Final Results - Part 2

RNS Number : 7415B

Air China Ld

20 April 2012

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Notes to Financial Statements

31 December 2011

(Prepared under International Financial Reporting Standards)

1 CORPORATE INFORMATION

Air China Limited (the "Company") was incorporated as a joint stock limited company in Beijing, the People's Republic of China (the "PRC"), on 30 September 2004. The Company's H shares are listed on the Hong Kong Stock Exchange (the "HKSE") and the London Stock Exchange while the Company's A shares are listed on the Shanghai Stock Exchange. In the opinion of the Directors, the Company's parent and ultimate holding company is China National Aviation Holding Company ("CNAHC"), a PRC state-owned enterprise under the supervision of the State Council.

On 25 February 2010, the Company, Fine Star Enterprises Corporation ("Fine Star", an indirectly wholly-owned subsidiary of the Company), Air China Cargo Limited ("Air China Cargo", another wholly-owned subsidiary of the Company), Cathay Pacific Airways Limited ("Cathay Pacific") and Cathay Pacific Cargo Holdings Limited ("Cathay Pacific Cargo", a wholly-owned subsidiary of Cathay Pacific), entered into a framework agreement and several related agreements, pursuant to which Cathay Pacific, through Cathay Pacific Cargo, agreed to subscribe for a 25% equity interest in Air China Cargo for a consideration of RMB851,621,140 and Fine Star agreed to make a further capital contribution of RMB238,453,919 in cash to Air China Cargo; and the Company agreed to sell Fine Star to Advent Fortune Limited ("AFL") for a consideration of RMB626,793,159. On 19 April 2011, these transactions were completed and were approved by the State Administration for Industry & Commerce of the People's Republic of China. Upon completion of these transactions, the equity interests held by the Company, Cathay Pacific and AFL became 51%, 25% and 24%, respectively.

On 28 February 2011, the Company, Beijing Enterprises Group Company, Beijing State-owned Assets Management Co., Ltd. and Zhong Da Yin Rui Co., Ltd. set up a private jet company named Beijing Airlines Co., Ltd ("Beijing Airlines"). The registered capital of Beijing Airlines is RMB1,000,000,000. The equity interest held by the Company is 51%.

On 1 August 2011, the Company and Dalian Bao Shui Zheng Tong Co., Ltd. set up an airline company named Dalian Airlines Co., Ltd ("Dalian Airlines"). The registered capital of Dalian Airlines is RMB1,000,000,000. The equity interest held by the Company is 80%.

The principal activities of the Company, its subsidiaries and joint ventures (collectively the "Group") and associates consist of the provision of airline, airline-related services, including aircraft engineering services, air catering services and airport ground handling services, mainly in Mainland China, Hong Kong and Macau.

The registered office of the Company is located at 9th Floor, Blue Sky Mansion, 28 Tianzhu Road, Zone A, Tianzhu Airport Industrial Zone, Shunyi District, Beijing 101312, the PRC.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

The Group's financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRSs", which comprise standards and interpretations approved by the International Accounting Standards Board (the "IASB"), and International Accounting Standards ("IASs") and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee that remain in effect) and the disclosure requirements of the Hong Kong Companies Ordinance.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of preparation(Continued)

As at 31 December 2011, the Group's net current liabilities amounted to approximately RMB37,978 million, which comprised current assets of approximately RMB23,353 million and current liabilities of approximately RMB61,331 million. The liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflows from operations and sufficient financing to meet its financial obligations as and when they fall due. In preparing the financial statements, the Directors of the Company have considered the Group's sources of liquidity and believe that adequate funding is available to fulfil the Group's debt obligations and capital expenditure requirements. Accordingly, the consolidated financial statements have been prepared on a basis that the Group will be able to continue as a going concern.

The financial statements have been prepared on a historical cost basis, except for derivative financial instruments, which have been measured at fair value, and non-current assets held for sale, which have been stated at the lower of their carrying amounts and fair value less costs to sell. These financial statements are presented in Renminbi ("RMB") and all values are rounded to the nearest thousand except when otherwise indicated.

Impact of new and revised IFRSs

The Group has adopted the following new and revised IFRSs for the first time for the current year's financial statements.

IFRS 1 Amendment	Amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards - Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters
IAS 24 (Revised)	Related Party Disclosures
IAS 32 Amendment	Amendment to IAS 32 Financial Instruments: Presentation - Classification of Rights Issues
IFRIC 14 Amendments	Amendments to IFRIC 14 Prepayments of a Minimum Funding Requirement
IFRIC 19	Extinguishing Financial Liabilities with Equity Instruments
Improvements to IFRSs 2010	Amendments to a number of IFRSs issued in May 2010

In May 2010, the IASB issued its third omnibus of amendments to its standards, including improvements to IFRS 1, IFRS 3, IFRS 7, IAS 1, IAS 27, IAS 34 and IFRIC 13, primarily with a view to removing inconsistencies and clarifying wording.

Other than as further explained below regarding the impact of IAS 24 (Revised), the adoption of these new and revised IFRSs has had no significant financial effect on these financial statements.

IAS 24 (Revised) clarifies and simplifies the definition of related parties. The new definitions emphasise a symmetrical view of related party relationships and clarifies the circumstances in which persons and key management personnel affect related party relationships of an entity. In addition, the revised standard introduces an exemption from the general related party disclosure requirements for transactions with a government and entities that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity. The adoption of IAS 24 (Revised) has resulted in the re-presenting of the comparative related party disclosures.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Issued but not yet effective IFRSs

The Group has not applied the following new and revised IFRSs, that have been issued but are not yet effective, in these financial statements.

IFRS 1 Amendments	Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters¹
IFRS 7 Amendments	Amendments to IFRS 7 Financial Instruments: Disclosures - Transfers of Financial Assets¹
IFRS 7 Amendments	Amendments to IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities⁴
IFRS 9	Financial Instruments⁶
IFRS 10	Consolidated Financial Statements⁴
IFRS 11	Joint Arrangements⁴
IFRS 12	Disclosure of Interests in Other Entities⁴
IFRS 13	Fair Value Measurement⁴
IAS 1 Amendments	Amendments to IAS 1 Presentation of Financial Statements - Presentation o f Items of Other Comprehensive Income³
IAS 12 Amendments	Amendments to IAS 12 Income Taxes - Deferred Tax: Recovery of Underlying Assets²
IAS 19 (Revised)	Employee Benefits⁴
IAS 27 (Revised)	Separate Financial Statements⁴
IAS 28 (Revised)	Investments in Associates and Joint Ventures⁴
IAS 32 Amendments	Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities⁵
IFRIC 20	Stripping Costs in the Production Phase of a Surface Mine⁴

¹ Effective for annual periods beginning on or after 1 July 2011

² Effective for annual periods beginning on or after 1 January 2012

³ Effective for annual periods beginning on or after 1 July 2012

⁴ Effective for annual periods beginning on or after 1 January 2013

⁵ Effective for annual periods beginning on or after 1 January 2014

⁶ Effective for annual periods beginning on or after 1 January 2015

Further information about those changes that are expected to significantly affect the Group is as follows:

IFRS 9 issued in November 2009 is the first part of phase 1 of a comprehensive project to entirely replace IAS 39 Financial Instruments: Recognition and Measurement. This phase focuses on the classification and measurement of financial assets. Instead of classifying financial assets into four categories, an entity shall classify financial assets as subsequently measured at either amortised cost or fair value, on the basis of both the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. This aims to improve and simplify the approach for the classification and measurement of financial assets compared with the requirements of IAS 39.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Issued but not yet effective IFRSs(Continued)

In October 2010, the IASB issued additions to IFRS 9 to address financial liabilities (the "Additions") and incorporated in IFRS 9 the current derecognition principles of financial instruments of IAS 39. Most of the Additions were carried forward unchanged from IAS 39, while changes were made to the measurement of financial liabilities designated at fair value through profit or loss using the fair value option ("FVO"). For these FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in other comprehensive income ("OCI"). The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liability's credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. However, loan commitments and financial guarantee contracts which have been designated under the FVO are scoped out of the Additions.

IAS 39 is aimed to be replaced by IFRS 9 in its entirety. Before this entire replacement, the guidance in IAS 39 on hedge accounting derecognition and impairment of financial assets continues to apply. The Group expects to adopt IFRS 9 from 1 January 2015.

IFRS 10 establishes a single control model that applies to all entities including special purpose entities or structured entities. It includes a new definition of control which is used to determine which entities are consolidated. The changes introduced by IFRS 10 require management of the Group to exercise significant judgement to determine which entities are controlled, compared with the requirements that were in IAS 27 and SIC-12 Consolidation - Special Purpose Entities. IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12.

IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly controlled Entities - Non-monetary Contributions by Venturers. It describes the accounting for joint arrangements with joint control. It addresses only two forms of joint arrangements, i.e., joint operations and joint ventures, and removes the option to account for joint ventures using proportionate consolidation.

IFRS 12 includes the disclosures requirements for subsidiaries, joint arrangements, associates and structured entities that are previously included in IAS 27 Consolidated and Separate Financial Statements, IAS 31 Interests in Joint Ventures and IAS 28 Investments in Associates. It also introduces a number of new disclosure requirements for these entities.

Consequential amendments were made to IAS 27 and IAS 28 as a result of the issuance of IFRS 10, IFRS 11 and IFRS 12. The Group expects to adopt IFRS 10, IFRS 11, IFRS 12, and the consequential amendments to IAS 27 and IAS 28 from 1 January 2013.

IFRS 13 provides a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The standard does not change the circumstances in which the Group is required to use fair value, but provides guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs. The Group expects to adopt IFRS 13 prospectively from 1 January 2013.

Amendments to IAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or "recycled") to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items which will never be reclassified. The Group expects to adopt the amendments from 1 January 2013.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of consolidation

The consolidated financial statements include the financial statements of the Company, its subsidiaries and joint ventures (collectively the "Group") for the year ended 31 December 2011. The financial statements of the subsidiaries and joint ventures are prepared for the same reporting period as the Company, using consistent accounting policies. The results of subsidiaries and joint ventures are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated on consolidation in full. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

Total comprehensive income within a subsidiary is attributed to the non-controlling interest even if that results in a deficit balance.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.

If the Group loses control over a subsidiary, it derecognises (i) the assets (including goodwill) and liabilities of the subsidiary, (ii) the carrying amount of any non-controlling interest and (iii) the cumulative translation differences recorded in equity; and recognises (i) the fair value of the consideration received, (ii) the fair value of any investment retained and (iii) any resulting surplus or deficit in profit or loss. The Group's share of components previously recognised in other comprehensive income is reclassified to profit or loss or retained earnings, as appropriate.

Foreign currencies

These financial statements are presented in RMB, which is the Company's functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency.

Foreign currency transactions recorded by the entities in the Group are initially recorded in their respective functional currency rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the end of the reporting period.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. The gain or loss arising on retranslation of non-monetary items is treated in line with the recognition of gain or loss on change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in other comprehensive income or profit or loss are also recognised in other comprehensive income or profit or loss, respectively).

The functional currencies of certain overseas subsidiaries, joint ventures and associates are currencies other than RMB. As at the end of the reporting period, the assets and liabilities of these entities are translated into RMB at the rates of exchange ruling at the end of the reporting period and their income statements are translated into RMB at the average exchange rates for the period of the translations. The resulting exchange differences are recognised in other comprehensive income and accumulated in the foreign exchange translation reserve. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign entity is recognised in the income statement.

For the purpose of the consolidated statement of cash flows, the cash flows of overseas subsidiaries and joint ventures are translated into RMB at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the year are translated into RMB at the average exchange rates for the period of the translations. Effect of foreign exchange rate changes on cash and cash equivalents is presented separately in the consolidated statement of cash flows as a reconciling item.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Subsidiaries

A subsidiary is an entity in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or controls the composition of its board of Directors; or over which the Company has a contractual right to exercise a dominant influence with respect to that entity's financial and operating policies.

The results of subsidiaries are included in the Company's income statement to the extent of dividends received and receivable. The Company's interests in subsidiaries that are not classified as held for sale in accordance with IFRS 5 are stated at cost less any impairment losses.

Joint ventures

A joint venture is an entity set up by contractual arrangement, whereby the Group and other parties undertake an economic activity. A jointly-controlled entity is a joint venture that is subject to joint control, resulting in none of the participating parties having unilateral control over the economic activity of the jointly-controlled entity. The Group has investments in certain joint ventures which are considered as jointly-controlled entities.

The Group's investments in its jointly-controlled entities are accounted for by the proportionate consolidation method, which involves recognising its share of the jointly-controlled entities' assets, liabilities, income and expenses with similar items in the consolidated financial statements on a line-by-line basis. Unrealised gains and losses resulting from transactions between the Group and its jointly-controlled entities are eliminated to the extent of the Group's investments in the jointly-controlled entities, except where unrealised losses provide evidence of an impairment of the asset transferred. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

The results of joint ventures are included in the Company's income statement to the extent of dividends received and receivable. The Company's investments in joint ventures are treated as non-current assets and are stated at cost less any impairment losses.

Associates

An associate is an entity in which the Group has a long term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence and which is neither a subsidiary nor a joint venture of the Group. The Group's investments in its associates are accounted for under the equity method of accounting.

The investments in associates are carried in the consolidated statement of financial position at the Group's share of net assets of the associates, less any impairment losses. Goodwill arising from the acquisition of associates is included in the carrying amounts of the investments and is not individually tested for impairment. The Group's share of the post-acquisition results and reserves of associates is included in the consolidated income statement and consolidated reserves, respectively. Unrealised gains and losses resulting from transactions between the Group and its associates are eliminated to the extent of the Group's investments in the associates, except where unrealised losses provide evidence of an impairment of the asset transferred.

The financial statements of the associates are prepared for the same reporting year as the Company. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

The results of associates are included in the Company's income statement to the extent of dividends received and receivable. The Company's investments in associates are treated as non-current assets and are stated at cost less any impairment losses.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Business combinations and goodwill

Business combinations are accounted for using the acquisition method. The consideration transferred is measured at the acquisition date fair value which is the sum of the acquisition date fair values of assets transferred by the Group, liabilities assumed by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. The Group elects to measure the non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of net assets in the event of liquidation at the proportionate share of the acquiree's identifiable net assets. All other components of non-controlling interests are measured at fair value. Acquisition costs are expensed as incurred.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer's previously held equity interest in the acquiree is remeasured to fair value as at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the acquirer is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it will not be remeasured. Subsequent settlement is accounted within equity. In instances where the contingent consideration does not fall within the scope of IAS 39, it is measured in accordance with the appropriate IFRS.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognised for non-controlling interests and any fair value of the Group's previously held equity interests in the acquiree over the identifiable net assets acquired and liabilities assumed. If the sum of this consideration and other items is lower than the fair value of the net assets of the subsidiary acquired, the difference is, after reassessment, recognised in profit or loss as a gain on bargain purchase.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at 31 December. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised. An impairment loss recognised for goodwill is not reversed in a subsequent period.

Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Related parties

A party is considered to be related to the Group if:

(a) the party is a person or a close member of that person's family and that person (i) has control or joint control over the Group; (ii) has significant influence over the Group; or (iii) is a member of the key management personnel of the Group or of a parent of the Group.

(b) the party is an entity where any of the following conditions applies:

(i) the entity and the Group are members of the same group;

(ii) one entity is an associate or joint venture of the other entity (or of a parent, subsidiary or fellow subsidiary of the other entity);

(iii) the entity and the Group are joint ventures of the same third party;

(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;

(v) the entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group;

(vi) the entity is controlled or jointly controlled by a person identified in (a); and

(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

Property, plant and equipment and depreciation

Property, plant and equipment other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. When an item of property, plant and equipment is classified as held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated and is accounted for in accordance with
IFRS 5, as further explained in the accounting policy for "Non-current assets and disposal groups held for sale". The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where the recognition criteria are satisfied, the expenditure for a major inspection is capitalised in the carrying amount of the asset as a replacement. Where significant parts of property, plant and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property, plant and equipment and depreciation (Continued)

Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The estimated useful lives and residual values used for this purpose are as follows:

	Estimated useful life	Residual value	Depreciation rate

Aircraft and flight equipment:
Core parts of airframe and engine	15 to 25 years	5%	3.80%-6.33%
Overhaul of airframe and cabin refurbishment	5 to 12 years	Nil	8.33%-20%
Overhaul of engine	2 to 8 years	Nil	12.50%-50%
Rotable	3 to 20 years	Nil - 5%	4.75%-33.33%
Buildings	5 to 50 years	Nil - 10%	1.8%-20%
Machinery	4 to 20 years	Nil - 10%	4.50%-25%
Transportation equipment	3 to 20 years	Nil - 10%	4.50%-33.33%
Office equipment	4 to 8 years	Nil - 10%	11.25%-25%

Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

The assets' residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year end.

An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognised.

Fixed assets under finance leases are depreciated over the same terms as self-owned fixed assets. If it is reasonably assured that the ownership of the leased property could be transferred to the Group after the lease periods, the leased assets are depreciated over the lease term. Otherwise, leased assets are depreciated over the shorter of the estimated useful lives of the assets and the lease term.

Construction in progress represents buildings or various infrastructure projects under construction, and equipment pending for installation in aircraft. Construction in progress is stated at cost less any impairment losses and is not depreciated. Costs of construction in progress comprise the direct costs of construction, the cost of equipment as well as capitalised borrowing costs on related borrowed funds during the construction or installation period. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.

The carrying amounts of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Non-current assets held for sale

Non-current assets are classified as held for sale if their carrying amounts will be recovered principally through a sales transaction rather than through continuing use. For this to be the case, the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for the sale of such assets and its sale must be highly probable.

Non-current assets classified as held for sale are measured at the lower of their carrying amounts and fair values less costs to sell. Property, plant and equipment and intangible assets classified as held for sale are not depreciated or amortised.

Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are subsequently amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end.

Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level. Such intangible assets are not amortised. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for on a prospective basis.

The estimated useful life of intangible asset is as follows:

	Estimated
	useful life

Admission rights to Star Alliance	indefinite

Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Finance leases, which transfer to the Group substantially all the risks and rewards of ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Minimum lease payments are apportioned between the finance charges and reduction of the outstanding liability so as to achieve a constant periodical rate of interest on the remaining balance of the liability. Finance charges are charged to the income statement.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Leases (Continued)

Leases where the lessor retains substantially all the risks and rewards of ownership of the asset are classified as operating leases. Where the Group is the lessor, assets leased by the Group under operating leases are included in non-current assets and rentals receivable under the operating leases are credited to the income statement on the straight-line basis over the lease terms. Where the Group is the lessee, rentals payable under operating leases net of any incentives received from the lessor are charged to the income statement on the straight-line basis over the lease terms.

Prepaid land lease payments under operating leases are initially stated at cost and subsequently recognised on the straight-line basis over the lease terms. When the lease payments cannot be allocated reliably between the land and buildings elements, the entire lease payments are included in the cost of the land and buildings as a finance lease in property, plant and equipment.

Investment properties

Investment properties are interests in land and buildings (including the leasehold interest under an operating lease for a property which would otherwise meet the definition of an investment property) held to earn rental income and/or for capital appreciation.

Investment properties are measured initially at cost, including transaction costs. Subsequent costs are recognised in the carrying amount of the investment properties if it is probable that future economic benefits associated with the item will flow to the entity and the costs can be measured reliably. Otherwise, these costs are recognised in profit or loss as incurred.

The Group chooses the cost model to measure its investment properties.

Depreciation is calculated on the straight-line basis to write off the cost to its residual value over its estimated useful life. The estimated useful lives and residual values used for this purpose are as follows:

	Estimated useful life	Residual value	Depreciation rate

Buildings	20 to 30 years	5%	3.17%-4.75%
Lease prepayments	50 years	-	2%

The carrying amounts of investment properties measured at the cost model are reviewed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable.

Advance payments for aircraft and flight equipment

Advance contractual payments to aircraft manufacturers to secure deliveries of aircraft and flight equipment in future years, including attributable finance costs, are included in assets. The advances are accounted for as part of the cost of property, plant and equipment upon delivery of the aircraft and flight equipment.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impairment of non-financial assets other than goodwill

Where an indication of impairment exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognised in the income statement in the period in which it arises in those expense categories consistent with the function of the impaired asset.

An assessment is made at the end of each reporting period as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation) had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement in the period in which it arises.

Investments and other financial assets

Initial recognition and measurement

Financial assets of the Group within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial investments. The Group determines the classification of its financial assets at initial recognition. When financial assets are recognised initially, they are measured at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss.

