after discounting the relevant future outflow of cash. The Bank rechecks the book value of the estimated liability on the balance sheet date and adjusts the book value to reflect the current best estimate.

23. Recognition of income and expense

 (1) Interest income and expense

Interest income and expense are calculated using the effective interest rate method and included in the current profits and losses. If the balance between the effective interest rate and the contract interest rate is small, the interest income and expense can also be calculated according to the contract interest rate.

The effective interest rate method refers to the method by which the amortized cost and the interest incomes of different installments or interest expenses are calculated in light of the effective interest rates of the financial assets or financial liabilities. The effective interest rate refers to the interest rate adopted to cash the future cash flow of a financial asset or financial liability within the predicted term of existence or within a shorter applicable term into the current book value of the financial asset or financial liability. When the effective interest rate is determined, the future cash flow shall be predicted on the basis of taking into account all the contractual provisions concerning the financial asset or financial liability, and the future credit losses shall not be taken into account.

 (2) Commission income

The commission income of the Group is recognized when the relevant services have been provided and the amount received can be reasonably estimated. The commissions collected through the provision of services during a certain period of time are recognized on an accrual basis during the service period; other commissions are recognized when the relevant services have been provided or completed.

24. Government subsidy

A government subsidy means the monetary or non-monetary assets obtained for free by the Group from the government, excluding the capital invested by the government as the owner. Government subsidies are recognized when they are able to meet the attached conditions to the government subsidies and can be received. Government subsidies consist of the government subsidies pertinent to assets and government subsidies pertinent to income.

If a government subsidy is a monetary asset, it is measured in the light of the received or receivable amount. If a government subsidy is a non-monetary asset, it is measured at its fair value. If its fair value cannot be obtained in a reliable way, it shall be measured at its nominal amount. However, government subsidies measured at nominal amounts are directly accounted into the profits or losses in the current period.

Government subsidy pertinent to asset shall write down the book value of the related assets/recognized as deferred income. If the governmental subsidy pertinent to assets is recognized as the deferred income, it shall be included into current profits and losses by installment in a realizable and systematic manner within the service life of related assets.

Among the governmental subsidiaries pertinent to income, those used to make up the related cost or loss in the future period are recognized as the deferred income and accounted into current profits and losses in the period of related expense recognition or write down related cost; those used to make up the related cost or loss already incurred are directly accounted into current profits and losses or write down related cost.

When it is necessary to refund any government subsidy that has been recognized, if there is the deferred income balance concerned, the book balance of the deferred income shall be written down, but the excessive part shall be included in the current profits and losses; and if there is no deferred income concerned to the government subsidy, it shall be directly included in the current profits and losses.

Government subsidy related to daily activities shall be included in other income or write down related cost in accordance with the economic business substance. Government subsidy not related to daily activities shall be included in the non-operating revenue and expenditure.

25. Income tax

Accounting of the income tax shall be made according to the law of obligations of the balance sheet. The income tax includes current income tax and deferred income tax. The Group shall include the deferred income tax related to the merger of enterprises into goodwill, and include those related to transactions or events that have been directly credited to owners' equity into other comprehensive income and owner’s equity, and other income taxes are included in the current profits and losses as income tax expenses or gains.

 (1) Current income tax

The current income tax is the amount of income tax payable in the current period determined by the Bank and its subsidiaries in accordance with the taxable income and the applicable tax rate. The taxable income is the amount calculated after corresponding adjustment is made to current pre-tax accounting profit according to relevant provisions of the tax law.

The current income tax liabilities or assets incurred in the current period or prior periods are measured in light of the expected payable or refundable amount of income taxes calculated according to provisions of the tax law.

 (2) Deferred income tax assets/deferred income tax liabilities

On the balance sheet date, the Group analyzes the tax base of asset and liability items (including the item not recognized as the asset and liability but whose tax basis can be determined according to the tax law) item by item. For the temporary difference between the book value of the asset and liability items and the tax base, at the applicable tax rate during the expected reversal period of the temporary difference, the deferred income tax asset and the deferred income tax liability are recognized using the law of obligations of the balance sheet.