All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

The Group's financial assets include cash and bank balances, trade and other receivables, loans and receivables and derivative financial instruments.

Subsequent measurement

The subsequent measurement of financial assets depends on their classifications as follows:

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments as defined by IAS 39. Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognised in the income statement. These net fair value changes do not include any dividends or interest earned on these financial assets, which are recognised in accordance with the policies set out for "Revenue recognition" below.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investments and other financial assets(Continued)

Subsequent measurement (Continued)

Financial assets at fair value through profit or loss (Continued)

Financial assets designated upon initial recognition at fair value through profit or loss are designated at the date of initial recognition and only if the criteria under IAS 39 are satisfied.

The Group evaluates its financial assets at fair value through profit or loss (held for trading) to assess whether the intent to sell them in the near term is still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets and management's intent to sell them in the foreseeable future significantly changes, the Group may elect to reclassify these financial assets. The reclassification from financial assets at fair value through profit or loss to loans and receivables, available-for-sale financial assets or held-to-maturity investments depends on the nature of the assets. This evaluation does not affect any financial assets designated at fair value through profit or loss using the fair value option at designation as these instruments cannot be reclassified after initial recognition.

Derivatives embedded in host contracts are accounted for as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contracts and the host contracts are not held for trading or designated at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required under the contract.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such assets are subsequently measured at amortised cost using the effective interest rate method less any allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and includes fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in finance revenue in the income statement. The loss arising from impairment is recognised in the income statement in finance costs for loans and general and administrative expenses for receivables.

Available-for-sale financial investments

Available-for-sale financial investments are those non-derivative financial assets in listed and unlisted equity investments. Equity investments classified as available for sale are those which are neither classified as held for trading nor designated at fair value through profit or loss.

After initial recognition, available-for-sale financial investments are subsequently measured at fair value, with unrealised gains or losses being recognised as other comprehensive income in the available-for-sale investment revaluation reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in the income statement, or until the investment is determined to be impaired, when the cumulative gain or loss is reclassified from the available-for-sale investment revaluation reserve to the income statement. Interest and dividends earned whilst holding the available-for-sale financial investments are reported as interest income and dividend income, respectively and are recognised in the income statement in accordance with the policies set out for "Revenue recognition" below.

When the fair value of unlisted equity investments cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such investments are stated at cost less any impairment losses.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investments and other financial assets(Continued)

Subsequent measurement (Continued)

Available-for-sale financial investments (Continued)

The Group evaluates whether the ability and intention to sell its available-for-sale financial assets in the near term are still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets and management's intent to do so significantly changes in the foreseeable future, the Group may elect to reclassify these financial assets. Reclassification to loans and receivables is permitted when the financial assets meet the definition of loans and receivables and the Group has the intent and ability to hold these assets for the foreseeable future or to maturity. Reclassification to the held-to-maturity category is permitted only when the Group has the ability and intent to hold until the maturity date of the financial asset.

For a financial asset reclassified from the available-for-sale category, the fair value carrying amount at the date of reclassification becomes its new amortised cost and any previous gain or loss on that asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the effective interest rate. Any difference between the new amortised cost and the maturity amount is also amortised over the remaining life of the asset using the effective interest rate. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the income statement.

Fair value of financial instruments

The fair value of financial instruments that are traded in active financial markets is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For financial instruments where there is no active market, the fair value is determined using appropriate valuation techniques. Such techniques include using recent arm's length market transactions, reference to the current market value of another instrument which is substantially the same, a discounted cash flow analysis and option pricing models.

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

• the rights to receive cash flows from the asset have expired; or

• the Group has transferred its rights to receive cash flows from the asset or has assumed obligations to pay the received cash flows in full without material delay to a third party under a "pass-through" arrangement, and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it revaluates if and to what extent it has retained the risk and rewards of ownership of the assets. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group's continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impairment of financial assets

The Group assesses at the end of each reporting period whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (an incurred "loss event") and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortised cost

For financial assets carried at amortised cost, the Group first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it included the assets in a group of financial assets with similar credit risk characteristics and collectively assessed them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset's original effective interest rate (i.e., the effective interest rate computed at initial recognition). If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group.

If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the income statement.

Assets carried at cost

If there is objective evidence that an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Impairment losses on these assets are not reversed.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impairment of financial assets(Continued)

Available-for-sale financial investments

For available-for-sale financial investments, the Group assesses at the end of each reporting period whether there is objective evidence that an investment or a group of investments is impaired.

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the income statement, is removed from other comprehensive income and recognised in the income statement.

Financial liabilities

Initial recognition and measurement

Financial liabilities of the Group within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, or loans and borrowings. The Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value plus, in the case of loans and borrowings, directly attributable transaction costs.

The Group's financial liabilities include trade and other payables, an amount due to the ultimate holding company, derivative financial instruments and interest-bearing loans and borrowings.

Subsequent measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are acquired for the purpose of sale in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the income statement. The net fair value gain or loss recognised in the income statement does not include any interest charged on these financial liabilities.

Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the date of initial recognition and only if the criteria of IAS 39 are satisfied.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial liabilities (Continued)

Subsequent measurement (Continued)

Loans and borrowings

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the effective interest rate amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in finance costs in the income statement.

Financial guarantee contracts

Financial guarantee contracts issued by the Group are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognised initially as a liability at its fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequent to initial recognition, the Group measures the financial guarantee contract at the higher of: (i) the amount of the best estimate of the expenditure required to settle the present obligation at the end of the reporting period; and (ii) the amount initially recognised less, when appropriate, cumulative amortisation.

Derecognition of financial liabilities

A financial liability is derecognised when the obligations under the liability is discharged or cancelled, or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in the income statement.

Treasury shares

Own equity instruments (treasury shares) are recognised at cost and deducted from equity. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of the Group's own equity instruments. Any difference between the carrying amount and the consideration is recognised in equity.

Inventories

Inventories, which consist primarily of expendable spare parts and supplies, are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis. Net realisable value is determined on the basis of anticipated sales proceeds less estimated costs to be incurred to completion and disposal.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounts receivable

Individually significant and impairment provided for

Accounts receivable that are individually significant are assessed for impairment individually.

Collectively significant and impairment provided for

The accounts receivable with similar credit risk characteristics, which are not individually significant but collectively significant, are collectively assessed for impairment. The percentages for the impairment are as follows:

	Percentages forimpairment

Receivables for sales of overseas tickets	5%
Receivables for ground services	1%

Individually insignificant but impairment provided for

Accounts receivable that are individually insignificant are assessed for impairment individually when events or changes in circumstances indicate that the carrying amounts may not be collectable.

Cash and cash equivalents

For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group's cash management.

For the purpose of the statement of financial position, cash and cash equivalents comprise cash on hand and at banks, including term deposits, and assets similar in nature to cash, which are not restricted as to use.

Manufacturers' credits

In connection with the acquisition of certain aircraft and flight equipment, the Group receives various credits from the manufacturers. Such credits are deferred until the aircraft and flight equipment are delivered, at which time they are applied as a reduction of the cost of acquiring the aircraft and flight equipment.

Provisions

A provision is recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an future outflow of resources will be required to settle the obligations and a reliable estimate can be made of the amount of the obligations. When the effect of discounting is material, the amount recognised for a provision is the present value at the end of the reporting period of the future expenditures expects to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in the income statement.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Employee benefits

(a) Pension obligations

The full-time employees of the Group are covered by various government-sponsored pension plans under which the employees are entitled to a monthly pension based on certain formulae. Certain government agencies are responsible for the pension liability to these retired employees. The Group contributes on a monthly basis to these pension plans. Under these plans, the Group has no legal or constructive obligations for retirement benefits beyond the contributions made. Contributions to these plans are expensed as incurred. In addition to these plans, the Company, Air China Cargo Co., Ltd. ("Air China Cargo"), Beijing Airlines, Shenzhen Airlines Co., Ltd ("Shenzhen Airlines") and so on also implements an additional defined contribution retirement scheme for voluntary employees. Contributions are made based on a percentage of the employees' total salaries and are charged to the income statement in accordance with the rules of the scheme.

(b) Termination and early retirement benefits

Termination benefits are payable whenever an employee's employment is voluntarily terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or to providing termination benefits as a result of an offer made to encourage voluntary redundancy.

All full-time employees of the Group are entitled to participate in various government-sponsored housing funds. The Group contributes on a monthly basis to these funds based on certain percentages of the salaries of the employees. The Group's liability in respect of these funds is limited to the contributions payable in each year.

(d) Share-based payment transactions

The Company operates a Share Appropriation Rights ("SARs") plan for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group's operations. Employees (including Directors) of the Group are entitled to a future cash payment (rather than an equity instrument) ("cash-settled transactions"), based on the increase in the entity's share price from a specified level over a specified period of time. The Company recognises the services received, and a liability to pay for those services, as the employees render service.

The cost of cash-settled transactions with employees is measured initially at fair value at the grant date using a binomial model. The liability is remeasured at each reporting date up to and including the settlement date, with any changes in fair value recognised in profit or loss for the period.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Maintenance and overhaul costs

In respect of aircraft and engines under operating leases, the Group has the responsibility to fulfil certain return conditions under the relevant operating leases. In order to fulfil these return conditions, major overhauls are required to be conducted on a regular basis. Accordingly, estimated costs of major overhauls for aircraft and engines under operating leases are accrued and charged to the income statement over the estimated period between overhauls using the ratios of actual flying hours/cycles and estimated flying hours/cycles between overhauls. The costs of major overhauls comprise mainly labour and materials. Differences between the estimated costs and the actual costs of overhauls are included in the income statement in the period of overhaul.

In respect of aircraft and engines owned by the Group or held under finance leases, costs of major overhauls are recognised in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are satisfied. Overhaul components subject to replacement during major overhauls are depreciated over the expected life between major overhauls.

All other routine repair and maintenance costs incurred in restoring such property, plant and equipment to their normal working condition are charged to the income statement as and when incurred.

Frequent-flyer programmes

The Group operates frequent-flyer programmes which allow customers to earn miles when they purchase air tickets from the Group. The miles can then be redeemed for free services or products, subject to a minimum number of points to be obtained. The consideration received or receivable from the tickets sold is allocated between the miles earned by the frequent-flyer programme members and the other components of the sales transactions. The fair value allocated to the miles earned by the frequent-flyer programme members is deferred until the miles are redeemed when the Group fulfil its obligations to supply services or products or when the miles expire.

Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

(a) Provision of airline and airline-related services

Passenger revenue is recognised either when transportation services are provided or when an unused ticket expires rather than when a ticket is sold. Ticket sales for transportation not yet provided are included in current liabilities as air traffic liabilities. In addition, the Group has code-sharing agreements with other airlines under which a carrier's flights can be marketed under the two-letter airline designator code of another carrier. Revenues earned under these arrangements are allocated between the code share partners based on existing contractual agreements and airline industry standard pro-ratio formulae and are recognised as passenger revenue when the transportation services are provided.

Cargo and mail revenue is recognised when transportation services are provided.

Revenue from airline-related services is recognised when the relevant services are rendered.

Revenue is stated net of business tax.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue recognition (Continued)

(b) Sale of goods

Revenue is recognised when the significant risks and rewards of ownership of the goods have been passed to the buyer.

Revenue is recognised on a time proportion basis taking into account the principal outstanding and the effective rate of interest applicable.

(d) Dividend income

Revenue is recognised when the Group's right to receive payments is established.

(e) Rental income and aircraft and flight equipment lease income

Revenue is recognised on a time proportion basis over the terms of the respective leases.

Government grants

Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate.

Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual instalments or deducted from the carrying amount of the asset and released to the income statement by way of a reduced depreciation charge.

Where the Group receives a non-monetary grant, the asset and the grant are recorded at the fair value of the non-monetary asset and released to the income statement over the expected useful life of the relevant asset by equal annual instalments.

Income tax

Income tax comprises current and deferred tax. Income tax relating to items recognised outside profit or loss is recognised outside profit or loss, either in other comprehensive income or directly in equity.

Current tax

Current tax assets and liabilities for the current and prior periods are measured at the amounts expected to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period, taking into consideration interpretations and practices prevailing in the countries in which the Group operates. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the end of the reporting period.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income tax (Continued)

Deferred tax

Deferred income tax is provided, using the liability method on temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

• when the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, the carryforward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, the carryforward of unused tax credits and unused tax losses can be utilised, except:

• when the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with investments in subsidiaries, associates and joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and sufficient taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at the end of each reporting period and are recognised to the extent that it has become probable that sufficient taxable profit will be available to allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Borrowing costs

Borrowing costs directly attributable to the acquisition of aircraft, construction or production of qualifying assets, that is, assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the costs of those assets. The capitalisation of aircraft borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalised. All other borrowing costs are expensed in the period in which they are incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

Where funds have been borrowed generally, and used for the purpose of obtaining qualifying assets, a capitalisation rate ranging between 1.24% and 8.23% (2010: ranging between 0.80% and 7.13%) has been applied to the expenditure on the individual asset.

Dividends

Interim dividends and final dividends proposed by the Directors are classified as a separate allocation of retained earnings within the equity section of the statement of financial position, until they have been approved by the shareholders in a general meeting. When these dividends have been approved by the shareholders and declared, they are recognised as a liability.

Significant accounting judgements and estimates

The preparation of the Group's financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future.

Judgements

In the process of applying the Group's accounting policies, management has made judgements regarding revenue recognition, classification of leases, classification of financial instruments, impairment indication of financial assets, classification of assets held for sale, derecognition of financial instruments, which have the most significant effect on the amounts recognised in the financial statements.

Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below.

(a) Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating units and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2011 was RMB1,311 million (2010: RMB1,658 million). More details are given in note 19 to the financial statements.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Estimation uncertainty (Continued)

(b) Impairment of non-financial assets (other than goodwill)

The Group assesses whether there are any indicators of impairment for all non-financial assets at the end of each reporting period. Indefinite life intangible assets are tested for impairment annually and at other times when such indicator exists. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. An impairment exists when the carrying value of an asset or a cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The calculation of the fair value less costs to sell is based on available data from binding sales transactions in an arm's length transaction of similar assets or observable market prices less incremental costs for disposal of the asset. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows.

Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to estimate the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies.

(d) Overhaul cost

Cost of overhaul for aircraft and engines under operating leases are accrued and charged to the income statement over the estimated overhaul period. This requires estimation of the expected flying hours/cycles, overhaul cost and overhaul cycle, which are largely based on the past experience of overhauls of aircraft and engines of the same or similar types. Different estimates could significantly affect the estimated overhaul provision and the results of operations.

(e) Deferred income

The amount of revenue attributable to the miles earned by the members of the Group's frequent-flyer programme is estimated based on the fair value of the miles awarded and the expected redemption rate. The fair value of the miles awarded is estimated by reference to external sales. The expected redemption rate was estimated considering the number of the miles that will be available for redemption in the future after allowing for miles which are not expected to be redeemed.

(f) Early retirement benefits

Early retirement benefits are incurred and charged to the income statement when the conditions for early retirement are realised. The estimated liabilities were affected by the uncertainty of the changes in salary standards, life expectancy of early retired employees and discount rate.

(g) Fair value of financial instruments

Where the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived directly from active markets, they are determined using valuation techniques. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimation is required in establishing fair values. The estimation includes considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Estimation uncertainty (Continued)

(h) Share-based payments

The Group measures the cost of cash-settled transactions with employees by reference to the instruments at the date at which they are granted. Estimating fair value for share-based payments requires determining the most appropriate valuation model for a grant of instruments, which is dependent on the terms and conditions of the grant. This also requires determining the most appropriate inputs to the valuation model and making assumptions about them.

Changes in accounting estimation

In order to improve the quality of services, the Company decided to implement a cabin refurbishment plan. The cabin refurbishment involving replacement of cabin facilities are recognized in the carrying amount of the property, plant and equipment and depreciated over the cabin refurbishment cycle if the recognition criteria are satisfied. Otherwise, the replacement costs are included in the income statement in the period of refurbishment. Accordingly, the accounting estimation is changed in regard to the useful life and residue value of the cabin facilities, which satisfy the capitalisation criteria. Such cabin facilities were previously included in the core part of airframe and depreciated over 20 years with a 5% residue value. After the changes, the cabin refurbishment costs are depreciated over the cabin refurbishment cycle with the residue value as nil. The changes of accounting estimate are prospectively applied in October, 2011.

The effect of the above mentioned changes is summarised as follows:

Group

2011	Before changes Ending balance/ Current year	Changes in Accounting Estimation Depreciation rate	After changes Ending balance/ Current year
	RMB'000	RMB'000	RMB'000


Property, plant and equipment	112,526,441	(127,010)	112,399,431
Tax payable	1,739,305	(31,752)	1,707,553
Reserves	36,208,501	(95,258)	36,113,243
Depreciation	9,433,897	127,010	9,560,907
Tax	2,323,825	(31,752)	2,292,073

Company

2011	Before changes Ending balance/ Current year	Changes in Accounting Estimation Depreciation rate	After changes Ending balance/ Current year
	RMB'000	RMB'000	RMB'000


Property, plant and equipment	80,477,841	(127,010)	80,350,831
Tax payable	1,254,964	(31,752)	1,223,212
Reserves	30,357,971	(95,258)	30,262,713
Depreciation	7,170,955	127,010	7,297,965
Tax	1,733,247	(31,752)	1,701,495

3 OPERATING SEGMENT INFORMATION

The Group's operating businesses are structured and managed separately, according to the nature of their operations and the services they provide. The Group has the following reportable operating segments:

(a) the "airline operations" segment which comprises the provision of air passenger and air cargo services; and

(b) the "other operations" segment which comprises the provision of aircraft engineering, ground services and other airline-related services.

In determining the Group's geographical information, revenue is attributed to the segments based on the origin and destination of each flight. Assets, which consist principally of aircraft and ground equipment, supporting the Group's worldwide transportation network, are mainly located in Mainland China. An analysis of assets of the Group by geographical distribution has therefore not been included.

Intersegment sales and transfers are transacted with reference to the selling prices used for sales made to third parties at the then prevailing market prices.

Operating segments

The following tables present the Group's consolidated revenue and profit before tax regarding the Group's operating segments in accordance with China Accounting Standards for Business Enterprises (the "CASs") for the years ended 31 December 2011 and 2010 and the reconciliations of reportable segment revenue and profit before tax to the Group's consolidated amounts under IFRSs:

Year ended 31 December 2011

	Airline operations	Other operations	Eliminations	Total
	RMB'000	RMB'000	RMB'000	RMB'000


REVENUE
Sales to external customers	96,998,433	140,678	-	97,139,111
Intersegment sales	-	1,215,116	(1,215,116)	-


Total revenue for reportable segments under CASs	96,998,433	1,355,794	(1,215,116)	97,139,111


Business tax not included in segment revenue				(2,267,856)
Other income not included in segment revenue				1,498,578
Effects of differences between IFRSs and CASs				2,039,669


Revenue for the year under IFRSs				98,409,502


SEGMENT PROFIT BEFORE TAX
Profit before tax for reportable segments under CASs	10,028,990	92,529	-	10,121,519


Effects of differences between IFRSs and CASs				(766,780)


Profit before tax for the year under IFRSs				9,354,739

3 OPERATING SEGMENT INFORMATION (Continued)

Operating segments (Continued)

Year ended 31 December 2010

	Airline operations	Other operations	Eliminations	Total
	RMB'000	RMB'000	RMB'000	RMB'000


REVENUE
Sales to external customers	80,927,043	35,634	-	80,962,677
Intersegment sales	-	935,326	(935,326)	-


Total revenue for reportable segments under CASs	80,927,043	970,960	(935,326)	80,962,677


Business tax not included in segment revenue				(1,628,290)
Other income not included in segment revenue				1,232,350
Effects of differences between IFRSs and CASs				1,920,802


Revenue for the year under IFRSs				82,487,539


SEGMENT PROFIT BEFORE TAX
Profit before tax for reportable segments under CASs	14,858,562	166,500	-	15,025,062


Effects of differences between IFRSs and CASs				(191,450)


Profit before tax for the year under IFRSs				14,833,612

3 OPERATING SEGMENT INFORMATION (Continued)

Operating segments (Continued)

The following tables present the segment assets, liabilities and other information of the Group's operating segments under CASs as at 31 December 2011 and 31 December 2010 and the reconciliations of reportable segment assets, liabilities and other information to the Group's consolidated amounts under IFRSs:

	Airline operations	Other operations	Eliminations	Total
	RMB'000	RMB'000	RMB'000	RMB'000


SEGMENT ASSETS

Total assets for reportable segments as at 31 December 2011 under CASs	172,951,576	4,961,357	(4,589,365)	173,323,568


Effects of differences between IFRSs and CASs				2,526,504


Total assets under IFRSs				175,850,072


Total assets for reportable segments as at 31 December 2010 under CASs	153,816,518	2,968,976	(1,565,881)	155,219,613


Effects of differences between IFRSs and CASs				3,549,918


Total assets under IFRSs				158,769,531

	Airline operations	Other operations	Eliminations	Total
	RMB'000	RMB'000	RMB'000	RMB'000


SEGMENT LIABILITIES

Total liabilities for reportable segments as at 31 December 2011 under CASs	127,360,960	1,050,452	(4,589,365)	123,822,047


Effects of differences between IFRSs and CASs				3,702,590


Total liabilities under IFRSs				127,524,637


Total liabilities for reportable segments as at 31 December 2010 under CASs	114,166,219	919,955	(1,565,881)	113,520,293


Effects of differences between IFRSs and CASs				3,878,001


Total liabilities under IFRSs				117,398,294

3 OPERATING SEGMENT INFORMATION (Continued)

Operating segments (Continued)

	Airline operations	Other operations	Eliminations	Total	Effects of Differences Between IFRSs andCASs	Amounts under IFRSs
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


OTHER SEGMENT INFORMATION

Year ended 31 December 2011

Share of profits and losses of associates	1,288,914	39,884	-	1,328,798	-	1,328,798
Impairment losses recognised in the income statement	1,969,970	176,846	-	2,146,816	708,095	2,854,911
Finance revenue	3,273,134	27,391	-	3,300,525	60,770	3,361,295
Finance costs	1,436,334	296	-	1,436,630	157,385	1,594,015
Tax	2,196,417	27,493	-	2,223,910	68,163	2,292,073

Interests in associates	13,060,493	314,730	-	13,375,223	21,808	13,397,031

Capital expenditure	30,092,582	8,488	-	30,101,070	457,554	30,558,624
Depreciation and amortisation	9,509,045	8,963	-	9,518,008	96,146	9,614,154

	Airline operations	Other operations	Eliminations	Total	Effects of Differences Between IFRSs and CASs	Amounts under IFRSs
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Year ended 31 December 2010

Share of profits and losses of associates	3,324,164	51,161	-	3,375,325	-	3,375,325
Impairment losses recognised in the income statement	2,098,127	129	-	2,098,256	314,741	2,412,997
Finance revenue	1,942,202	12,394	-	1,954,596	25,419	1,980,015
Finance costs	1,413,283	1,788	-	1,415,071	34,178	1,449,249
Tax	2,554,237	16,067	-	2,570,304	(72,556)	2,497,748

Interests in associates	13,803,512	328,590	-	14,132,102	56,324	14,188,426

Capital expenditure	17,371,014	5,410	-	17,376,424	41,686	17,418,110
Depreciation and amortisation	8,568,096	6,608	-	8,574,704	81,705	8,656,409

3 OPERATING SEGMENT INFORMATION (Continued)

Geographical information

The following table presents the geographical information of the Group's consolidated revenue under IFRSs for the years ended 31 December 2011 and 2010:

Year ended 31 December 2011

	Mainland China	Hong Kong, Macau and Taiwan	Europe	North America	Japan and Korea	Asia Pacific and others	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Sales to external customers and total revenue	66,154,716	4,335,880	10,464,556	6,984,158	6,110,530	4,359,662	98,409,502

Year ended 31 December 2010

	Mainland China	Hong Kong, Macau and Taiwan	Europe	North America	Japan and Korea	Asia Pacific and others	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Sales to external customers and total revenue	52,441,112	4,212,616	9,848,721	6,008,965	5,818,381	4,157,744	82,487,539

Information about a major customer

There was no revenue from transactions with a single customer amounting to 10% or more of the Group's revenue during the year (2010: Nil).

4 AIR TRAFFIC REVENUE

Air traffic revenue represents revenue from the Group's airline operation business and is stated net of business tax. An analysis of the Group's air traffic revenue during the year is as follows:

	2011	2010
	RMB'000	RMB'000


Passenger	83,510,323	68,137,672
Cargo and mail	9,833,098	10,071,516


	93,343,421	78,209,188

Air traffic revenue for all domestic flights were subject to a business tax rate of 3%. Pursuant to the relevant business tax rules and regulations in Mainland China, all international, Hong Kong, Macau and Taiwan regional flights are exempted from business tax with effect from 1 January 2010. Business tax incurred and set off against air traffic revenue for the year ended 31 December 2011 amounted to approximately RMB2,128 million (2010: RMB1,544 million).

5 OTHER OPERATING REVENUE

	2011	2010
	RMB'000	RMB'000


Aircraft engineering income	730,746	639,194
Ground service income	724,346	681,883
Service charges on return of unused flight tickets	574,136	417,130
Income from other travelling services	535,482	439,219
Government grants and subsidies:
Recognition of deferred income (note 41(b))	240,486	83,277
Others	938,120	702,995
Gain on disposal of property, plant and equipment, net	252,662	159,011
Cargo handling service income	167,934	164,407
Revaluation gain on acquisition of a subsidiary	-	150,628
Rental income:
Aircraft and flight equipment	44,802	76,342
Others	42,489	45,382
Training service income	81,051	63,852
Sale of materials	24,966	21,953
Import and export service income	16,400	16,427
Others	692,461	616,651


	5,066,081	4,278,351

6 EMPLOYEE COMPENSATION COSTS

An analysis of the Group's employee compensation costs, including the emoluments of Directors and supervisors, is as follows:

	2011	2010
	RMB'000	RMB'000


Wages, salaries and social security costs	11,002,334	9,046,461
Retirement benefit costs (note 10)	1,274,561	795,233
Share-based benefits (note 45)	(6,830)	10,241


	12,270,065	9,851,935

7 PROFIT FROM OPERATIONS

The Group's profit from operations is arrived at after charging/(crediting):

	2011	2010
	RMB'000	RMB'000


Auditors' remuneration	18,370	13,051
Depreciation (note 15)	9,560,907	8,569,370
Impairment of property, plant and equipment (note 15)	2,237,403	1,863,194
Gain on disposal of property, plant and equipment, net	252,662	159,011
Losses on derecognition of property, plant and equipment	31,345	55,434
Amortisation of lease prepayments (note 16)	53,247	87,039
Minimum lease payments under operating leases:
Aircraft and flight equipment	3,931,549	3,483,180
Land and buildings	583,338	600,296
Impairment of aircraft and flight equipment held for sale (note 26)	99,669	185,992
Impairment of goodwill (note 19)	176,891	-
Impairment of interests in associates	19,810	-
Impairment of inventories	77,785	236,219
Impairment of accounts receivable (note 28)	3,771	8,983
Impairment of prepayments, deposits and other receivables (note 29)	239,582	118,609

8 FINANCE REVENUE AND FINANCE COSTS

An analysis of the Group's finance revenue and finance costs during the year is as follows:

Finance revenue

	2011	2010
	RMB'000	RMB'000


Exchange gains, net	3,117,700	1,919,415
Interest income	240,234	60,307
others	3,361	293


	3,361,295	1,980,015

8 FINANCE REVENUE AND FINANCE COSTS(Continued)

Finance costs

	2011	2010
	RMB'000	RMB'000


Interest on interest-bearing bank loans and other borrowings	1,869,764	1,497,429
Interest on finance leases	326,771	110,903
Loss on interest rate derivative contracts and forward foreign exchange contracts, net	41,122	206,707


	2,237,657	1,815,039


Less: Interest capitalised	(643,642)	(365,790)


	1,594,015	1,449,249

The interest capitalisation rates range from 1.24% to 8.23% (2010: 0.80% to 7.13%) per annum relating to the costs of related borrowings during the year.

9 REMUNERATION OF Directors, SUPERVISORS AND FIVE HIGHEST PAID EMPLOYEES

Remuneration of the Company's Directors and supervisors for the year disclosed pursuant to the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange and Section 161 of the Hong Kong Companies Ordinance is as follows:

	Group
	2011	2010
	RMB'000	RMB'000


Fees	322	240
Basic salaries, housing benefits, other allowances and benefits in kind	908	1,025
Discretionary bonuses	1,300	1,139
Retirement benefits	193	113
Share appreciation rights	947	-


	3,670	2,517

9 REMUNERATION OF Directors, SUPERVISORS AND FIVE HIGHEST PAID EMPLOYEES (Continued)

	Fees	Basic salaries, Housing benefits, other allowances and benefits in kind in kind	Discretionary bonuses bonuses	Retirement benefits	SARs⁽⁴⁾	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Year ended 31 December 2011

Directors
Kong Dong	-	-	-	-	341	341
Wang Yinxiang	-	-	-	-	-	-
Sun Yude	-	-	-	-	-	-
Cao Jianxiong	-	-	-	-	-	-
Christopher Dale Pratt	-	-	-	-	-	-
Ian Sai Cheung Shiu	-	-	-	-	-	-
Cai Jianjiang	-	278	591	67	322	1,258
Fan Cheng	-	274	553	62	284	1,173
Li Shuang	84	-	-	-	-	84
Fu Yang	84	-	-	-	-	84
Han Fangming	84	-	-	-	-	84
Yang Yuzhong⁽¹⁾	60	-	-	-	-	60
Jia Kang⁽¹⁾	10	-	-	-	-	10


	322	552	1,144	129	947	3,094

Supervisors
He Chaofan⁽³⁾	-	-	-	-	-	-
Zhou Feng⁽³⁾	-	-	-	-	-	-
Chen Bangmao⁽²⁾	-	-	-	-	-	-
Xiao Yanjun⁽²⁾	-	146	65	24	-	235
Su Zhiyong	-	210	91	40	-	341
Li Qinglin	-	-	-	-	-	-
Zhang Xueren	-	-	-	-	-	-


	-	356	156	64	-	576


	322	908	1,300	193	947	3,670

Fees of RMB322,000 were paid or payable to the Company's Independent Non-executive directors during the year. There were no other emoluments payable to the Independent Non-executive directors during the year.

(1) On 26 May 2011, Jia Kang resigned as Directors of the Company. On the same date, Yang Yuzhong was appointed as Directors of the Company to fill the vacancy.

(2) On 16 June 2011, Chen Bangmao resigned as supervisors of the Company. On the same date, Xiao Yanjun was appointed as supervisors of the Company to fill the vacancy.

(3) On 25 November 2011, He Chaofan resigned as supervisors of the Company. On the same date, Zhou Feng was appointed as supervisors of the Company to fill the vacancy.

(4) Up to 31 December 2011, 70% of SARs were vested and the amount represents the total vested part.

9 REMUNERATION OF Directors, SUPERVISORS AND FIVE HIGHEST PAID EMPLOYEES (Continued)

	Fees	Basic salaries, Housing benefits, other allowances and benefits in kind	Discretionary bonuses	Retirement benefits	SARs⁽⁴⁾
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Year ended 31 December 2010

Directors
Kong Dong	-	-	-	-	-
Wang Yinxiang⁽²⁾	-	-	-	-	-
Sun Yude⁽²⁾	-	-	-	-	-
Wang Shixiang	-	-	-	-	-
Cao Jianxiong	-	-	-	-	-
Christopher Dale Pratt	-	-	-	-	-
Chen Nan Lok Philip⁽²⁾	-	-	-	-	-
Ian Sai Cheung Shiu⁽²⁾	-	-	-	-	-
Cai Jianjiang	-	275	492	29	796
Fan Cheng	-	252	431	29	712
Hu Hung Lick, Henry⁽¹⁾	50	-	-	-	50
Zhang Ke⁽¹⁾	50	-	-	-	50
Jia Kang	60	-	-	-	60
Fu Yang	60	-	-	-	60
Li Shuang⁽¹⁾	10	-	-	-	10
Han Fangming⁽¹⁾	10	-	-	-	10


	240	527	923	58	1,748

Supervisors
Sun Yude⁽³⁾	-	-	-	-	-
He Chaofan	-	-	-	-	-
Zhou Guoyou⁽³⁾	-	-	-	-	-
Chen Bangmao	-	302	135	26	463
Su Zhiyong	-	196	81	29	306
Li Qinglin⁽³⁾	-	-	-	-	-
Zhang Xueren⁽³⁾	-	-	-	-	-


	-	498	216	55	769


	240	1,025	1,139	113	2,517

Fees of RMB240,000 were paid or payable to the Company's Independent Non-executive directors during the year. There were no other emoluments payable to the Independent Non-executive directors during the year.

(1) On 28 October 2010, Hu Hung Lick, Henry and Zhang Ke resigned as Directors of the Company. On the same date, Li Shuang and Han Fangming were appointed as Directors of the Company to fill the vacancy.

(2) On 1 July 2010 and 28 October 2010, respectively, Chen Nan Lok, Philip and Wang Shixiang resigned as Directors of the Company. On 28 October 2010, Sun Yude and Ian Sai Cheung Shiu were appointed as Directors of the Company to fill the vacancy.

(3) On 28 October 2010, Sun Yude and Zhou Guoyou resigned as supervisors of the Company. On the same date, Li Qinglin and Zhang Xueren were appointed as supervisors of the Company to fill the vacancy.

9 REMUNERATION OF Directors, SUPERVISORS AND FIVE HIGHEST PAID EMPLOYEES (Continued)

An analysis of the five highest paid employees within the Group is as follows:

	Group
	2011	2010
	Number of individuals	Number of individuals


Directors	2	-
Employees	3	5

The five highest paid employees during the year included two (2010: Nil) Directors, details of whose remuneration are set out above. Details of the remuneration of the remaining three (2010: Five) non-directors, highest paid employees for the year are as follows:

	Group
	2011	2010
	RMB'000	RMB'000


Basic salaries, housing benefits, other allowances and benefits in kind	4,569	5,404
Retirement benefits	52	86


	4,621	5,490

The number of these three (2010: five) non-director and non-supervisor highest paid employees whose remuneration for the year fell within the following bands is as follows:

	Group
	2011	2010
	Number of individuals	Number of individuals


HK$1,000,001 to HK$1,500,000
(equivalent to 2011: RMB810,700 to RMB1,216,050)
(2010: RMB850,930 to RMB1,276,395)	-	5
HK$1,500,001 to HK$2,000,000
(equivalent to 2011: RMB1,216,051 to RMB1,621,400)
(2010: RMB1,276,396 to RMB1,701,860)	2	-
HK$2,000,001 to HK$2,500,000
(equivalent to 2011: RMB1,621,401 to RMB2,026,750)
(2010: RMB1,701,861 to RMB2,127,325)	1	-


	3	5

There was no arrangement under which a Director or a Supervisor waived or agreed to waive any remuneration during the year (2010: Nil).

10 RETIREMENT BENEFIT COSTS

The retirement benefit costs in relation to the defined contribution retirement scheme and early retirement benefits are as follows:

	Group
	2011	2010
	RMB'000	RMB'000


Contributions to defined contribution retirement scheme	1,255,198	764,882
Early retirement benefits	19,363	30,351


Total retirement benefit costs (note 6)	1,274,561	795,233

As at 31 December 2011, no forfeited contributions were available to reduce the Group's contributions to the defined contribution retirement scheme operated by the Group in future years (2010: Nil).

11 TAX

Under the relevant Corporate Income Tax Law and regulations in the PRC, except for a subsidiary which is taxed at the preferential rate of 24% (2010: 22%) and two joint ventures which are taxed at the preferential rates from 12.5% to 15% (2010: 12.5% to 22%), all group companies located in Mainland China are subject to a corporate income tax rate of 25% (2010: 25%). Subsidiaries in Hong Kong and Macau are taxed at the profits tax rate of 16.5% (2010:16.5%) and 12% (2010: 12%), respectively.

The determination of current and deferred income taxes was based on the enacted tax rates. Major components of income tax charge are as follows:

	Group
	2011	2010
	RMB'000	RMB'000


Current income tax:
Mainland China	2,968,108	2,506,846
Hong Kong and Macau	1,662	1,197


	2,969,770	2,508,043

Deferred income tax (note 25)	(677,697)	(10,295)


Income tax charge for the year	2,292,073	2,497,748

11 TAX (Continued)

The Group's share of tax charge attributable to associates amounting to RMB280,541,000 (2010: RMB548,527,000) is included in the "Share of profits and losses of associates" on the face of the consolidated income statement.

A reconciliation of the tax expense applicable to profit before tax at the statutory rate for Mainland China in which the Company and the majority of its subsidiaries and joint ventures are domiciled to the tax expense at the effective tax rate, and a reconciliation of the statutory tax rate to the effective tax rate, are as follows:

	Group
	2011		2010
	RMB'000	%	RMB'000	%


Profit before tax	9,354,739		14,833,612


Tax at the statutory tax rate	2,338,685	25.0	3,708,403	25.0
Tax effect of share of profits and losses of associates	(332,199)	(3.5)	(843,832)	(5.7)
Lower income tax rates enacted by other territories	(93,621)	(1.0)	(74,783)	(0.5)
Adjustment in respect of current income tax of previous periods	(98,922)	(1.1)	(55,249)	(0.4)
Income not subject to tax	(39,958)	(0.4)	(33,208)	(0.2)
Expenses not deductible for tax	53,425	0.6	25,222	0.2
Utilisation of tax losses not recognised in prior years	(24,819)	(0.3)	(21,669)	(0.1)
Deductible temporary differences and tax losses not recognised	489,482	5.2	-	-
Utilisation of deductible temporary differences not recognised in prior years	-	-	(169,479)	(1.2)
Revaluation gain on acquisition of a subsidiary	-	-	(37,657)	(0.3)


At the Group's effective income tax rate	2,292,073	24.5	2,497,748	16.8

As at 31 December 2011, there was unrecognised deferred tax liability of RMB37,657,000 (2010: RMB37,657,000) for taxes that would be payable on the disposal of a subsidiary as the Directors are of the view that the Company is able to control the timing of the disposal and they have no intention to dispose of this subsidiary in the foreseeable future.

There are no income tax consequences attaching to the payment of dividends by the Company to its shareholders.

12 PROFIT ATTRIBUTABLE TO OWNERS OF THE PARENT

The consolidated profit attributable to owners of the parent for the year ended 31 December 2011 includes a profit of approximately RMB5,798 million (2010: RMB7,352 million), which was arrived at after deducting dividend income received from subsidiaries, joint ventures and associates aggregating approximately RMB725 million (2010: RMB60 million) from the Company's total comprehensive income of approximately RMB6,523 million (2010: RMB7,412 million), that has been dealt with in the financial statements of the Company (note 44).

13 APPROPRIATIONS

	Company
	2011	2010
	RMB'000	RMB'000


Proposed final dividend	1,521,251	1,523,829

Under the PRC Company Law and the Company's articles of association, profit after tax as reported in the PRC statutory financial statements can only be distributed as dividends after allowances have been made for the following:

(i) making up prior years' cumulative losses, if any;

(ii) allocations to the statutory common reserve fund of at least 10% of after-tax profit, until the fund aggregates 50% of the Company's registered capital (for the purpose of calculating transfers to reserves, profit after tax would be the amount determined under CASs. The transfers to reserves should be made before any distribution of dividends to shareholders. The statutory common reserve fund can be used to offset previous years' losses, if any, and part of the statutory common reserve fund can be capitalised as the Company's share capital provided that the amount of such reserve remaining after the capitalisation shall not be less than 25% of the share capital of the Company); and

(iii) allocations to the discretionary common reserve if approved by the shareholders.

The above reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends.

In accordance with the Company's articles of association, the profit after tax of the Company for the purpose of dividend distribution is based on the lesser of (i) the profit determined in accordance with CASs; and (ii) the profit determined in accordance with IFRSs.

14 EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

The calculation of basic earnings per share for the year ended 31 December 2011 was based on the profit attributable to equity holders of the Company for the year ended 31 December 2011 of approximately RMB7,082 million and the weighted average of 12,161,502,125 ordinary shares in issue during the year, as adjusted to reflect the weighted average number of treasury shares held by Cathay Pacific through reciprocal shareholding.

The calculation of basic earnings per share for the year ended 31 December 2010 was based on the profit attributable to equity holders of the Company for the year ended 31 December 2010 of approximately RMB12,005 million and the weighted average of 11,644,528,123 ordinary shares in issue during the year, as adjusted to reflect the weighted average number of treasury shares held by Cathay Pacific through reciprocal shareholding after considering the dilution effect caused by the additional issue of shares during the year.

No adjustment has been made to the basic earnings per share amounts presented for the years ended 31 December 2011 and 2010 in respect of a dilution as the Group had no potentially dilutive ordinary shares in issue during both years.