The Group shall recognize the deferred income tax assets arising from a deductible temporary difference to the extent of the amount of the taxable income which it is most likely to obtain and which can be used to deduct the deductible temporary difference. For the deferred income tax assets having been recognized, if it is expected to be unlikely to obtain sufficient taxable income in future periods to offset the deferred income tax assets, the book value of the deferred income tax assets shall be written down. When it is probable to obtain sufficient taxable income taxes, such write-down amount shall be subsequently reversed.

26. Lease

The Group shall classify a lease as a financing lease or an operating lease on the lease beginning date.

The "financing lease" shall refer to a lease that has transferred in substance all the risks and rewards related to the ownership of an asset. The ownership of it may or may not eventually be transferred. Other lease other than the financing lease is operating lease.

 (1) The Group records the operating lease business as the leasee.

The rent expenditure of operating lease is recorded in the relevant asset cost or the profit and loss of the current period by using the straight-line method over each period of the lease term. The initial direct cost is directly included in the profit and loss of the current period. Contingent rents are recorded in the current profits and losses when they actually occur.

 (2) The Group records the operating lease business as the leasor.

Rental income from operating lease is recognized as the current profit and loss by using the straight-line method over each period of the lease term. The initial direct cost at a large amount is capitalized at the time of the occurrence, in the entire period of the lease, it is included in the current profits and losses by installment in accordance with the same basis as the basis for recognition of the rental income; the other initial direct cost at a smaller amount is included in the current profits and losses at the time of the occurrence. Contingent rents are recorded in the current profits and losses when they actually occur.

 (3) The Group records the financing lease business as the leasee.

On the lease beginning date, the lessee shall record the smaller one of the fair value of the leased asset and the present value of the minimum lease payment on the lease beginning date as the entry value, recognize the amount of the minimum lease payment as the entry value of long-term account payable, and treat the balance between the recorded amount of the leased asset and the long-term account payable as unrecognized financing charges. Furthermore, the initial direct costs attributable to the leased item incurred during the process of lease negotiating and signing the leasing agreement shall also be recorded in the value of the leased asset. The balance of the minimum lease payment after deducting the unrecognized financing charges is presented in the long-term liabilities and long-term liabilities due within one year respectively.

If the financing charge is not recognized, the effective interest rate method shall be used to calculate and recognize the financing charge in the current period. Contingent rents are recorded in the current profits and losses when they actually occur.

 (4) The Group records the financing lease business as the leasor.

On the beginning date of the lease term, a lessor shall recognize the sum of the minimum lease receipt on the lease beginning date and the initial direct cost as the entering value in an account of the financing lease values receivable, and record the unguaranteed residual value at the same time. The balance between the sum of the minimum lease receipt, the initial direct cost and the unguaranteed residual value and the sum of their present values shall be recognized as unrealized financing income. The balance of the financing lease receivables after deducting the unrealized financing income is presented in the long-term claims and the long-term claims due within one year respectively.

For the unrealized financing income, within the lease term, the effective interest rate method is adopted to calculate and recognize the financing income of the current period. Contingent rents are recorded in the current profits and losses when they actually occur.

27. Trustee business

When the Group conducts activities in the capacity of the appointee, trustee or agent, including entrusted loans, entrusted investment and agency wealth management business, the assets generated by the entrusted activities and the guarantee responsibility for repaying the assets to the customers are not included in the balance sheet of the Group.

28. Contingent liabilities

The term "contingent liabilities" refers to a potential obligation caused by past transactions or events and whose existence needs to be confirmed only by the occurrence or non-occurrence of uncertain future events. Contingent liabilities may also refer to a current obligation caused by a past event but the performance of the obligation is not likely to incur an outflow of economic benefits or the outflow of economic benefits cannot be measured in a reliable way.