15 PROPERTY, PLANT AND EQUIPMENT

Group

	Aircraft and flight equipment	Buildings	Machinery	Transportation equipment	Office equipment	Construction in progress	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


As at 1 January 2010, net of accumulated depreciation and impairment	65,007,440	3,676,394	1,264,545	720,183	223,010	4,153,298	75,044,870
Additions	1,450,086	14,579	59,416	121,001	269,964	11,801,578	13,716,624
Acquisition of a subsidiary	15,667,878	904,864	456,138	83,762	22,750	1,209,396	18,344,788
Disposals	(200,099)	(20,704)	(18,711)	(12,382)	(3,256)	-	(255,152)
Transfer from construction in progress	10,719,125	1,491,894	228,753	19,184	9,012	(12,467,968)	-
Reclassification to aircraft and flight equipment held for sale under current assets (note 26)	(259,552)	-	-	-	-	-	(259,552)
Impairment (note 7)	(1,863,008)	-	-	(186)	-	-	(1,863,194)
Depreciation charge for the year (note 7)	(7,861,370)	(190,428)	(205,266)	(153,581)	(158,725)	-	(8,569,370)
Exchange realignment	(5,944)	(108)	(80)	(330)	(10)	-	(6,472)


As at 31 December 2010 and 1 January 2011, net of accumulated depreciation and impairment	82,654,556	5,876,491	1,784,795	777,651	362,745	4,696,304	96,152,542
Additions	1,785,258	91,036	297,576	132,183	79,282	27,568,686	29,954,021
Disposals	(1,342,150)	(44,586)	(82,777)	(3,744)	(11,130)	-	(1,484,387)
Transfer from construction in progress	23,680,416	117,549	210,456	46,939	21,349	(24,076,709)	-
Reclassification to investment properties (note 17)	-	(197,913)	-	-	-	-	(197,913)
Reclassification to aircraft and flight equipment held for sale under current assets (note 26)	(183,904)	-	-	-	-	-	(183,904)
Impairment* (note 7)	(2,237,403)	-	-	-	-	-	(2,237,403)
Depreciation charge for the year (note 7)	(8,689,759)	(269,420)	(314,627)	(167,627)	(119,474)	-	(9,560,907)
Derecognition of a joint venture	(27,927)	-	(3,680)	(1,986)	(428)	-	(34,021)
Exchange realignment	(7,867)	-	(81)	(639)	(10)	-	(8,597)


As at 31 December 2011, net of accumulated depreciation and impairment	95,631,220	5,573,157	1,891,662	782,777	332,334	8,188,281	112,399,431


As at 31 December 2010 and 1 January 2011:
Cost	140,046,596	7,911,206	4,114,100	2,135,748	887,055	4,696,304	159,791,009
Accumulated depreciation and impairment	(57,392,040)	(2,034,715)	(2,329,305)	(1,358,097)	(524,310)	-	(63,638,467)


Net book value	82,654,556	5,876,491	1,784,795	777,651	362,745	4,696,304	96,152,542


As at 31 December 2011:
Cost	159,995,048	7,742,054	4,445,902	2,254,321	911,758	8,188,281	183,537,364
Accumulated depreciation and impairment	(64,363,828)	(2,168,897)	(2,554,240)	(1,471,544)	(579,424)	-	(71,137,933)


Net book value	95,631,220	5,573,157	1,891,662	782,777	332,334	8,188,281	112,399,431

15 PROPERTY, PLANT AND EQUIPMENT(Continued)

Company

	Aircraft and flight equipment	Buildings	Machinery	Transportation equipment	Office equipment	Construction in progress	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


As at 1 January 2010, net of accumulated depreciation and impairment	61,578,625	2,620,871	938,343	628,188	182,770	3,638,393	69,587,190
Additions	653,444	12,396	97,793	72,123	143,099	7,958,464	8,937,319
Disposals	(160,583)	(2,669)	(8,989)	(9,605)	(1,724)	-	(183,570)
Transfer from construction in progress	7,187,640	1,159,193	195,021	18,986	737	(8,561,577)	-
Reclassification to aircraft and flight equipment held for sale under current assets (note 26)	(259,552)	-	-	-	-	-	(259,552)
Impairment	(1,278,689)	-	-	-	-	-	(1,278,689)
Depreciation charge for the year	(6,556,529)	(112,908)	(187,433)	(109,030)	(64,407)	-	(7,030,307)


As at 31 December 2010 and 1 January 2011, net of accumulated depreciation and impairment	61,164,356	3,676,883	1,034,735	600,662	260,475	3,035,280	69,772,391
Additions	743,543	7,413	139,155	73,877	32,024	19,019,993	20,016,005
Disposals	(898,656)	(6,784)	(7,536)	(3,619)	(7,044)	-	(923,639)
Transfer from construction in progress	17,252,872	57,884	144,341	45,438	33,470	(17,534,005)	-
Reclassification to aircraft and flight equipment held for sale under current assets (note 26)	(168,721)	-	-	-	-	-	(168,721)
Impairment	(1,141,234)	-	-	-	-	-	(1,141,234)
Depreciation charge for the year	(6,641,747)	(165,339)	(216,068)	(113,071)	(67,746)	-	(7,203,971)


As at 31 December 2011, net of accumulated depreciation and impairment	70,310,413	3,570,057	1,094,627	603,287	251,179	4,521,268	80,350,831


As at 31 December 2010 and 1 January 2011:
Cost	111,947,396	5,006,999	2,580,965	1,549,736	534,034	3,035,280	124,654,410
Accumulated depreciation and impairment	(50,783,040)	(1,330,116)	(1,546,230)	(949,074)	(273,559)	-	(54,882,019)


Net book value	61,164,356	3,676,883	1,034,735	600,662	260,475	3,035,280	69,772,391


As at 31 December 2011:
Cost	125,801,001	5,047,585	2,795,026	1,631,313	554,277	4,521,268	140,350,470
Accumulated depreciation and impairment	(55,490,588)	(1,477,528)	(1,700,399)	(1,028,026)	(303,098)	-	(59,999,639)


Net book value	70,310,413	3,570,057	1,094,627	603,287	251,179	4,521,268	80,350,831

* During the year, the Group recognised an impairment loss of approximately RMB2,237 million relating to aircraft and flight equipment. The recoverable amounts of these impaired aircraft and flight equipment are the higher of their fair value less costs to sell and value in use. The Group has plans to sell these impaired assets and has received quotation from potential buyers. Those impaired aircraft which fall under the criteria at IFRS 5 Non-current Assets Held for Sale were reclassified as aircraft and flight equipment held for sale under current assets, details of which are set out in Note 26.

15 PROPERTY, PLANT AND EQUIPMENT (Continued)

As at 31 December 2011, the Group's aircraft and flight equipment, buildings and machinery with an aggregate net book value of approximately RMB37,482 million (2010: RMB27,575 million) were pledged to secure certain bank loans of the Group (note 38(a)).

The aggregate net book value of aircraft held under finance leases included in the property, plant and equipment of the Group amounted to approximately RMB34,762 million (2010: RMB28,310 million) (note 37(a)).

As at 31 December 2011, the Group was in the process of applying for the title certificates of certain buildings with an aggregate net book value of approximately RMB2,729 million (2010: RMB2,935 million). The Directors of the Company are of the opinion that the Group is entitled to lawfully and validly occupy and use the above-mentioned buildings, and therefore the aforesaid matter did not have any significant impact on the Group's financial position as at 31 December 2011.

16 LEASE PREPAYMENTS

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Cost
As at 1 January	2,390,599	2,088,610	1,789,028	1,698,791
Additions	76,709	182,042	2,145	90,237
Acquisition of a subsidiary and a joint venture	-	119,947	-	-
Disposal	(1,461)	-	-	-
Reclassification to investment properties (note 17)	(51,150)	-	-	-


As at 31 December	2,414,697	2,390,599	1,791,173	1,789,028


Accumulated amortisation
As at 1 January	(226,950)	(133,791)	(159,845)	(114,354)
Acquisition of a subsidiary and a joint venture	-	(6,120)	-	-
Amortisation for the year (note 7)	(53,247)	(87,039)	(39,053)	(45,491)
Reclassification to investment properties (note 17)	8,184	-	-	-


As at 31 December	(272,013)	(226,950)	(198,898)	(159,845)


Net carrying amount
As at 31 December	2,142,684	2,163,649	1,592,275	1,629,183

The Group's lease prepayments in respect of land are held under long term leases and located in Mainland China.

As at 31 December 2011, the Group's land use rights with an aggregate net book value of approximately RMB39.52 million (2010: RMB40.43 million) were pledged to secure certain bank loans of the Group (note 38(a)).

As at 31 December 2011, the Group was in the process of applying for the title certificates of certain land acquired by the Group with an aggregate net book value of approximately RMB626 million (2010: RMB631 million). The Directors of the Company are of the view that the Group is entitled to lawfully and validly occupy and use the above-mentioned land, and therefore the aforesaid matter did not have any significant impact on the Group's financial position as at 31 December 2011.

17 INVESTMENT PROPERTIES

The Group's investment properties are subsequently measured at cost model.

	Group
	2011	2010
	RMB'000	RMB'000


Cost
Reclassification from property, plant and equipment (note 15)	287,464	-
Reclassification from lease prepayments (note 16)	51,150	-


As at 31 December	338,614	-


Accumulated amortisation
Reclassification from property, plant and equipment (note 15)	(89,551)	-
Reclassification from lease prepayments (note 16)	(8,184)	-


As at 31 December	(97,735)	-


Net carrying amount
As at 31 December	240,879	-

During the year, the Group leased a cargo terminal located in the Mainland China to a third party under an operating lease arrangement, further details of which are included in note 49 to the financial statements. As at 31 December 2011, the carrying amount of investment properties included lease prepayments of approximately RMB43 million relating to land use rights held under a medium term lease.

18 INTANGIBLE ASSET

	Group and Company
	2011	2010
	RMB'000	RMB'000


As at 1 January	41,076	49,267
Reduction upon admission of new Star Alliance members	(3,855)	(8,191)


As at 31 December	37,221	41,076

The Group's intangible asset represents admission rights to Star Alliance which is stated at cost and has an indefinite useful life.

19 GOODWILL

Group

	2011	2010
	RMB'000	RMB'000


Cost and net carrying amount as at 1 January	1,657,675	346,845


Acquisition of additional interest in Shenzhen Airlines	-	1,304,320
Acquisition of additional interest in an associate	-	6,510
Goodwill attributable to non-controlling interest upon dilution of interest in a subsidiary	(169,954)	-


Provision for impairment (note 7)	(176,891)	-


Net carrying amount as at 31 December	1,310,830	1,657,675


As at 31 December
Cost	1,487,721	1,657,675
Impairment	(176,891)	-


Net carrying amount	1,310,830	1,657,675

Impairment testing of goodwill

Goodwill acquired through business combinations has been mainly allocated to the following cash-generating units for impairment testing:

• Air China Cargo cash-generating unit

• Shenzhen Airlines cash-generating unit

Air China Cargo cash-generating unit

The recoverable amount of the Air China Cargo cash-generating unit has been determined based on a value in use calculation using cash flow projections based on financial budgets covering a five-year period approved by senior management. The discount rate applied to the cash flow projections is 10.8% (2010: 10.5%) and cash flows beyond the five-year period were extrapolated using a growth rate of 2% by reference to the long term average growth rate. The Group accrued full provision for impairment of goodwill allocated to Air China Cargo as the result of impairment test.

Shenzhen Airlines cash-generating unit

The recoverable amount of the Shenzhen Airlines cash-generating unit was determined based on a value in use calculation using cash flow projections based on financial budgets covering a four-year period approved by senior management. The discount rate applied to the cash flow projections is 10.8% (2010: 10.5%) and cash flows beyond the four-year period were extrapolated using a growth rate of 2% by reference to the long term average growth rate.

19 GOODWILL (Continued)

The net carrying amounts of goodwill allocated to each of the cash-generating units are as follows:

Air China Cargo		Shenzhen Airlines		Others		Total
2011	2010	2011	2010	2011	2010	2011	2010
RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


-	346,845	1,304,320	1,304,320	6,510	6,510	1,310,830	1,657,675

Key assumptions were used in the value in use calculation for 31 December 2011 and 31 December 2010. The following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill:

Budgeted gross margins - The basis used to determine the value assigned to the budgeted gross margins is the average gross margins achieved in the year immediately before the budget year, increased for expected efficiency improvements, and expected market development.

Discount rates - The discount rates used reflect specific risks relating to the relevant units.

The values assigned to the key assumptions on utilisation of aircraft, market development and discount rates are consistent with external information sources.

20 INTERESTS IN SUBSIDIARIES

	Company
	2011	2010
	RMB'000	RMB'000


Unlisted investments, at cost	17,343,911	16,513,911
Due from subsidiaries (note 54)	1,296,115	617,201
Due to subsidiaries (note 54)	(397,288)	(367,364)


	18,242,738	16,763,748

The balances with the subsidiaries are unsecured, interest-free and have no fixed terms of repayment.

20 INTERESTS IN SUBSIDIARIES (Continued)

Particulars of the principal subsidiaries as at 31 December 2011 are as follows:

Company name	Place of incorporation/registrationand operations	Legal status	Nominal value of paid-up capital	Percentage of equity interests attributable to the Company		Principal activities
Company name	Place of incorporation/registrationand operations	Legal status	Nominal value of paid-up capital	Direct	Indirect	Principal activities


China National Aviation Company Limited ("CNAC") (中航興業有限公司)	Hong Kong	Limited liability company	HK$400,000,000	69	31	Investment holding

Air China Group Import and Export Trading Co. ("AIE") (國航進出口有限公司)	PRC/Mainland China	Limited liability company	RMB95,080,786	100	-	Import and export trading

Zhejiang Air Services Co., Ltd. ^# (浙江航空服務有限公司)	PRC/Mainland China	Limited liability company	RMB20,000,000	100	-	Provision of cabin service and airline catering

Shanghai Air China Aviation Service Co., Ltd. ^# (上海國航航空服務有限公司)	PRC/Mainland China	Limited liability company	RMB2,000,000	100	-	Provision of ground service

Air China Development Corporation (Hong Kong) Limited (國航香港發展有限公司)	Hong Kong	Limited liability company	HK$9,379,010	95	-	Provision of air ticketing services

Beijing Golden Phoenix Human Resource Co., Ltd. ^# (北京金凰凰人力資源服務有限公司)	PRC/Mainland China	Limited liability company	RMB1,700,000	100	-	Provision of human resources services

Total Transform Group Ltd. (國航海外控股有限公司)	British Virgin Islands	Limited liability company	HK$13,765,440,000	99.94	0.06	Investment holding

Air Macau Company Limited ("Air Macau") (澳門航空股份有限公司)	Macau	Limited liability company	MOP442,042,000	-	67	Airline operator

Angel Paradise Limited	British Virgin Islands	Limited liability company	US$10	-	100	Investment holding

Air China Cargo (中國國際貨運航空有限公司)	PRC/Mainland China	Limited liability company	RMB3,235,294,118	51	49	Provision of cargo carriage services

Chengdu Falcon Aircraft Engineering Service Co., Ltd. ^# ("Chengdu Falcon") (成都富凱飛機工程服務有限公司)	PRC/Mainland China	Limited liability company	RMB37,565,216	60	-	Provision of aircraft overhaul and maintenance services

Shenzhen Airlines (深圳航空有限責任公司)	PRC/Mainland China	Limited liability company	RMB812,500,000	51	-	Airline operator

Shenzhen Jinpeng Industrial & Trading Co., Ltd ^# (深圳金鵬工貿有限責任公司)	PRC/Mainland China	Limited liability company	RMB20,000,000	-	100	Tickets agent

Shenzhen Kunpeng International Flight Academy ^# (深圳鯤鵬國際飛行學校)	PRC/Mainland China	Private on-enterprise organisation	RMB3,000,000	-	100	Flight academy

Kunming Airlines Co., Ltd (昆明航空有限公司) ^#	PRC/Mainland China	Limited liability ompany	RMB80,000,000	-	80	Airline operator

Beijing Airlines Co., Ltd ^# (北京航空有限責任公司)	PRC/Mainland China	Limited liability company	RMB1,000,000,000	51	-	Airline operator

Dalian Airlines Co., Ltd ^# (大連航空有限責任公司)	PRC/Mainland China	Limited liability company	RMB400,000,000	80	-	Airline operator

^# The English names of these companies are direct translations of their Chinese names.

During the year, two new subsidiaries namely Beijing Airlines Co., Ltd and Dalian Airlines Co., Ltd were established on 28 February and 1 August 2011, respectively.

20 INTERESTS IN SUBSIDIARIES (Continued)

The above table lists the subsidiaries of the Company which, in the opinion of the Directors, principally affected the results for the year ended 31 December 2011 or formed a substantial portion of the net assets of the Group at 31 December 2011. To give details of other subsidiaries would, in the opinion of the Directors, result in particulars of excessive length.

21 INTERESTS IN JOINT VENTURES

	Company
	2011	2010
	RMB'000	RMB'000


Unlisted investments, at cost	856,076	856,076

Particulars of the joint ventures of the Group at 31 December 2011 are as follows:

Company name	Place of incorporation/ registration and operations	Issued capital	Ownership interest	Percentage of Voting power	Profit sharing	Principal activities


Aircraft Maintenance and Engineering Corporation, Beijing (北京飛機維修工程有限公司)	PRC/Mainland China	US$187,533,000	60	57.1	60	Provision of aircraft and engine overhaul and maintenance services

SkyWorks Capital Asia Ltd.	Hong Kong	HK$30	33.3	33.3	33.3	Provision of financial services

ACT Cargo (USA), Inc.	United States	US$500,000	51	55.6	51	Cargo forwarding agent

Shanghai Pudong International Airport Cargo Terminal Co., Ltd. ^# (上海浦東國際機場西區公共貨運站有限公司)	PRC/Mainland China	RMB680,000,000	39	28.6	39	Provision of cargo carriage services

Jade Cargo International Company Limited ^# (翡翠國際航空貨運有限責任公司)	PRC/Mainland China	RMB245,662,126	51	50	51	Provision of cargo carriage services

SSAMC (四川國際航空發動機維修有限公司)	PRC/Mainland China	US$71,900,000	60	60	60	Provision of engine overhaul and maintenance services

^# The English name of the company is the direct translation of its Chinese name.

Henan Airlines Company Limited ("Henan Airlines") is in the process of liquidation. The liquidator has taken over the control over the operation of Henan Airlines since 24 October 2011. Therefore, the Group ceased to have joint control over Henan Airlines and accordingly the investment in Henan Airlines was deconsolidated in the Group's consolidated statements of financial position as at 31 December 2011. As at 31 December 2011, the investment in Henan Airlines has been impaired and fully provided for.

21 INTERESTS IN JOINT VENTURES(Continued)

The Group's proportionate share of the assets, liabilities, revenue and expenses of the joint ventures at the end of the reporting period are as follows:

	Group
	2011	2010
	RMB'000	RMB'000


Current assets	1,638,867	1,703,497
Non-current assets	2,363,194	3,113,983
Current liabilities	(3,769,877)	(2,415,143)
Non-current liabilities	(236,924)	(1,504,430)


Net assets/(liabilities) attributable to the Group	(4,740)	897,907


Revenue	3,662,589	3,158,652
Operating expenses	(4,378,855)	(2,991,037)
Finance revenue	36,869	18,735
Finance costs	(102,267)	(67,376)


Profit/(loss) before tax attributable to the Group	(781,664)	118,974
Tax	(32,303)	(33,057)


Profit/(loss) for the year attributable to the Group	(813,967)	85,917

22 INTERESTS IN ASSOCIATES

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Listed shares in Mainland China, at cost	-	-	163,477	163,477
Unlisted investments, at cost	-	-	534,615	534,615
Share of net assets	10,628,510	11,385,388	-	-
Goodwill on acquisition	2,886,729	2,886,729	-	-
Due from associates (note 54)	16,022	44,420	5,652	40,448
Due to associates (note 54)	(134,230)	(128,111)	(57,378)	(30,753)


	13,397,031	14,188,426	646,366	707,787


Market value of listed shares			1,267,595	2,142,000

As at 31 December 2011, the listed shares in an associate of the Group with an aggregate market value of approximately RMB4,312 million (2010: RMB7,287 million) were pledged to secure certain bank loans of the Group (note 38(b)).