Contingent liabilities are not recognized in the balance sheet and are disclosed only in the contingencies and commitments of the notes. If the circumstances change and the event is likely to result in an outflow of economic benefits and the amount can be reliably measured, it is recognized as an estimated liability.

29. Significant accounting judgments and estimates

The preparation of financial statements requires the management to make judgments and estimates that may affect the reporting amount of income, expenses, assets and liabilities, and the disclosure of contingent liabilities on the balance sheet date. However, the uncertainties of these estimates may cause significant adjustments to the book amount of future assets or liabilities affected.

 (1) In the process of implementing the accounting policies of the Group, the management has made the following judgments that have a significant impact on the amounts recognized in the financial statements:

① Classification of financial assets: The management needs to make significant judgments on the classification of financial assets. Different classifications will affect accounting methods and the financial position of the Group.

a. Held-to-maturity investments: The term "held-to-maturity investments" refers to a non-derivative financial asset with a fixed date of maturity, a fixed or determinable recovery amount and which the Group holds for a definite purpose or is able to hold until its maturity. The management needs to make a judgment when assessing whether a financial asset meets the criteria for classification as a held-to-maturity investment.

b. Investment real estates: The term "investment real estates" refers to the real estates held for generating rent or capital appreciation or the combination. The management needs to make a judgment when assessing whether a real estate meets the criteria for classification as an investment real estate.

② Operating lease: The Group has signed a lease contract for some real estates. The Group believes that, in accordance with the terms of the lease contract, the Group retains all significant risks and rewards of ownership of these real estates and therefore treats them as operating leases.

 (2) The following are key assumptions about the future on the balance sheet date and other key sources of estimate uncertainty, which may result in significant adjustments to the book amount of assets and liabilities of the next fiscal year.

① Impairment of loans and receivables and held-to-maturity investments: in addition to the separate evaluation of the impairment losses on the impaired loans and receivables and held-to-maturity investments recognized, the Group regularly evaluates the impairment loss of financial asset portfolio. For loans and receivables and held-to-maturity investments that are not found to be reduced in cash flow in a single test, they shall be included in a portfolio of financial assets with similar credit risk characteristics for impairment test. The Group judges whether there is any sign of impairment of the expected future cash flow reduction in the financial asset portfolio to determine whether it is necessary to make accrual of provision for loan impairment. Signs of impairment of the expected cash flow reduction include deterioration in the borrower's ability to repay the financial asset portfolio, or an adverse change in the economic environment in which the borrower is located, resulting in a default by the borrower of the financial asset portfolio. Based on the historical experience of losses arising from financial asset portfolio with similar credit risk characteristics, the Group makes impairment estimate for financial asset portfolio with any sign of impairment. For the methods and assumptions used to estimate the timing and amount of expected future cash flows, the Group will make evaluation regularly to reduce the difference between the actual impairment loss of loans and the estimated loss.

② Impairment of available-for-sale financial assets: The Group determines whether the available-for-sale financial assets are impaired in accordance with the “Accounting Standards for Enterprises No. 22 - Recognition and Measurement of Financial Instrument”. The determination of impairment depends to a large extent on the judgment of the management. In the process of making judgments, the Group needs to assess the extent and duration of the fair value of the investment below the cost, as well as the financial status and short-term business outlook of the investee, including industry conditions, technological changes, credit ratings, default rates, loss coverage and risk to the counterparty.

③ Fair value of financial instruments: The Group uses valuation techniques to determine the fair value of the financial instruments that do not have an active trading market. The valuation techniques used by the Group include the discounted cash flow method. The use of valuation techniques requires the Group to estimate factors such as credit risk (including both parties to the transaction), market interest rate volatility and correlation. If the assumptions made on the above factors change, the assessment of the fair value of financial instruments will be affected.

④ Income tax: The Group needs to carry out a large amount of estimation work when accruing the income tax. There are certain uncertainties in the final tax treatment and calculation of some transactions. Especially, for some items, the approval from competent government authorities shall be obtained regarding whether an amount may be deducted from the profit before income taxation. If there is a difference between the final recognition result of these tax matters and the initial recorded amount, the difference will affect the current income tax, deferred income tax and payable income tax liabilities, deferred income tax assets and deferred income tax liabilities for the final recognition period.

⑤ Deferred income tax assets: The Group shall recognize the deferred income tax assets arising from a deductible temporary difference to the extent of the amount of the taxable income which it is most likely to obtain and which can be used to deduct the deductible temporary difference. On the balance sheet date, the Group reviews the book value of deferred income tax assets. If it is unlikely to obtain sufficient taxable income in future periods to offset the deferred income tax assets, the book value of the deferred income tax assets shall be written down. Therefore, the Group needs to make significant judgments on the tax treatment of related transactions in accordance with relevant tax regulations, and make significant estimates on the possibility of obtaining sufficient taxable income to offset the deferred income tax assets.

⑥ Merger of structured entities

When the Group acts as an asset manager or as an investor in a structured entity, the Group needs to make significant judgments on whether to control the structured entity and include it in the scope of merger. The Group assessed the contractual rights and obligations under the transaction structure and the powers of the structured entities, and analyzed and tested the variable returns of the structured entities, including but not limited to the fee income and asset management fees obtained as asset managers, retained residual income, etc., and whether liquidity support or other support was provided to structured entities. In addition, the Group has made a judgment on its role as the primary responsible person or the agent in the structured entity transaction, including the analysis and evaluation of the scope of the decision-making power of the structured entity, the level of compensation obtained by providing asset management services, the risk of variable returns assumed due to holding of other equities of the structured entity as well as the substantive rights held by other parties.

30. Changes of important accounting policies and accounting estimates

① Changes of important accounting policies

② Changes of important accounting estimates: None.

• . Taxes

1. The main income taxes and other taxes applicable to the Group and their tax rates are as follows:

Tax preference and official approval

According to the “Notice on Pilot of Full Implementation of Replacing Business Tax with Value-added Tax” (CS [2016] No. 36) by the Ministry of Finance of the PRC and the State Administration of Taxation on March 23, 2016, since May 1, 2016, the pilot of replacing business tax with VAT was fully implemented nationwide. The financial industry was included in the pilot scope, and the payment of the business tax was changed to the payment of the value-added tax.

According to the regulations in the “Notice on Further Clarifying the Relevant Policies of the Financial Industry for the Pilot of Full Implementation of Replacing Business Tax with VAT” (CS [2016] No. 46) of the Ministry of Finance of the PRC and the State Administration of Taxation, the Bank and its holding subsidiaries were recognized as VAT general taxpayers since May 1, 2016 and implemented simple collection. For the related transactions occurred, the original business tax charged was changed to the VAT. The tax shall be calculated and paid at the following tax collection rate: 3% of financial business income, 6% of agency business service charge, 5% of rental income, and 3% of other business income.

VII. Notes to important items of financial statements

1. Cash and deposits in the central bank

(1) The legal reserve requirements on deposit deposited in the central bank refer to the required reserve submitted by the Group to the People's Bank of China in accordance with regulations, including Renminbi deposit reserves and foreign-currency deposit reserves. These reserves cannot be used for routine business and may not be used without the approval of the People's Bank of China.

The deposit ratio of RMB deposit reserve applicable to the Bank on December 31, 2017 was 12%.

(2) The excess reserves on deposit deposited in the central bank refer to the excess reserve deposited by the Group in the People's Bank of China for liquidation.

2. Deposits in member banks and other financial institutions

There was no obvious sign of impairment at the end of the year for deposits in member banks, so no impairment provision was accrued.

3. Lendings to banks and other financial institutions

4. Financial assets bought and resold

5. Interest receivable

(1) Listed by nature of the business

Note: The impairment provision for interest receivable of the Group was accrued in accordance with the provisions of the “Regulations on the Risk Management and Control of the Strengthening of the Rural Commercial Banks within the Jurisdiction of the Taizhou Banking Regulatory Commission Branch” issued by the Office of Taizhou Regulatory Branch of China Banking Regulatory Commission.