22 INTERESTS IN ASSOCIATES (Continued)

Particulars of the principal associates as at 31 December 2011 are as follows:

Company name	Place of incorporation/ registration and operations	Nominal value of registered/issued share capital	Percentage of equity interests attributable to the Group	Principal activities


Cathay Pacific* ^△ (國泰航空有限公司)	Hong Kong	HK$787,139,514	29.99	Airline operator

Shandong Aviation Group Corporation ("Shandong Aviation")^△ (山東航空集團有限公司)	PRC/Mainland China	RMB580,000,000	49.4	Investment holding

Shandong Airlines Co., Ltd.^△ (山東航空股份有限公司)	PRC/Mainland China	RMB400,000,000	22.8	Airline operator

China National Aviation Finance Co., Ltd. ("CNAF")**^△ (中國航空集團財務有限責任公司)	PRC/Mainland China	RMB505,269,500	23.5	Provision of financial services

Menzies Macau Airport Services Limited* (明捷澳門機場服務有限公司)	Macau	MOP10,000,000	41	Provision of airport ground handling services

Guangzhou Baiyun International Airport Ground Handling Service Company Limited^△ (廣州白雲國際機場地勤服務有限公司)	PRC/Mainland China	RMB100,000,000	21	Provision of airport ground handling services

Yunnan Airport Aircraft Maintenance Services Co., Ltd.^△ (雲南空港飛機維修服務有限公司)	PRC/Mainland China	RMB10,000,000	40	Provision of aircraft overhaul and maintenance services

CAAC Cares Chongqing Co., Ltd.^△ (重慶民航凱亞信息技術有限公司)	PRC/Mainland China	RMB9,800,000	24.5	Provision of airline- related information system services

Chengdu CAAC Southwest Cares Co., Ltd.^△^# (成都民航西南凱亞有限責任公司)	PRC/Mainland China	RMB10,000,000	35	Provision of airline- related information system services

Macau Aircraft Maintenance and Engineering Corporation^△^# (澳門飛機維修工程有限公司)	Macau	MOP100	35	Provision of aircraft overhaul and maintenance services

Shenzhen Airlines Property Development Co., Ltd. ("SZ Property")*^△ (深航房地產開發有限責任公司)	PRC/Mainland China	RMB100,000,000	30	Property development

Zhengzhou Aircraft Maintenance Engineering Co., Ltd*^△^# (鄭州飛機維修工程有限公司)	PRC/Mainland China	RMB150,000,000	30	Provision of aircraft overhaul and maintenance services

22 INTERESTS IN ASSOCIATES (Continued)

* The equity interests of these associates are held indirectly through certain subsidiaries of the Company.

** 19.3% of the Group's equity interest in CNAF is held directly by the Company, and the remaining 4.2% is held indirectly through certain subsidiaries of the Company.

^△ Not audited by Ernst & Young, Hong Kong or another member firm of the Ernst & Young global network.

^# The English names of these companies are direct translations of their Chinese names.

The above table lists the associates of the Group which, in the opinion of the Directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group as at 31 December 2011. To give details of other associates would, in the opinion of the Directors, result in particulars of excessive length.

Summarised financial information of the Group's associates at the end of the reporting period is as follows:

	Group
	2011	2010
	RMB'000	RMB'000


Total assets	129,918,794	128,321,857


Total liabilities	(80,257,773)	(78,045,923)


Revenue	92,402,939	86,573,436


Net profits	5,756,881	13,313,969

Movements in goodwill are as follows:

	Group
	2011	2010
	RMB'000	RMB'000


As at 1 January	2,886,729	2,893,239
Acquisition of a joint venture	-	(6,510)


As at 31 December	2,886,729	2,886,729

23 LONG TERM RECEIVABLE FROM THE ULTIMATE HOLDING COMPANY

On 30 September 2004, the Company entered into an agreement with CNAHC whereby CNAHC agreed to assume the obligations to settle an aggregate amount of approximately RMB757 million, which was recorded by the Group as a government grant receivable as at 31 December 2003 of RMB842 million, consisting of a long term portion and a short term portion of RMB764 million and RMB78 million, respectively. This receivable from CNAHC is unsecured, interest-free and is repayable over eight years commencing from 31 December 2004 by 16 semi-annual instalments to be made by 30 June and 31 December each year. Pursuant to the relevant agreement, the first instalment amount of RMB25 million was settled by 31 December 2004 and the final instalment amount of approximately RMB32 million will be settled by 30 June 2012, with the remaining 14 semi-annual instalment amounts of RMB50 million each to be settled by 30 June and 31 December each year between 30 June 2005 and 31 December 2011.

24 AVAILABLE-FOR-SALE INVESTMENTS

Available-for-sale investments consist of unlisted equity investments measured at cost less impairment losses.

25 DEFERRED TAX ASSETS AND LIABILITIES

The movements in deferred tax assets and liabilities during the year are as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Deferred tax liabilities
As at 1 January	1,006,227	263,750	128,387	263,750
Acquisition of a subsidiary	-	695,833	-	-
Charge for the year (note 11)	206,803	46,644	7,613	(135,363)


Gross deferred tax liabilities as at 31 December	1,213,030	1,006,227	136,000	128,387


Deferred tax assets
As at 1 January	2,193,002	1,682,203	1,515,000	1,626,750
Acquisition of a subsidiary	-	453,860	-	-
Charge for the year (note 11)	884,500	56,939	746,490	(111,750)


Gross deferred tax assets as at 31 December	3,077,502	2,193,002	2,261,490	1,515,000


Net deferred assets as at 31 December	1,864,472	1,186,775	2,125,490	1,386,613

25 DEFERRED TAX ASSETS AND LIABILITIES(Continued)

The principal components of the Group's and the Company's deferred tax assets and liabilities are as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Deferred tax liabilities
Differences in value of property, plant and equipment	-	(387)	-	(387)
Unrealised exchange gain	(95,000)	(128,000)	(95,000)	(128,000)
Depreciation allowance in excess of the related depreciation	(1,065,671)	(858,671)	(41,000)	-
Others	(52,359)	(19,169)	-	-


Gross deferred tax liabilities	(1,213,030)	(1,006,227)	(136,000)	(128,387)


Deferred tax assets
Differences in value of property, plant and equipment	20,490	-	20,490	-
Provisions and accruals	2,054,513	1,464,762	1,481,000	970,000
Losses available for offsetting against future taxable income	128,043	20,430	-	-
Unrealised loss on derivative financial instruments	44,000	85,000	44,000	85,000
Impairment	759,456	513,810	645,000	351,000
Government grants and subsidies	71,000	109,000	71,000	109,000


Gross deferred tax assets	3,077,502	2,193,002	2,261,490	1,515,000


Net deferred tax assets	1,864,472	1,186,775	2,125,490	1,386,613

Deferred tax assets not recognised are as follows:

	Group
	2011	2010
	RMB'000	RMB'000


Tax losses	1,918,547	968,548
Deductible temporary differences	937,770	129,735


	2,856,317	1,098,283

The Group has tax losses arising from operations outside Mainland China of RMB177,444,000 (2010: RMB384,269,000) that will expire in three financial years from the year of incurrence for offsetting against future taxable profits. The Group also has tax losses arising from the operation in Mainland China of RMB1,741,103,000 (2010: RMB584,279,000) that will expire in five financial years from the year of incurrence for offsetting against future taxable profits. Deferred tax assets have not been recognised in respect of these losses which relate to subsidiaries that have been loss-making for some years and it is not considered probable that sufficient taxable profits will be available in the near future against which the tax losses can be utilised.

There are no income tax consequences attaching to the payment of dividends by the Company to its shareholders.

26 AIRCRAFT AND FLIGHT EQUIPMENT HELD FOR SALE

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


As at 1 January	303,736	526,920	259,552	159,594
Disposals	(278,103)	(482,736)	(259,552)	(159,594)
Reclassification from property, plant and equipment during the year (note 15)	183,904	259,552	168,721	259,552


	209,537	303,736	168,721	259,552

Impairment	(117,050)	(226,054)	(91,510)	(185,992)


As at 31 December	92,487	77,682	77,211	73,560

The movements in the provision for impairment of aircraft and flight equipment held for sale are as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


As at 1 January	(226,054)	(396,106)	(185,992)	(27,892)
Disposal	202,688	356,044	185,992	27,892
Reclassification to property, plant and equipment during the year	5,985	-	-	-
Provision during the year (note 7)	(99,669)	(185,992)	(91,510)	(185,992)


As at 31 December	(117,050)	(226,054)	(91,510)	(185,992)

Aircraft and flight equipment held for sale represent aircraft and the related flight equipment to retire in the next 12 months and are measured at the lower of their carrying amounts and fair values less costs to sell.

27 INVENTORIES

An analysis of inventories as at the end of the reporting period is as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Spare parts of flight equipment	1,365,272	1,195,218	705,170	570,788
Work in progress	388,785	372,349	4,409	2,633
Catering supplies	56,263	41,384	52,967	37,555


	1,810,320	1,608,951	762,546	610,976

28 ACCOUNTS RECEIVABLE

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Accounts receivable	2,772,518	3,161,458	1,270,164	1,496,235
Impairment	(71,787)	(69,389)	(45,568)	(48,608)


	2,700,731	3,092,069	1,224,596	1,447,627

The Group normally allows a credit period of 30 to 90 days to its sales agents and other customers while some major customers are granted a credit period up to six months or above. The Group seeks to maintain strict control over its outstanding receivables to minimise credit risk. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that the Group's accounts receivable relate to a large number of diversified customers, there is no significant concentration of credit risk. Accounts receivable are non-interest-bearing.

An aged analysis of the accounts receivable as at the end of the reporting period, net of provision for impairment, is as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Within 30 days	2,276,040	2,495,523	1,071,320	1,176,637
31 to 60 days	240,359	272,380	113,403	85,677
61 to 90 days	70,293	97,884	20,968	22,352
Over 90 days	114,039	226,282	18,905	162,961


	2,700,731	3,092,069	1,224,596	1,447,627

Included in accounts receivable as at the end of the reporting period is the following amount due from joint ventures:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Joint ventures	2,171	1,412	-	-

28 ACCOUNTS RECEIVABLE (Continued)

The movements in the provision for impairment of accounts receivable are as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


As at 1 January	69,389	51,478	48,608	42,288
Acquisition of a subsidiary and a joint venture	-	10,928	-	-
Impairment losses recognised (note 7)	14,751	8,983	4,910	8,857
Amount reversed (note 7)	(10,980)	-	(7,516)	-
Amount written off as uncollectible	(1,373)	(2,000)	(434)	(2,537)


As at 31 December	71,787	69,389	45,568	48,608

As at 31 December 2011, accounts receivable with a nominal value of RMB23,502,809 (2010: RMB26,151,216) were impaired and fully provided for. The individually impaired accounts receivable relate to customers that were in financial difficulties and the probability to recover these receivables is remote.

An aged analysis of the accounts receivable that are not considered to be impaired is as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Neither past due nor impaired	2,146,537	2,660,326	826,787	1,193,591
Less than 3 moths past due	463,205	393,900	330,842	245,885
More than 3 months past due	90,989	37,843	66,967	8,151


	2,700,731	3,092,069	1,224,596	1,447,627

Receivables that were neither past due nor impaired relate to a large number of diversified customers for whom there was no recent history of default.

Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, the Directors of the Company are of the opinion that no provision for impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold any collateral or other credit enhancements over these balances.

29 PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

An analysis of prepayments, deposits and other receivables as at the end of the reporting period, net of provision for impairment, is as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Prepayments
Advances and others	352,116	486,809	180,512	133,820
Manufacturers' credits	827,013	424,817	696,135	263,957
Prepaid aircraft operating lease rentals	283,012	268,015	147,828	148,317


	1,462,141	1,179,641	1,024,475	546,094


Deposits and other receivables	1,235,051	1,104,589	616,678	530,010


	2,697,192	2,284,230	1,641,153	1,076,104

The movements in the provision for impairment of prepayments, deposits and other receivables are as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


As at 1 January	3,312,082	9,619	-	-
Acquisition of a subsidiary	-	3,185,145	-	-
Impairment losses recognised (note 7)	294,771	118,609	-	-
Amount reversed (note 7)	(55,189)	-	-	-
Amount written off as uncollectible	(5,990)	(1,003)	-	-
Exchange realignment	(109)	(288)	-	-


As at 31 December	3,545,565	3,312,082	-	-

30 FINANCIAL ASSETS AND FINANCIAL LIABILITIES

Group

	2011		2010
	Assets	Liabilities	Assets	Liabilities
	RMB'000	RMB'000	RMB'000	RMB'000


Fuel derivative contracts	-	-	-	83,506
Interest rate derivative contracts	3,549	223,137	5,894	330,012
Forward foreign exchange contracts	-	-	-	13,811
Listed equity securities at fair value	8,595	-	21,485	-


	12,144	223,137	27,379	427,329

Company

	2011		2010
	Assets	Liabilities	Assets	Liabilities
	RMB'000	RMB'000	RMB'000	RMB'000


Fuel derivative contracts	-	-	-	83,506
Interest rate derivative contracts	-	176,167	-	256,543


	-	176,167	-	340,049

The above financial assets and liabilities are accounted for as held-for-trading financial instruments and any fair value changes are recognised in the income statement.

The Group's strategy for managing jet fuel price risk is to provide the Group with protection against sudden and significant increases in prices. In meeting these objectives, the Group allows for the use of approved derivative instruments with approved counterparties and within approved credit limits. The movements in the fair value of fuel derivative contracts for the year ended 31 December 2011 was RMB85,446,542 (2010: RMB1,954,070,906), which consisted of a recovery in fair value of RMB83,505,624 (2010: RMB1,967,922,187) and an increase in fair value of RMB1,940,918 (2010: a decrease in fair value of RMB13,851,281) resulting from the settlement of fuel derivative contracts.

The fair value of interest rate derivative contracts as at the end of the reporting period was estimated by using the Rendlemen-Barter model, taking into account the terms and conditions of the derivative contracts. The major inputs used in the estimation process include volatility of short term interest rate and the LIBOR curve, which can be obtained from observable markets.

31 ENTRUSTED LOANS

During the year, the Company provided short term entrusted loans to certain subsidiaries of the Group through CNAF. The interest rates of these entrusted loans range from 5.49% to 6.10% with borrowing terms of 6 months.

32 BALANCES WITH THE ULTIMATE HOLDING COMPANY AND RELATED COMPANIES

The balances with the ultimate holding company and related companies are unsecured, interest-free and repayable within one year or have no fixed terms of repayment.

33 PLEDGED DEPOSITS, CASH AND CASH EQUIVALENTS

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Cash and bank balances	4,963,512	3,477,325	997,004	1,620,070
Cash placed with CNAF (China National Aviation Finance Co., Ltd.)	116,374	99,659	116,072	99,242


Total cash and bank balances	5,079,886	3,576,984	1,113,076	1,719,312


Time deposits placed with banks	7,080,051	7,867,795	3,254,047	5,982,305
Time deposits placed with CNAF	3,430,000	3,800,000	3,430,000	3,800,000


Total time deposits	10,510,051	11,667,795	6,684,047	9,782,305


Less: Pledged deposits against
- Aircraft operating leases and financial derivatives	(130,133)	(324,923)	-	-
- Bank loans	-	(436,270)	-	-
- Others	(2,432)	(81,872)	-	-


Total pledged deposits	(132,565)	(843,065)	-	-

Non-pledged deposits	10,377,486	10,824,730	6,684,047	9,782,305


Cash and cash equivalents	15,457,372	14,401,714	7,797,123	11,501,617

An analysis of non-pledged time deposits placed with banks is as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Non-pledged time deposits with original maturity of:
Less than 3 months when acquired	5,703,587	10,799,066	3,437,748	9,762,923
Over 3 months when acquired	4,673,899	25,664	3,246,299	19,382


	10,377,486	10,824,730	6,684,047	9,782,305

Cash at banks earns interest at floating rates based on daily bank deposit rates. Time deposits are placed for vesting periods of up to one year, depending on the cash requirements of the Group and the Company, and earn interest at the respective time deposit rates. The bank balances and pledged deposits are deposited with creditworthy banks with no recent history of default.

As at 31 December 2011, the Group had a bank balance of US$12,262,700 (equivalent to RMB77,266,046) which was put under custody of a commercial bank for aircraft purchase payments.

34 ACCOUNTS PAYABLE

An aged analysis of the accounts payable as at the end of reporting period is as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Within 30 days	7,560,307	5,590,954	4,416,387	3,441,775
31 to 60 days	889,164	959,910	489,726	618,938
61 to 90 days	459,248	456,123	223,784	331,275
Over 90 days	1,508,467	1,093,485	1,425,530	494,501


	10,417,186	8,100,472	6,555,427	4,886,489

Included in the accounts payable as at the end of the reporting period is the following amount due to joint ventures:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Joint ventures	230,618	106,741	416,426	156,254

The accounts payable are non-interest-bearing and have normal credit terms of 90 days.

35 BILLS PAYABLE

An aged analysis of the bills payable as at the end of the reporting period is as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


31 to 60 days	-	208,600	-	-
61 to 90 days	-	128,727	-	-
Over 90 days	-	50,000	-	-


	-	387,327	-	-

36 OTHER PAYABLES AND ACCRUALS

An analysis of other payables and accruals as at the end of the reporting period is as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Provision for staff housing benefits	31,670	47,350	29,411	45,091
Accrued salaries, wages and benefits	2,976,406	1,988,466	1,848,473	1,090,817
Interest payable	414,891	320,254	336,128	283,176
Business tax, customs duties and levies tax payable	1,232,824	1,061,619	753,001	749,818
Current portion of long term payables (note 40)	14,663	28,716	1,524	6,817
Current portion of deferred income related to the frequent-flyer programme (note 41(a))	310,675	423,658	180,032	347,338
Current portion of deferred income related to government grants (note 41(b))	223,759	110,671	223,759	110,671
Deposits received from sales agents	1,050,290	851,033	461,229	348,286
Accrued operating expenses	1,719,619	1,812,333	805,758	1,073,479
Receipts in advance for employee residence	1,862,804	806,025	-	-
Due to a non-controlling shareholder of a subsidiary	707,787	707,787	-	-
Land lease payable	256,538	256,538	-	-
Others	2,013,849	845,383	906,815	264,995


	12,815,775	9,259,833	5,546,130	4,320,488

Included in the other payables and accruals as at the end of the reporting period is the following amounts due to joint ventures:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Joint ventures	5,311	9,970	1,279	-

37 OBLIGATIONS UNDER FINANCE LEASES

The Group and the Company have obligations under finance lease agreements expiring during the years from 2013 to 2023 (2010: 2011 to 2022) in respect of aircraft. An analysis of the future minimum lease payments under these finance leases as at the end of the reporting period, together with the present values of the net minimum lease payments which are principally denominated in foreign currencies, are as follows:

Group

	Minimum Lease payments	Present values of minimum lease payments	Minimum lease payments	Present values of minimum lease payments
	2011	2011	2010	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Amounts repayable:
Within one year	2,872,990	2,687,925	2,336,913	2,223,240
In the second year	2,880,384	2,713,995	2,339,661	2,250,662
In the third to fifth years, inclusive	8,936,842	8,564,818	7,109,895	6,918,659
Over five years	8,153,488	7,913,047	7,139,157	6,892,031


Total minimum finance lease payments (notes 51 and 53)	22,843,704	21,879,785	18,925,626	18,284,592


Less: Amounts representing finance charges	(963,919)		(641,034)


Present value of minimum lease payments	21,879,785		18,284,592

Less: Portion classified as current liabilities	(2,687,925)		(2,223,240)


Non-current portion	19,191,860		16,061,352

37 OBLIGATIONS UNDER FINANCE LEASES(Continued)

Company

	Minimum Lease payments	Present values of minimum lease payments	Minimum lease payments	Present values of minimum lease payments
	2011	2011	2010	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Amounts repayable:
Within one year	2,629,613	2,505,900	2,114,129	2,048,727
In the second year	2,713,735	2,596,827	2,127,253	2,076,198
In the third to fifth years, inclusive	8,543,050	8,278,176	6,838,500	6,720,277
Over five years	7,741,847	7,553,122	6,809,804	6,610,650


Total minimum finance lease payments (notes 51 and 53)	21,628,245	20,934,025	17,889,686	17,455,852


Less: Amounts representing finance charges	(694,220)		(433,834)


Present value of minimum lease payments	20,934,025		17,455,852

Less: Portion classified as current liabilities	(2,505,900)		(2,048,727)


Non-current portion	18,428,125		15,407,125

Certain finance lease arrangements comprise finance leases between the Company and certain of its subsidiaries, and the corresponding borrowings between such subsidiaries and commercial banks. The Company has guaranteed the subsidiaries' obligations under those bank borrowing arrangements and, accordingly, the relevant assets and obligations are recorded in the Company's statement of financial position to reflect the substance of the transactions. The future payments under these finance leases have therefore been presented by the Company and the Group in the amounts that reflect the payments under the bank borrowing arrangements between the subsidiaries and commercial banks.