6. Issued loans and imprest

(1)  Listed by the distribution of individual and company

(2) Industrial distribution of company loans and imprest

(3)  Category of personal loan      

(4) Distribution of discount by type of notes

(5) Distribution of guarantee modes for loans and imprest

(6) Guarantee mode of overdue loans and distribution of overdue duration

Group

Bank:

If the principal or interest is overdue for one day, the entire loan is classified as an overdue one.

(7) Loan loss provision

Group

Bank:

This year's write-off refers to the loan loss provision written off by the Bank's loan inspection committee to approve the loan for write-off.

(8) Top 10 list of single customer loans (excluding discount)

The Group and the Bank:

①As of December 31, 2017, the top 10 customers were:

②As of Saturday, December 31, 2016, the top 10 customers were:

7.  Available-for-sale securities

(1) Available-for-sale securities of the Group and the Bank

(2) Available-for-sale financial assets equity investment measured at cost at the end of the period

Equity investment of available-for-sale financial assets is an equity investment held by the Group that does not have control, joint control or significant influence, and has no quotation in an active market. Its fair value cannot be reliably measured. The Group measured this investment on a cost basis.

(3) The impairment provision for available-for-sale financial assets of the Group was accrued in accordance with the provisions of the “Regulations on the Risk Management and Control of the Strengthening of the Rural Commercial Banks within the Jurisdiction of the Taizhou Banking Regulatory Commission Branch” issued by the Office of Taizhou Banking Regulatory Commission Branch.

8. Held-to-maturity investments

(1) Situation of held-to-maturity investments

(2) Disposal of held-to-maturity investments that have not matured

In 2017 and 2016, the Group did not sell any held-to-maturity investments that have not yet matured.

(3) The impairment provision for a held-to-maturity investments of the Group was accrued in accordance with the provisions of the “Regulations on the Risk Management and Control of the Strengthening of the Rural Commercial Banks within the Jurisdiction of the Taizhou Banking Regulatory Commission Branch” issued by the Office of Taizhou Banking Regulatory Commission Branch.

9. Long-term equity investments

(1) Long-term equity investments of the Group

There was no obvious sign of impairment for long-term equity investments at the end of the year, so no impairment provision was accrued.

 (2) Long-term equity investments of the Bank

(1) The Group, the largest shareholder of Jiangsu Jinhu Rural Commercial Bank Co., Ltd., held its 13.33% equity and has assigned to it directors, which could have a significant impact on its business. Therefore, it was accounted by the equity method.

(2) There was no obvious sign of impairment for long-term equity investments at the end of the year, so no impairment provision was accrued.

10. Fixed assets

(1) Net fixed assets of the Group

The depreciation amount for 2017 was 36,143,276.34 yuan.

(2) Net fixed assets of the Group

The depreciation amount for 2017 was 33,324,150.77 yuan.

There was no obvious sign of impairment for fixed assets at the end of the year, so no impairment provision was accrued.

(3) In-process project of the Group

4.  In-process project of the Bank

11. Intangible assets

The Group and the Bank:

There was no obvious sign of impairment for intangible assets at the end of the year, so no impairment provision was accrued.

12. Deferred income tax assets

On the balance sheet date, the Group expects to be able to obtain sufficient taxable income in the future to deduct temporary differences, so the related deferred income tax assets were recognized.

13. Other assets

(1) Listed by items

(2)  Other receivables

①Balance details

②Listed by aging

(3)  Long-term deferred expense

Group

Bank:

14. Asset impairment provision

Group

Bank:

15. Deposits in member banks and other financial institutions

16. Loans from other banks

17. Financial assets sold for repurchase

18. Absorbed deposits

19. Salaries payable

Group

(1) Classification of salaries payable

    (2) Short-term remuneration

(3) Establishment of a withdrawal and deposit plan

Bank

(1) Classification of salaries payable

    (2) Short-term remuneration

(3) Establishment of a withdrawal and deposit plan

20. Taxes payable