As at 31 December 2011, there were 90 (2010: 74) aircraft under finance lease agreements. Under the terms of the leases, the Company has the option to purchase these aircraft, at the end of or during the lease terms, at market value or at the price as stipulated in the finance lease agreements. The effective borrowing rates during the current year ranged from -1.51% to 7.05% (2010: -1.52% to 6.40%) per annum.

The Group's finance leases were secured by mortgages over certain of the Group's aircraft, which had an aggregate net carrying amount of approximately RMB34,762 million (2010: RMB28,310 million) (note 15).

The Company's finance leases were secured by mortgages over certain of the Company's aircraft, which had an aggregate net carrying amount of approximately RMB33,491 million (2010: RMB27,226 million).

38 INTEREST-BEARING BANK LOANS AND OTHER BORROWINGS

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Bank loans:
Secured	26,430,507	24,362,134	10,874,464	7,450,002
Unsecured	31,095,287	33,274,531	28,679,731	30,219,346


	57,525,794	57,636,665	39,554,195	37,669,348


Other loans:
Secured	210,000	270,000	-	-
Unsecured	800,000	735,499	-	-


	1,010,000	1,005,499	-	-


Corporate bonds - unsecured	9,000,000	9,000,000	9,000,000	9,000,000


	67,535,794	67,642,164	48,554,195	46,669,348


Bank loans repayable:
Within one year	24,277,313	24,757,226	18,383,897	19,093,115
In the second year	9,437,746	9,862,106	7,436,853	8,228,949
In the third to fifth years, inclusive	13,906,847	12,275,782	8,441,328	7,508,840
Over five years	9,903,888	10,741,551	5,292,117	2,838,444


	57,525,794	57,636,665	39,554,195	37,669,348


Other loans repayable:
Within one year	860,000	725,499	-	-
In the second year	60,000	90,000	-	-
In the third to fifth years, inclusive	90,000	190,000	-	-


	1,010,000	1,005,499	-	-


Corporate bonds:
Within one year	3,000,000	-	3,000,000	-
In the second year	-	3,000,000	-	3,000,000
In the third to fifth years, inclusive	6,000,000	6,000,000	6,000,000	6,000,000
Over five years	-	-	-	-


	9,000,000	9,000,000	9,000,000	9,000,000


Total bank loans, other loans and corporate bonds	67,535,794	67,642,164	48,554,195	46,669,348


Less: Portion classified as current liabilities	(28,137,313)	(25,482,725)	(21,383,897)	(19,093,115)


Non-current portion	39,398,481	42,159,439	27,170,298	27,576,233

38 INTEREST-BEARING BANK LOANS AND OTHER BORROWINGS (Continued)

Further details of the bank loans, other loans and corporate bonds at the end of the reporting period are as follows:

		Group		Company
Nature	Interest rate and final maturity	2011	2010	2011	2010
		RMB'000	RMB'000	RMB'000	RMB'000


RMB denominated loans and corporate bonds:

Loans for purchases of aircraft and flight equipment	Floating interest rates ranging from 6.0003% to 8.23% (2010: 5.18% to 7.13%) per annum, with maturities up until 2023	5,067,421	4,928,816	-	7,900

Loans for construction in progress	Floating interest rate at 4.86% per annum, with maturities up until 2011	-	100,000	-	-

Loans for working capital	Fixed interest rates ranging from 5.49% to 7.22 % (2010: 4.37% to 8.60%) per annum, with maturities up until 2012	582,957	1,063,307	-	-

Loans for working capital	Floating interest rates from 5.18% to 7.22% (2010: 4.59% to 5.83%) per annum, with maturities up until 2015	2,199,482	2,688,643	-	-

Corporate bonds for purchases of aircraft and flight equipment	Fixed interest rate at 4.50% (2010: 4.50%) per annum, with maturities up until 2015	3,000,000	3,000,000	3,000,000	3,000,000

Corporate bonds for working capital	Fixed interest rates ranging from 3.32% to 3.48% (2010: 3.32% to 3.48%) per annum, with maturities up until 2014	6,000,000	6,000,000	6,000,000	6,000,000


		16,849,860	17,780,766	9,000,000	9,007,900

38 INTEREST-BEARING BANK LOANS AND OTHER BORROWINGS (Continued)

		Group		Company
Nature	Interest rate and final maturity	2011	2010	2011	2010
		RMB'000	RMB'000	RMB'000	RMB'000


United States dollar ("US$") denominated loans:

Loans for purchases of aircraft and flight equipment	Fixed interest rates ranging from 3.80% to 8.33% (2010: 3.80% to 8.33%) per annum, with maturities up until 2019	372,446	921,620	372,446	921,620

Loans for purchases of aircraft and flight equipment	Floating interest rate at three-month LIBOR+0.50% to three-month LIBOR +4.80% and six-month LIBOR+0.45% to six-month LIBOR+5.50% and twelve-month LIBOR +1.60% (2010: six-month LIBOR+0.50% to six-month LIBOR +3.40% and twelve- month LIBOR +1.60%) per annum, with maturities up until 2023	29,877,797	19,944,761	20,012,107	9,694,516

Loans for working capital	Floating interest rates ranging from three-month LIBOR+ 0.50% to six-month LIBOR+2.60% (2010: three-month LIBOR+0.18% to six- month LIBOR+3.00%) per annum, with maturities up until 2014	14,808,461	22,517,899	13,872,755	20,993,296

Loans for working capital	Fixed interest rates ranging from 3.61% to 6.24% (2010: 0.85% to 2.44%) per annum, with maturities up until 2012	330,343	425,102	-	-


		45,389,047	43,809,382	34,257,308	31,609,432

38 INTEREST-BEARING BANK LOANS AND OTHER BORROWINGS (Continued)

		Group		Company
Nature	Interest rate and final maturity	2011	2010	2011	2010
		RMB'000	RMB'000	RMB'000	RMB'000


Hong Kong dollar denominated loans:

Loans for capital investment	Floating interest rates ranging from three-month HIBOR+0.45% to six-month HIBOR+0.85% (2010: three-month HIBOR+0.45% to six-month HIBOR+0.85%) per annum, with maturities up until 2013	5,112,274	5,845,683	5,112,274	5,845,683


		5,112,274	5,845,683	5,112,274	5,845,683


Euros denominated loans:

Loans for purchase of related equipment	Fixed interest rate at 3.88% (2010: 3.88%) per annum, with maturities up until 2013	184,613	206,333	184,613	206,333


		184,613	206,333	184,613	206,333


Total bank and other borrowings		67,535,794	67,642,164	48,554,195	46,669,348


Less: Portion falling due within one year and classified as current liabilities		(28,137,313)	(25,482,725)	(21,383,897)	(19,093,115)


Non-current portion		39,398,481	42,159,439	27,170,298	27,576,233

38 INTEREST-BEARING BANK LOANS AND OTHER BORROWINGS (Continued)

The interest rates of RMB denominated loans are set and subject to change by the People's Bank of China.

The Group's bank and other loans of approximately RMB26,590 million as at 31 December 2011 (2010: RMB27,632 million) were secured by:

(a) mortgages over certain of the Group's aircraft and flight equipment, buildings and machinery with an aggregate net carrying amount of approximately RMB37,482 million as at 31 December 2011 (2010: RMB27,575 million) (note 15) and land use rights with an aggregate carrying amount of approximately RMB39.52 million as at 31 December 2011 (2010: RMB40.43 million) (note 16); and

(b) the pledge of certain number of listed shares in an associate of the Group with an aggregate market value of approximately RMB4,312 million as at 31 December 2011 (2010: RMB7,287 million) (note 22); and

(c) guarantees by certain commercial banks amounting to approximately RMB374 million as at 31 December 2011 (2010: RMB1,169 million).

The Company's bank and other loans of approximately RMB9,949 million as at 31 December 2011 (2010: RMB16,696 million) were secured by:

(d) mortgages over certain of the Company's aircraft and buildings with an aggregate net book value of approximately RMB14,304 million as at 31 December 2011 (2010: RMB9,706 million) and land use rights with an aggregate carrying amount of approximately RMB34 million as at 31 December 2011 (2010: RMB35 million); and

(e) guarantees provided by certain commercial banks amounting to approximately RMB374 million as at 31 December 2011 (2010: RMB1,169 million).

As at 31 December 2011, certain PRC state-owned banks provided counter-guarantees in an aggregate amount of approximately RMB275 million (2010: RMB1,012 million) to one of the above-mentioned commercial banks.

39 PROVISION FOR MAJOR OVERHAULS

Details of the movements in provision for major overhauls in respect of aircraft and engines under operating leases at the end of the reporting period are as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


As at 1 January	2,608,778	1,587,126	1,349,927	1,232,729
Acquisition of a subsidiary	-	1,205,296	-	-
Provision for the year	1,212,002	1,264,117	509,995	643,476
Utilisation during the year	(723,988)	(1,447,761)	(243,615)	(526,278)
Derecognition of a joint venture	(11,375)	-	-	-


As at 31 December	3,085,417	2,608,778	1,616,307	1,349,927

Less: Portion classified as current liabilities	(589,123)	(503,628)	(235,964)	(135,662)


Non-current portion	2,496,294	2,105,150	1,380,343	1,214,265

The amount of provision is estimated based on the costs of overhauls and actual flying hours/cycles of aircraft and engines under operating leases. The estimation basis is reviewed on an ongoing basis and revised whenever appropriate.

40 LONG TERM PAYABLES

An analysis of long term payables at the end of the reporting period is as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Customs duties and value-added tax payable in respect of acquisition of aircraft and flight equipment under finance leases	2,167	9,193	2,167	9,193
Non-voting redeemable preference shares of a subsidiary	157,417	165,229	-	-
Others	86,140	119,453	-	-


	245,724	293,875	2,167	9,193

Less: Portion classified as current liabilities (note 36)	(14,663)	(28,716)	(1,524)	(6,817)


Non-current portion	231,061	265,159	643	2,376

41 DEFERRED INCOME

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Frequent-flyer programme (note a)	2,381,596	1,694,147	1,669,967	1,102,972
Government grant (note b)	970,300	1,357,436	961,101	1,344,735
Gain on sale and leaseback arrangements	83,382	114,659	-	-
Operating lease rebates	23,860	29,861	-	-


	3,459,138	3,196,103	2,631,068	2,447,707

41 DEFERRED INCOME (Continued)

Notes

(a) The movements in deferred income related to the Group's frequent-flyer programme during the year are as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


As at 1 January	2,117,805	947,455	1,450,310	931,607
Acquisition of a subsidiary	-	491,147	-	-
Arising during the year	1,482,066	1,346,633	1,166,972	1,102,972
Recognised as air traffic revenue during the year	(907,600)	(667,430)	(767,283)	(584,269)


As at 31 December	2,692,271	2,117,805	1,849,999	1,450,310

Less: Portion classified as
current liabilities (note 36)	(310,675)	(423,658)	(180,032)	(347,338)


Non-current portion	2,381,596	1,694,147	1,669,967	1,102,972

(b) The movements in deferred income related to government grant during the year are as follows:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Deferred income:
As at 1 January	2,284,368	2,112,037	2,253,357	2,107,957
Acquisition of a subsidiary	-	26,931	-	-
Addition	-	145,400	-	145,400


As at 31 December	2,284,368	2,284,368	2,253,357	2,253,357


Accumulated income recognised:
As at 1 January	(816,261)	(687,278)	(797,951)	(687,278)
Acquisition of a subsidiary	-	(11,976)	-	-
Recognised as other operating revenue during the year (note 5)	(240,486)	(83,277)	(236,984)	(76,943)
Recognised as air traffic revenue during the year	(33,562)	(33,730)	(33,562)	(33,730)


As at 31 December	(1,090,309)	(816,261)	(1,068,497)	(797,951)


Net carrying amount	1,194,059	1,468,107	1,184,860	1,455,406

Less: Portion classified as current liabilities (note 36)	(223,759)	(110,671)	(223,759)	(110,671)


Non-current portion	970,300	1,357,436	961,101	1,344,735

42 SHARE CAPITAL

The number of shares of the Company and their nominal values as at 31 December 2011 and 31 December 2010 are as follows:

	Number of shares	Nominal value	Number of shares	Nominal value
	2011	2011	2010	2010
		RMB'000		RMB'000


Registered, issued and fully paid:
H shares of RMB1.00 each:
Tradable	4,562,683,364	4,562,683	4,405,683,364	4,405,683
Trade-restricted *	-	-	157,000,000	157,000
A shares of RMB1.00 each:
Tradable	8,199,737,630	8,199,738	7,845,678,909	7,845,679
Trade-restricted *	129,533,679	129,534	483,592,400	483,593


	12,891,954,673	12,891,955	12,891,954,673	12,891,955

* The trade-restricted shares were issued on 12 November 2010.

The H shares and A shares rank pari passu, in all material respects, with the state legal person shares and non-H foreign shares of the Company.

43 TREASURY SHARES

As at 31 December 2011, the Group owned a 29.99% equity interest in Cathay Pacific, which in turn owned a 19.53% equity interest in the Company. Accordingly, the 29.99% of Cathay Pacific's shareholding in the Company was recorded in the Group's consolidated financial statements as treasury shares through deduction from equity.

44 RESERVES

Group

The amounts of the Group's reserves and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity.

Company

	Capital reserve	Reserve funds	Retained earnings/ (accumulated losses)	Total
	RMB'000	RMB'000	RMB'000	RMB'000


As at I January 2010	11,022,878	1,554,324	(506,651)	12,070,551
Total comprehensive income for the year	(127)	-	7,412,496	7,412,369
Issue of new shares	5,780,556	-	-	5,780,556
Appropriation of statutory reserve fund	-	614,386	(614,386)	-


As at 31 December 2010 and 1 January 2011	16,803,307	2,168,710	6,291,459	25,263,476
Total comprehensive income for the year	-	-	6,523,066	6,523,066
Final dividend declared	-	-	(1,523,829)	(1,523,829)
Appropriation of statutory reserve fund	-	679,126	(679,126)	-
Appropriation of discretionary reserve fund	-	614,386	(614,386)	-


As at 31 December 2011	16,803,307	3,462,222	9,997,184	30,262,713

45 SHARE APPRECIATION RIGHTS

The Company has adopted a share appreciation rights ("SARs") arrangement (the "Plan") which was approved by the shareholders on 18 October 2004 for the purpose of motivating its employees. The Plan provides for the grant of SARs to eligible participants, including the Company's Directors (excluding independent non-executive directors), president, vice presidents, heads of key departments in the Company's headquarters, general managers and general deputy managers of principal branches and subsidiaries as well as selected senior professionals and key specialists. In any event, no more than 200 individuals will be granted SARs.

Under the Plan, the holders of SARs are entitled to the rights to receive an amount in respect of the appreciation in market value of the Company's H shares from the date of grant of SARs to the date of exercise. No shares will be issued under the Plan and therefore the Company's equity interests will not be diluted as a result of the issuance of SARs. The maximum number of unexercised SARs permitted to be granted under the Plan is, upon their exercise, limited to 2% of the Company's H shares in issue at any time during each year. The maximum number of SARs granted to eligible participants under the Plan within any 12-month period is, upon their exercise, limited to 0.4% of the Company's H shares in issue at any time during each year. The maximum number of SARs granted to any eligible participant is limited to 10% of the total number of unexercised SARs in issue at any time during each year. Any further grant of SARs in excess of the above limits is subject to shareholders' approval in general meetings.

45 SHARE APPRECIATION RIGHTS(Continued)

The exercise period of all SARs commences after a vesting period and ends on a date which is not later than five years from the date of grant of the SARs. The exercise price of SARs will be equal to the average closing price of the Company's H shares on the HKSE for the five consecutive trading days immediately preceding the date of the grant. On 15 June 2007, 14,939,900 SARs were granted to a total of 109 individuals at an exercise price of HK$2.98 per share. As at each of the last days of the second, third and fourth anniversaries of the date of grant, the total numbers of SARs exercisable will not exceed 30%, 70% and 100%, respectively, of the total SARs granted to the respective eligible participants.

On 25 August 2009, a board resolution was passed to suspend the Plan and to amend certain terms of the Plan in response to the requirements of related government policies. In 2011, a board resolution was passed to approve the revised "Share Appreciation Rights Management Rules of Air China Limited". On 26 May 2011, a resolution was passed in the annual general meeting of the Company to resume the Plan and to authorize the exercise of 70% of the SARs already vested during a special window period within 60 trading days after the annual general meeting. The exercise price was adjusted to HK$5.70 per share according to the revised Plan. According to the revised plan, the exercise price was adjusted to the fair value at the date of the grant, which was HK$5.97 per Share. While dividends have been declared for three times after the grant date, the exercise price was adjusted to HK$5.70 per share as at 31 December 2011.

Based on a board resolution, the special window period for the exercise of the 70% vested SARs was from 19 July 2011 to 22 July and the date of 25 July. The settlement price of above is HK$7.85 per share. Up to 31 December 2011, 70% of SARs were vested. The total amount has been included and paid with salaries. As at 31 December 2011, all SARs granted which still remained unexercised had an aggregate fair value of RMB1,235,353.

As at the grant date and the subsequent balance sheet date, the fair value of SARs was estimated using the binomial option pricing model considering related vesting conditions and restrictions.

46 DISTRIBUTABLE RESERVES

As at 31 December 2011, in accordance with the PRC Company Law, an amount of approximately RMB20,112 million (2010: RMB20,113 million) standing to the credit of the Company's capital reserve account, and an amount of approximately RMB3,462 million (2010: RMB2,169 million) standing to the credit of the Company's reserve funds, as determined in accordance with CASs, were available for distribution by way of a future capitalisation issue. In addition, the Company had retained earnings of approximately RMB9,503 million available for distribution as at 31 December 2011.

47 MAJOR NON-CASH TRANSACTIONS

During the year, the Group entered into several finance lease arrangements in respect of property, plant and equipment with a total capital value at the inception of the leases of approximately RMB6,872 million (2010: RMB3,231 million).

48 CONTINGENT LIABILITIES

As at 31 December 2011, the Group had the following contingent liabilities:

(a) Pursuant to the restructuring of CNAHC in preparation for the listing of the Company's H shares on the HKSE and the LSE, the Company entered into a restructuring agreement (the "Restructuring Agreement") with CNAHC and China National Aviation Corporation (Group) Limited ("CNACG", a wholly-owned subsidiary of CNAHC) on 20 November 2004. According to the Restructuring Agreement, except for liabilities constituting or arising out of or relating to business undertaken by the Company after the restructuring, no liabilities would be assumed by the Company and the Company would not be liable, whether severally, or jointly and severally, for debts and obligations incurred prior to the restructuring by CNAHC and CNACG. The Company has also undertaken to indemnify CNAHC and CNACG against any damage suffered or incurred by CNAHC and CNACG as a result of any breach by the Company of any provision of the Restructuring Agreement.

(b) On 26 February 2007, the Eastern District Court of New York of the Federal Judiciary of the United States filed a civil summon against the Company and Air China Cargo, claiming that they, together with a number of other airlines, violated certain anti-trust regulations in respect of their air cargo operations in the United States by acting in concert in imposing excessive surcharges to impede the offering of discounts and allocating revenue and customers so as to increase, maintain and stabilise air cargo prices. The status of the proceedings is still in the preliminary stage and therefore the Directors of the Company are of the view that it is not possible to estimate the eventual outcome of the claim with reasonable certainty at this stage. The Directors of the Company are also of the view that there would be valid defence against this claim and consider that no provision for this claim is needed accordingly.

(c) On 17 November 2009, Airport City Development Co., Ltd. ("Airport City Development") commenced proceedings involving approximately RMB224 million against the Company, Air China Cargo, Air China International Corporation and a third party for the unlawful use of land owned by Airport City Development. The status of the proceedings is still in the mediation stage and the Directors of the Company are of the view that it is not possible to estimate the eventual outcome of the claim with reasonable certainty at this stage. The Directors of the Company are also of the view that there would be valid defence against this claim and consider that no provision for this claim is needed accordingly.

(d) In May 2011, Shenzhen Airlines, a subsidiary of the Group, received a summon issued by the Higher People's Court of Guangdong Province in respect of a guarantee provided by Shenzhen Airlines on loans borrowed by Shenzhen Huirun Investment Co., Ltd ("Huirun", a non-controlling shareholder of Shenzhen Airlines) from a third party amounting to RMB390,000,000. It was alleged that Shenzhen Airlines had entered into several guarantee agreements with Huirun and the third party, pursuant to which Shenzhen Airlines acted as a guarantor in favour of the third party for the loans borrowed by Huirun. The proceeding is still in the preliminary stage and therefore the Directors consider that a provision of RMB130,000,000 in respect of this legal claim is adequate. Accordingly a provision of the same amount was made in the consolidated financial statements for the year ended 31 December 2011.

(e) Shenzhen Airlines provided guarantees to banks for certain employees in respect of their residential loans as well as for certain pilot trainees in respect of their tuition loans. As at 31 December 2011, Shenzhen Airlines had outstanding guarantees for employees' residential loans amounting to RMB559,992,568 (31 December 2010: RMB281,475,589) and for pilot trainees' tuition loans amounting to RMB341,945,016 (31 December 2010: RMB354,705,922).

48 CONTINGENT LIABILITIES (Continued)

(f) Shenzhen Airlines is a co-lessee under certain aircraft operating lease contracts (the "Lease Contracts") entered into by a company invested by Shenzhen Airlines. Under the Lease Contracts, Shenzhen Airlines is obligated to bear the lease payments if the other co-obligor fails to fulfill its obligations. According to the Lease Contracts, the monthly operating lease payment is US$823,147(approximately RMB5,186,565). The Lease Contracts will expire before June 2021.

(g) As at December 2010, the Company provided guarantee in respect of bank loans borrowed by a subsidiary amounting to approximately RMB272 million. There was no such guarantee provided as at 31 December 2011.

49 OPERATING LEASE ARRANGEMENTS

As lessee:

The Group and the Company lease certain office premises, aircraft and flight equipment under operating lease arrangements. Leases for these assets are negotiated for terms ranging from 1 to 20 years.

At the end of the reporting period, the Group and the Company had the following future minimum lease payments under non-cancellable operating leases:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Within one year	3,757,269	3,743,901	2,393,463	2,272,501
In the second to fifth years, inclusive	8,928,590	9,952,825	4,951,990	5,060,039
Over five years	4,219,950	5,423,563	2,383,820	2,710,510


	16,905,809	19,120,289	9,729,273	10,043,050

Included in the above commitments, the Group had the following minimum lease payments under non-cancellable operating leases towards associates and a related company:

	Group
	2011	2010
	RMB'000	RMB'000


Associates	570,132	524,502
Related company	255	255

As lessor:

Operating lease of investment properties

The Group leases its investment properties to a third party under operating lease arrangements. The leasing period is from 8 December 2011 to 7 September 2022.

50 COMMITMENTS

(a) Capital commitments

The Group and the Company had the following amounts of contractual commitments for the acquisition and construction of plant, property and equipment as at the end of the reporting period:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Contracted, but not provided for:
Aircraft and flight equipment	93,157,457	118,639,688	76,615,258	91,367,627
Buildings	2,030,556	1,765,801	1,435,349	723,939
Others	59,052	48,369	23,369	38,639


	95,247,065	120,453,858	78,073,976	92,130,205


Authorised, but not contracted for:
Aircraft and flight equipment	-	-	-	-
Buildings	788,805	1,443,606	645,295	1,443,605
Others	163,224	187,963	163,224	150,463


	952,029	1,631,569	808,519	1,594,068


Total capital commitments (note 53)	96,199,094	122,085,427	78,882,495	93,724,273

Included in the above commitments, the Group had the following amounts of contractual commitments for the acquisition and construction of plant, property and equipment toward an associate and a related company:

	Group
	2011	2010
	RMB'000	RMB'000


Contracted, but not provided for:
Associate	293,000	1,208,520
Related company	1,088,413	918,930


	1,381,413	2,217,450

Authorised, but not contracted for:
Related company	612,268	285,674


	1,993,681	2,413,124

(b) Investment commitment

The Group and the Company had the following amount of investment commitment as at the end of the reporting period:

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


Contracted, but not provided for an
associate (note 53)	35,000	239,000	-	-

51 FINANCIAL INSTRUMENTS BY CATEGORY

The carrying amounts of the Group's and the Company's financial instruments approximated to their fair value as at the end of the reporting period. The present value of bank loans and other borrowings has been calculated by discounting the expected future cash flows at prevailing interest rates. The fair values of long term deposits and other financial assets have been discounted to present value based on market interest rates. Fair value estimates are made at a specific point in time and based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The carrying amounts of each of the categories of financial instruments as at the end of the reporting period are as follows:

Group

2011

Financial assets

	Financial assets at fair value through profit or loss and held for trading	Loans and receivables	Available- for-sale financial assets	Total
	RMB'000	RMB'000	RMB'000	RMB'000


Due from associates (note 22)	-	16,022	-	16,022
Due from related companies	-	20,194	-	20,194
Deposits for aircraft under operating leases	-	420,854	-	420,854
Available-for-sale investments	-	-	27,182	27,182
Accounts and bills receivables	-	2,702,332	-	2,702,332
Financial assets included in deposits and other receivables (note 29)	-	1,235,051	-	1,235,051
Financial assets	12,144	-	-	12,144
Due from the ultimate holding company	-	428,561	-	428,561
Pledged deposits	-	132,565	-	132,565
Cash and cash equivalents	-	15,457,372	-	15,457,372


	12,144	20,412,951	27,182	20,452,277

Financial liabilities

	Financial liabilities at fair value through profit or loss and held for trading	Financial liabilities at amortised cost	Total
	RMB'000	RMB'000	RMB'000


Due to associates (note 22)	-	(134,230)	(134,230)
Accounts and bills payables	-	(10,417,186)	(10,417,186)
Financial liabilities included in other payables and accruals	-	(10,386,867)	(10,386,867)
Financial liabilities	(223,137)	-	(223,137)
Due to related companies	-	(190,775)	(190,775)
Obligations under finance leases (note 37)	-	(21,879,785)	(21,879,785)
Interest-bearing bank loans and other borrowings (note 38)	-	(67,535,794)	(67,535,794)


	(223,137)	(110,544,637)	(110,767,774)

51 FINANCIAL INSTRUMENTS BY CATEGORY (Continued)

Group

2010

Financial assets

	Financial assets at fair value through profit or loss and held for trading	Loans and receivables	Available- for-sale financialassets	Total
	RMB'000	RMB'000	RMB'000	RMB'000


Due from associates (note 22)	-	44,420	-	44,420
Due from related companies	-	3,244	-	3,244
Deposits for aircraft under operating leases	-	391,600	-	391,600
Long term receivable from the ultimate holding company	-	31,813	-	31,813
Available-for-sale investments	-	-	27,182	27,182
Accounts and bills receivables	-	3,106,364	-	3,106,364
Financial assets included in deposits and other receivables (note 29)	-	1,104,589	-	1,104,589
Financial assets	27,379	-	-	27,379
Due from the ultimate holding company	-	617,140	-	617,140
Pledged deposits	-	843,065	-	843,065
Cash and cash equivalents	-	14,401,714	-	14,401,714


	27,379	20,543,949	27,182	20,598,510

Financial liabilities

	Financial liabilities at fair value through profit or loss and held for trading	Financial liabilities at amortised cost	Total
	RMB'000	RMB'000	RMB'000


Due to associates (note 22)	-	(128,111)	(128,111)
Accounts and bills payables	-	(8,487,799)	(8,487,799)
Financial liabilities included in other payables and accruals	-	(7,872,129)	(7,872,129)
Financial liabilities	(427,329)	-	(427,329)
Due to related companies	-	(181,002)	(181,002)
Obligations under finance leases (note 37)	-	(18,284,592)	(18,284,592)
Interest-bearing bank loans and other borrowings (note 38)	-	(67,642,164)	(67,642,164)


	(427,329)	(102,595,797)	(103,023,126)

51 FINANCIAL INSTRUMENTS BY CATEGORY(Continued)

Company

2011

Financial assets

	Financial assets at fair value through profit or loss and held for trading	Loans and receivables	Available- for-sale financial assets	Total
	RMB'000	RMB'000	RMB'000	RMB'000


Due from subsidiaries (note 20)	-	1,296,115	-	1,296,115
Due from associates (note 22)	-	5,652	-	5,652
Due from related companies	-	7,803	-	7,803
Deposits for aircraft under operating leases	-	251,729	-	251,729
Available-for-sale investments	-	-	3,366	3,366
Accounts and bills receivables	-	1,224,596	-	1,224,596
Deposits and other receivables (note 29)	-	616,678	-	616,678
Due from the ultimate holding company	-	432,267	-	432,267
Cash and cash equivalents	-	7,797,123	-	7,797,123


	-	11,631,963	3,366	11,635,329

Financial liabilities

	Financial liabilities at fair value through profit or loss and held for trading	Financial liabilities at amortised cost	Total
	RMB'000	RMB'000	RMB'000


Due to subsidiaries (note 20)	-	(397,288)	(397,288)
Due to associates (note 22)	-	(57,378)	(57,378)
Accounts and bills payables	-	(6,555,427)	(6,555,427)
Financial liabilities included in other payables and accruals	-	(5,112,928)	(5,112,928)
Financial liabilities	(176,167)	-	(176,167)
Due to related companies	-	(170,187)	(170,187)
Obligations under finance leases (note 37)	-	(20,934,025)	(20,934,025)
Interest-bearing bank loans and other borrowings (note 38)	-	(48,554,195)	(48,554,195)


	(176,167)	(81,781,428)	(81,957,595)

51 FINANCIAL INSTRUMENTS BY CATEGORY(Continued)

Company

2010

Financial assets

	Financial assets at fair value through profit or loss and held for trading	Loans and receivables	Available- for-sale financial assets	Total
	RMB'000	RMB'000	RMB'000	RMB'000


Due from subsidiaries (note 20)	-	617,201	-	617,201
Due from associates (note 22)	-	40,448	-	40,448
Due from related companies	-	2	-	2
Deposits for aircraft under operating leases	-	202,668	-	202,668
Long term receivable from the ultimate holding company	-	31,813	-	31,813
Available-for-sale investments	-	-	3,366	3,366
Accounts and bills receivables	-	1,461,627	-	1,461,627
Deposits and other receivables (note 29)	-	530,010	-	530,010
Due from the ultimate holding company	-	617,669	-	617,669
Cash and cash equivalents	-	11,501,617	-	11,501,617


	-	15,003,055	3,366	15,006,421

Financial liabilities

	Financial liabilities at fair value through profit or loss and held for trading	Financial liabilities at amortised cost	Total
	RMB'000	RMB'000	RMB'000


Due to subsidiaries (note 20)	-	(367,364)	(367,364)
Due to associates (note 22)	-	(30,753)	(30,753)
Accounts and bills payables	-	(4,886,489)	(4,886,489)
Financial liabilities included in other payables and accruals	-	(3,817,388)	(3,817,388)
Financial liabilities	(340,049)	-	(340,049)
Due to related companies	-	(159,913)	(159,913)
Obligations under finance leases (note 37)	-	(17,455,852)	(17,455,852)
Interest-bearing bank loans and other borrowings (note 38)	-	(46,669,348)	(46,669,348)


	(340,049)	(73,387,107)	(73,727,156)

52 FAIR VALUE HIERARCHY

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments:

Level 1: fair values measured based on quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: fair values measured based on valuation techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly

Level 3: fair values measured based on valuation techniques for which any inputs which have a significant effect on the recorded fair value are not based on observable market data (unobservable inputs)

As at 31 December 2011, the Group held the following financial instruments measured at fair value:

Group

Assets measured at fair value as at 31 December 2011:

	Level 1	Level 2	Level 3	Total
	RMB'000	RMB'000	RMB'000	RMB'000


Financial assets	8,595	3,549	-	12,144

Liabilities measured at fair value as at 31 December 2011:

	Level 1	Level 2	Level 3	Total
	RMB'000	RMB'000	RMB'000	RMB'000


Financial liabilities	-	(223,137)	-	(223,137)

During the year ended 31 December 2011, there were no transfers of fair value measurements between Level 1 and Level 2 and no transfers into or out of Level 3.

53 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group's principal financial instruments, other than derivatives, comprise bank loans, other loans and corporate bonds, obligations under finance leases, cash and cash equivalents and pledged deposits. The main purpose of these financial instruments is to raise finance for the Group's operations. The Group has various other financial assets and liabilities such as accounts receivable and accounts payable, which arise directly from its operations.

The Group also enters into derivative transactions, including principally swaps and collars contracts. The purpose is to manage the jet fuel price risk and interest rate risk arising from the Group's operations.

The Group operates globally and generates revenue in various currencies. The Group's airline operations are exposed to liquidity risk, jet fuel price risk, foreign currency risk, interest rate risk and credit risk. The Group's overall risk management approach is to moderate the effects of such volatility on its financial performance.

53 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)

Financial risk management policies are periodically reviewed and approved by the Board of Directors and they are summarised below.

(a) Liquidity risk

The Group's net current liabilities amounted to approximately RMB37,978 million as at 31 December 2011 (2010: RMB29,409 million). The Group recorded a net cash inflow from operating activities of approximately RMB19,670 million for the year ended 31 December 2011 (2010: RMB18,366 million). For the same period, the Group had a net cash outflow from investing activities of approximately RMB21,669 million (2010: RMB14,058 million). The Group also recorded a net cash outflow from financing activities of approximately RMB1,432 million and a net cash inflow of approximately RMB7,463 million for the years ended 31 December 2011 and 2010, respectively. The Group recorded a decrease in cash and cash equivalents of approximately RMB3,593 million and an increase in cash and cash equivalents of approximately RMB11,700 million for the years ended 31 December 2011 and 2010, respectively.

The liquidity of the Group is primarily dependent on its ability to maintain adequate cash inflows from operations to meet its debt obligations as they fall due, and its ability to obtain external financing to meet its committed future capital expenditure. With regard to its future capital commitments and other financing requirements, the Company has already obtained banking facilities with several PRC banks of up to an aggregate amount of RMB141,263 million as at 31 December 2011 (2010: RMB125,071 million), of which an amount of approximately RMB49,902 million was utilised (2010: RMB46,365 million).

The Directors of the Company had carried out a detailed review of the cash flow forecast of the Group for the year ended 31 December 2011. Based on such forecast, the Directors had determined that adequate liquidity existed to finance the working capital and capital expenditure requirements of the Group. In preparing the cash flow forecast, the Directors had considered historical cash requirements of the Group as well as other key factors, including the availability of the above-mentioned loans financing which may impact the operations of the Group. The Directors are of the opinion that the assumptions and sensitivities which are included in the cash flow forecast are reasonable. However, these are subject to inherent limitations and uncertainties and some or all of these assumptions may not be realised.

53 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)

(a) Liquidity risk (Continued)

The maturity profile of the Group's financial liabilities as at the end of the reporting period, based on the contractual undiscounted payments, is as follows:

Group

	2011
	On demand	Within 1 year	1 to 5 years	Over 5 years	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Due to associates (note 22)	-	134,230	-	-	134,230
Accounts and bills payables	561,563	9,855,623	-	-	10,417,186
Financial liabilities included in other payables and accruals	2,955,114	7,431,753	-	-	10,386,867
Financial liabilities	-	223,137	-	-	223,137
Due to related companies	-	190,775	-	-	190,775
Obligations under finance leases (note 37)	-	2,872,990	11,817,226	8,153,488	22,843,704
Interest-bearing bank loans and other borrowings	-	28,186,006	30,711,850	10,939,191	69,837,047
Guarantee (note 48(f))	901,938	-	-	-	901,938


	4,418,615	48,894,514	42,529,076	19,092,679	114,934,884

	2010
	On demand	Within 1 year	1 to 5 years	Over 5 years	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Due to associates (note 22)	-	128,111	-	-	128,111
Accounts and bills payables	510,080	7,977,719	-	-	8,487,799
Financial liabilities included in other payables and accruals	1,912,652	5,959,477	-	-	7,872,129
Financial liabilities	-	427,329	-	-	427,329
Due to related companies	-	181,002	-	-	181,002
Obligations under finance leases (note 37)	-	2,336,913	9,449,556	7,139,157	18,925,626
Interest-bearing bank loans and other borrowings	-	25,920,416	32,766,107	11,793,662	70,480,185
Guarantee (note 48(f))	636,182	-	-	-	636,182


	3,058,914	42,930,967	42,215,663	18,932,819	107,138,363

53 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)

(a) Liquidity risk (Continued)

The maturity profile of the Company's financial liabilities as at the end of the reporting period, based on the contractual undiscounted payments, is as follows:

Company

	2011
	On demand	Within 1 year	1 to 5 years	Over 5 years	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Due to subsidiaries (note 20)	-	397,288	-	-	397,288
Due to associates (note 22)	-	57,378	-	-	57,378
Account and bills payables	499,342	6,056,085	-	-	6,555,427
Financial liabilities included in other payables and accruals	1,886,227	3,226,701	-	-	5,112,928
Financial liabilities	-	176,167	-	-	176,167
Due to related companies	-	170,187	-	-	170,187
Obligations under finance leases (note 37)	-	2,629,613	11,256,785	7,741,847	21,628,245
Interest-bearing bank loans and other borrowings	-	21,722,897	22,815,237	5,800,869	50,339,003


	2,385,569	34,436,316	34,072,022	13,542,716	84,436,623

	2010
	On demand	Within 1 year	1 to 5 years	Over 5 years	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Due to subsidiaries (note 20)	-	367,364	-	-	367,364
Due to associates (note 22)	-	30,753	-	-	30,753
Account and bills payables	461,383	4,425,106	-	-	4,886,489
Financial liabilities included in other payables and accruals	1,098,104	2,719,284	-	-	3,817,388
Financial liabilities	-	340,049	-	-	340,049
Due to related companies	-	159,913	-	-	159,913
Obligations under finance leases (note 37)	-	2,114,129	8,965,753	6,809,804	17,889,686
Interest-bearing bank loans and other borrowings	-	19,432,115	25,760,155	3,038,952	48,231,222
Guarantee (note 48(e))	271,797	-	-	-	271,797


	1,831,284	29,588,713	34,725,908	9,848,756	75,994,661

53 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)

(b) Jet fuel price risk

The Group's strategy for managing the risk on jet fuel price aims to provide the Group with protection against sudden and significant increases in prices. In meeting these objectives, the Group allows for the judicious use of approved derivative instruments such as swaps and collars with approved counterparties and within approved limits.

The following table demonstrates the sensitivity at the end of the reporting period to a reasonably possible change in fuel price, with all other variables held constant and excluding the impact of fuel derivative contracts, of the Group's profit before tax for the year:

	Change in profit before tax
	RMB'000


31 December 2011
If fuel price changes by RMB1,000 per tonne	4,721,818


31 December 2010
If fuel price changes by RMB1,000 per tonne	4,262,070

The Group's finance lease obligations as well as certain bank and other loans are mainly denominated in United States dollars, and certain expenses of the Group are denominated in currencies other than RMB. The Group generates foreign currency revenue from ticket sales made in overseas offices and normally generates sufficient foreign currencies after payment of foreign currency expenses to meet its foreign currency liabilities repayable within one year.

The following table demonstrates the sensitivity at the end of the reporting period to a reasonably possible change in the US$ exchange rate, with all other variables held constant, of the Group's profit before tax (due to changes in the fair value of monetary assets and liabilities) for the year:

	Change in profit before tax
	RMB'000


31 December 2011
If RMB changes against US$ by 1%	620,739


31 December 2010
If RMB changes against US$ by 1%	701,158

53 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)

(d) Interest rate risk

The Group's exposure to the risk of changes in market interest rates relates primarily to the Group's long term debt obligations with floating interest rates.

The Group's policy is to manage its interest cost using a mix of fixed and variable rate debts. To manage this mix in a cost-effective manner, the Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount.

The following table sets out the carrying amounts, by maturity, of the Group's financial instruments that are exposed to interest rate risk:

31 December 2011

Fixed rate

	Within one year	In the Second year	In the third to fifth years, inclusive	Over five years	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Obligations under finance leases (note 37)	200,947	207,663	665,150	1,334,037	2,407,797
Interest-bearing bank loans and other borrowings (note 38)	4,748,446	434,550	7,220,407	1,795,723	14,199,126
Time deposits (note 33)	10,510,051	-	-	-	10,510,051

Floating rate

	Within one year	In the Second year	In the third to fifth years, inclusive	Over five years	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Obligations under finance leases (note 37)	2,486,978	2,506,332	7,899,668	6,579,010	19,471,988
Interest-bearing bank loans and other borrowings (note 38)	23,388,867	9,063,196	12,776,440	8,108,165	53,336,668
Cash at banks (note 33)	5,079,886	-	-	-	5,079,886

53 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES(Continued)

(d) Interest rate risk(Continued)

31 December 2010

Fixed rate

	Within one year	In the Second year	In the third to fifth years, inclusive	Over five years	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Obligations under finance leases (note 37)	100,972	105,364	345,462	688,130	1,239,928
Interest-bearing bank loans and other borrowings (note 38)	2,032,916	3,204,028	6,130,350	249,067	11,616,361
Time deposits (note 33)	11,667,795	-	-	-	11,667,795

Floating rate

	Within one year	In the Second year	In the third to fifth years, inclusive	Over five years	Total
	RMB'000	RMB'000	RMB'000	RMB'000	RMB'000


Obligations under finance leases (note 37)	2,122,268	2,145,298	6,573,197	6,203,901	17,044,664
Interest-bearing bank loans and other borrowings (note 38)	23,449,809	9,748,078	12,335,432	10,492,484	56,025,803
Cash at banks (note 33)	3,576,984	-	-	-	3,576,984

Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. Interest on financial instruments classified as a fixed rate is fixed until the maturity of the instrument. The other financial instruments of the Group that are not included in the above tables are non-interest-bearing and are therefore not subject to interest rate risk.

The following table demonstrates the sensitivity to a reasonably possible change in interest rate, with all other variables held constant, of the Group's profit before tax (through the impact on floating rate borrowings) for the year.

	Change in profit before tax
	RMB'000


31 December 2011
If interest rate of borrowings changes by 50 basis points	295,105


31 December 2010
If interest rate of borrowings changes by 50 basis points	301,082

53 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)

(e) Credit risk

The following table set forth the maximum credit exposure of the Group, within which loans and receivables granted and deposits are placed at carrying amount, net of any impairment losses, and derivatives are at current fair value. For financial guarantees and loan commitments, the maximum exposure represents the maximum amount the Group could be required to pay without consideration of the probability of the actual outcome.

	31 December 2011	31 December 2010
	RMB'000	RMB'000


Due from associates (note 22)	16,022	44,420
Deposits for aircraft under operating leases	420,854	391,600
Long term receivable from the ultimate holding company	-	31,813
Available-for-sale investments	27,182	27,182
Accounts and bills receivables	2,702,332	3,106,364
Financial assets included in deposits and other receivables (note 29)	1,235,051	1,104,589
Financial assets	12,144	27,379
Due from the ultimate holding company	428,561	617,140
Due from related companies	20,194	3,244
Pledged deposits	132,565	843,065
Cash and cash equivalents	15,457,372	14,401,714
Guarantees (note 48(f))	901,938	636,182
Commitments (note 50)	96,234,094	122,324,427
Operating lease arrangements (note 49)	16,905,809	19,120,289


	134,494,118	162,679,408

The above-mentioned financial assets are mainly neither past due nor impaired. Further quantitative data in respect of the Group's exposure to credit risk arising from accounts receivable are disclosed in note 28 to the financial statements.

The Group's cash and cash equivalents are deposited with banks in Mainland China, overseas banks and an associate. The Group has policies in place to limit the exposure to any single financial institution.

A significant portion of the Group's air tickets are sold by agents participating in the Billing and Settlements Plan (the "BSP"), a clearing system between airlines and sales agents organised by the International Air Transportation Association. The balance due from the BSP agents amounted to approximately RMB558 million or 18% of accounts receivable as at 31 December 2011 (2010: RMB882 million or 28% of accounts receivable).

Except for the above, the Group has no significant concentration of credit risk, with the exposure spreading over a number of counterparties.

53 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)

(f) Capital management

The primary objectives of the Group's capital management are to safeguard the Group's ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximise shareholders' value.

The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes for managing capital during the years ended 31 December 2011 and 31 December 2010.

The Group monitors capital structure by reference to the gearing ratio, which represents total liabilities divided by total assets. The gearing ratios as at the end of the reporting periods were as follows:

	2011	2010
	RMB'000	RMB'000


Total Liabilities	127,524,637	117,398,294

Total assets	175,850,072	158,769,531

Gearing ratio	72.52%	73.94%

54 RELATED PARTY TRANSACTIONS

During the year, the Group had the following significant transactions with (i) CNAHC, its subsidiaries (other than the Group), joint ventures and associates (collectively, the "CNAHC Group"); (ii) its joint ventures; and (iii) associates:

	Group
	2011	2010
	RMB'000	RMB'000
		(Restated)


(a) Included in air traffic revenue

Sale of cargo space:
CNAHC Group	97,292	109,287
Joint venture	750	15,348
Associate	74,373	116,128


	172,415	240,763


Government charter flights:
CNAHC Group	521,574	557,706


	521,574	557,706


(b) Included in other operating revenue

Equipment lease income:
CNAHC Group	-	1,050
Joint venture	1,204	-
Associate	9,914	8,844


	11,118	9,894


Aircraft engineering income:
Joint venture	1,095	447
Associates	24,860	41,483


	25,955	41,930


Ground service income:
CNAHC Group	482	520
Joint venture	161	183
Associates	72,580	73,458


	73,223	74,161


Others:
CNAHC Group	49,558	44,194
Joint venture	8,004	11,776
Associates	13,752	14,067


	71,314	70,037

54 RELATED PARTY TRANSACTIONS(Continued)

	Group
	2011	2010
	RMB'000	RMB'000
		(Restated)


(c) Included in finance revenue and finance costs

Interest income:
Joint venture	786	-
Associate	60,887	11,153


	61,673	11,153


Interest expense:
Associate	51,802	26,070


Entrusted loans commission expenses:
Associate	1,275	-


(d) Included in operating expenses

Airport ground services, take-off, landing and depot expenses:
CNAHC Group	554,535	553,728
Joint venture	37,867	-
Associates	106,396	90,707


	698,798	644,435


Air catering charges:
CNAHC Group	723,401	589,572
Associates	11,159	9,609


	734,560	599,181


Repair and maintenance costs:
CNAHC Group	3,348	3,075
Joint venture	855,952	778,778
Associates	17,769	675,673


	877,069	1,457,526


Sale commission expenses:
CNAHC Group	4,330	9,399
Joint venture	18,665	15,366
Associates	4,361	1,922


	27,356	26,687


Management fees:
CNAHC Group	7,839	8,352


Aircraft and flight equipment leasing fees:
Associates	679,770	645,242


Others:
CNAHC Group	210,306	192,160
Joint venture	1,793	1,721
Associates	35,361	20,739


	247,460	214,620

54 RELATED PARTY TRANSACTIONS(Continued)

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000
		(Restated)		(Restated)


(e) Deposits, loans and bills payable:
Deposits placed with an associate (note 33)	3,546,374	3,899,659	3,546,072	3,899,242
Loans from an associate	1,226,903	1,005,499	-	-


(f) Entrusted loans to:
Subsidiaries	-	-	2,200,000	-
Joint venture	25,235	-	-	-


(g) Sales of office equipment and
motor vehicle to:
Joint venture	1,536	-	-	-


(h) Purchase of aircrafts and engines from:
Associate	789,415	394,485	-	-


(i) Other:
Associate	-	19,500	-	-

	Group		Company
	2011	2010	2011	2010
	RMB'000	RMB'000	RMB'000	RMB'000


(j) Outstanding balances with related parties:
Long term receivable from the ultimate holding company	-	31,813	-	31,813
Due from related companies	20,194	3,244	7,803	2
Due to related companies	(190,775)	(181,002)	(170,187)	(159,913)
Due from associates (note 22)	16,022	44,420	5,652	40,448
Due to associates (note 22)	(134,230)	(128,111)	(57,378)	(30,753)
Due from joint ventures	34,050	64,152	-	-
Due to joint ventures	(235,929)	(116,711)	(399,809)	(156,254)
Due from the ultimate holding company	428,561	617,140	432,267	617,669
Due from subsidiaries (note 20)	-	-	1,296,115	617,201
Due to subsidiaries (note 20)	-	-	(397,288)	(367,364)

The long term receivable from CNAHC is unsecured, interest-free and is not repayable within one year from the end of the reporting period. Except for the long term receivable from CNAHC, the outstanding balances with other related parties are unsecured, interest-free and repayable within one year or have no fixed terms of repayment.

54 RELATED PARTY TRANSACTIONS(Continued)

(k) An analysis of the compensation of key management personal of the Group is as follows:

	Group
	2011	2010
	RMB'000	RMB'000


Compensation of key management personnel:
Short term employee benefits	10,667	10,462
Post-employment benefits	776	412
Equity-settled share option expense	(2,202)	3,656


	9,241	14,530

Further details of the remuneration of the Directors and Supervisors are included in note 9 to the financial statements.

(l) On 25 August 2004, CNACG entered into two licence agreements with CNAC pursuant to which CNACG has agreed to grant licences to CNAC, free of royalty, for the rights to use certain trademarks in Hong Kong and Macau, respectively, so long as CNAC is a direct or indirect subsidiary of CNAHC. No royalty charge was levied in respect for the use of these trademarks during each of the two years ended 31 December 2011 and 2010.

(m) The Company entered into several agreements with CNAHC regarding the use of trademarks granted by the Company to CNAHC; the provision of financial services by CNAF; the provision of construction project management services by China National Aviation Construction and Development Company; the subcontracting of charter flight services to CNAHC; the leasing of properties from and to CNAHC; the provision of air ticketing and cargo services; media and advertising service arrangement to China National Aviation Media and Advertising Co., Ltd.; the tourism services co-operation agreement with CNAHC; the comprehensive services agreement with CNAHC; and the provision of maintenance by China Aircraft Services Limited.

Part of the related party transactions above also constitute connected transactions or continuing connected transactions as defined in Chapter 14A of the Listing Rules.

55 COMPARATIVE AMOUNTS

As further explained in note 2 to the financial statements, due to the adoption of IAS 24 (Revised) during the current year, the disclosures of related parties have been revised to comply with the new requirements. Accordingly, certain comparative amounts have been reclassified and restated to conform with the current year presentation.

56 APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the Board of Directors on 27 March 2012.

Consolidated Balance Sheet

31 December 2011

(Prepared under China Accounting Standards for Business Enterprises)

	31 December	31 December
	2011	2010
	RMB'000	RMB'000


ASSETS

CURRENT ASSETS
Cash and bank balances	15,420,242	15,011,027
Financial assets held for trading	12,144	27,379
Bills receivable	1,601	14,295
Accounts receivable	2,652,439	3,180,638
Other receivables	1,662,087	1,138,695
Prepayments	584,983	683,781
Inventories	1,128,164	932,317


Total current assets	21,461,660	20,988,132


NON-CURRENT ASSETS
Long term receivables	424,618	393,492
Long term equity investments	14,804,420	15,522,585
Investment property	240,879	-
Fixed assets	101,737,456	88,224,954
Construction in progress	27,566,439	23,518,332
Intangible assets	2,805,249	2,867,600
Goodwill	1,102,185	1,449,030
Long term deferred expenses	187,893	181,317
Deferred tax assets	2,992,769	2,074,171


Total non-current assets	151,861,908	134,231,481


Total assets	173,323,568	155,219,613

Consolidated Income Statement

31 December 2011

(Prepared under China Accounting Standards for Business Enterprises)

	31 December	31 December
	2011	2010
	RMB'000	RMB'000


LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Short term loans	11,507,317	15,703,154
Financial liabilities held for trading	223,137	427,329
Bills payable	-	387,327
Accounts payable	12,081,912	9,426,483
Domestic air traffic liabilities	2,052,297	1,582,868
International air traffic liabilities	2,510,478	2,025,831
Receipts in advance	121,503	125,088
Employee compensations payable	2,703,428	1,593,762
Taxes payable	2,756,215	2,998,802
Interest payable	360,578	310,029
Other payables	6,309,825	4,630,782
Non-current liabilities repayable within one year	17,240,694	11,421,643


Total current liabilities	57,867,384	50,633,098


NON-CURRENT LIABILITIES
Long term loans	33,398,481	31,923,371
Corporate bonds	6,000,000	9,000,000
Long term payables	2,643,472	2,271,951
Obligations under finance leases	19,191,860	16,061,353
Accrued liabilities	346,284	77,820
Deferred income	3,161,536	2,546,860
Deferred tax liabilities	1,213,030	1,005,840


Total non-current liabilities	65,954,663	62,887,195


Total liabilities	123,822,047	113,520,293


SHAREHOLDERS' EQUITY
Issued capital	12,891,955	12,891,955
Capital reserve	16,288,523	16,245,469
Reserve funds	3,471,812	2,178,300
Retained earnings	17,134,982	12,515,511
Foreign exchange translation reserve	(3,049,254)	(2,178,610)


Equity attributable to owners of the parent	46,738,018	41,652,625

Non-controlling interests	2,763,503	46,695


Total shareholders' equity	49,501,521	41,699,320


Total liabilities and shareholders' equity	173,323,568	155,219,613

	2011	2010
	RMB'000	RMB'000


Revenue from operations	97,139,111	80,962,677
Less: Cost of operations	76,692,435	61,004,800
Business taxes and surcharges	2,241,459	1,607,734
Selling expenses	6,521,025	5,503,427
General and administrative expenses	3,307,241	2,340,040
Finance costs	(1,549,773)	(539,525)
Impairment losses in assets	2,146,816	2,098,256
Add: Gains from movements in fair value	33,744	1,743,515
Investment income	1,336,532	3,572,863
Including: Share of profits and losses of associates and joint ventures	1,331,670	3,405,574


Profit from operations	9,150,184	14,264,323
Add: Non-operating income	1,198,749	847,901
Less: Non-operating expenses	227,414	87,162
Including: Loss on disposal of non-current assets	61,470	45,801


Profit before tax	10,121,519	15,025,062
Less: Tax	2,223,910	2,570,304


Net profit	7,897,609	12,454,758


Net profit attributable to owners of the parent	7,476,855	12,208,049
Non-controlling interests	420,754	246,709


Earnings per share (RMB)
Basic and diluted	0.61	1.05


Other comprehensive loss	(889,223)	(589,481)


Total comprehensive income	7,008,386	11,865,277


Attributable to:
Owners of the parent	6,597,673	11,620,294


Non-controlling interests	410,713	244,983

Supplementary Information

31 December 2011

EFFECTS OF SIGNIFICANT DIFFENCES BETWEEN IFRSs AND CASs

The effects of significant differences between the consolidated financial statements of the Group prepared under CASs and IFRSs are as follows:

		2011	2010
	Notes	RMB'000	RMB'000


Net profit attributable to owners of the parent under CASs		7,476,855	12,208,049
Deferred tax	(i)	(17,123)	105,613
Differences in value of fixed assets	(ii)	(83,510)	(387,353)
Government grants	(iii)	152,387	(18,264)
Others		(446,235)	96,959


Net profit attributable to owners of the parent under IFRSs		7,082,374	12,005,004

		2011	2010
	Notes	RMB'000	RMB'000


Equity attributable to owners of the parent under CASs		46,738,018	41,652,625
Deferred tax	(i)	97,490	114,613
Differences in value of fixed assets	(ii)	(233,626)	(150,116)
Government grants	(iii)	(283,418)	(435,805)
Unrecognition profit of the disposal of Hong Kong Dragon Airlines	(iv)	139,919	139,919
Others		(342,584)	116,718


Equity attributable to owners of the parent under IFRSs		46,115,799	41,437,954

Notes:

(i) The differences in deferred tax were mainly caused by the other differences under CASs and IFRSs as explained below

.(ii) The differences in the value of fixed assets mainly consist of the following three types: (1) fixed assets acquired in foreign currencies prior to 1 January 1994 and translated at the equivalent amount of RMB at the then prevailing exchange rates prescribed by the government (i.e., the government-prescribed rates) under CASs. Under IFRSs, the costs of fixed assets acquired in currencies prior to 1 January 1994 should be translated at the then prevailing market rate (i.e., the swap rate) and therefore resulted in differences in the costs of fixed assets in the financial statements prepared under CASs and IFRSs; (2) in accordance with the accounting policies under IFRSs, all assets are recorded at historical cost. Therefore, the revaluation surplus or deficit and the related depreciation/amortisation or impairment recorded under CASs should be reversed in the financial statements prepared under IFRSs; (3) the differences were caused by the adoption of component accounting in different years under CASs and IFRSs. Component accounting was adopted by the Group on a prospective basis under IFRSs in 2005 and under CASs in 2007. Such differences are expected to be eliminated through depreciation or disposal of fixed assets in future.

(iii) Under both CASs and IFRSs, government grants or government subsidies should be debited as government grants/subsidies receivable or the relevant assets and credited as deferred income, which will then be charged to the income statement on a straight-line basis over the useful lives of the relevant assets. As the accounting for government grants or government subsidies have had no significant impact on the Group's financial statements, no adjustment has been made to unify the accounting treatments of government grants or government subsidies under CASs and IFRSs. Therefore, in the Group's financial statements prepared in accordance with CASs, government grants received were debited as the relevant assets and credited as capital reserve; government subsidies were debited as cash and bank balances and credited as subsidy income in the income statement. Such differences are expected to be eliminated gradually through amortisation of deferred income to the income statement in future.

(iv) The difference was caused by the disposal of Hong Kong Dragon Airlines Limited to Cathay Pacific and is expected to be eliminated when the Group's interest in Cathay Pacific is disposed of.

Glossary of Technical Terms

CAPACITY MEASUREMENTS

"available seat kilometres" or "ASK(s)"	the number of seats available for sale multiplied by the kilometres flown

"available freight tonne kilometres" or "AFTK(s)"	the number of tonnes of capacity available for the carriage of cargo and mail multiplied by the kilometres flown

"available tonne kilometres" or "ATK(s)"	the number of tonnes of capacity available for the transportation of revenue load (passengers and cargo) multiplied by the kilometres flown

"tonne"	a metric ton, equivalent to 2,204.6 pounds

TRAFFIC MEASUREMENTS

"revenue passenger kilometres" or "RPK(s)"	the number of revenue passengers carried multiplied by the kilometres flown

"passenger traffic"	measured in RPKs, unless otherwise specified

"revenue freight tonne kilometres" or "RFTK(s)"	the revenue cargo and mail load in tonnes multiplied by the kilometres flown

"cargo and mail traffic"	measured in RFTKs, unless otherwise specified

"revenue tonne kilometres" or "RTK(s)"	the revenue load (passenger and cargo) in tonnes multiplied by the kilometres flown

YIELD MEASUREMENTS

"passenger yield"	revenues from passenger operations divided by RPKs

"cargo yield"	revenues from cargo operations divided by RFTKs

LOAD FACTORS

"passenger load factor"	RPKs expressed as a percentage of ASKs

"cargo and mail load factor"	RFTKs expressed as a percentage of AFTKs

"overall load factor"	RTKs expressed as a percentage of ATKs

UTILISATION

"block hour(s)"

each whole or partial hour elapsing from the moment the chocks are removed from the wheels of the aircraft for flights until the chocks are next again returned to the wheels of the aircraft

Definitions

In this annual report, the following expressions shall have the following meanings unless the context requires otherwise:

"Air China Cargo"	Air China Cargo Co., Ltd

"Air Macau"	Air Macau Company Limited

"Articles of Association"	the articles of association of the Company, as amended from time to time

"Beijing Airlines"	Beijing Airlines Company Limited

"Board"	the board of directors of the Company

"CASs"	China Accounting Standards for Business Enterprises

"Cathay Pacific"	Cathay Pacific Airways Limited

"CNACG"	China National Aviation Corporation (Group) Limited

"CNAHC"	China National Aviation Holding Company

"CNAMC"	China National Aviation Media and Advertisement Co., Ltd

"Company" or "Air China"	中國國際航空股份有限公司 (Air China Limited), a joint stock limited company incorporated in the PRC with limited liability, whose H shares are listed on the Hong Kong Stock Exchange as its primary listing venue and on the Official List of the UK Listing Authority as its secondary listing venue, and whose A shares are listed on the Shanghai Stock Exchange, and whose principal business is the operation of scheduled airline services

"Dalian Airlines"	Dalian Airlines Company Limited

"Director(s)"	the director(s) of the Company

"Group"	the Company, its subsidiaries and joint ventures

"Hong Kong Stock Exchange"	The Stock Exchange of Hong Kong Limited

"IASs"	International Accounting Standards

"IFRSs"	International Financial Reporting Standards

"Kunming Airlines"	Kunming Airlines Company Limited

"Listing Rules"	The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited

"Lufthansa"	Deutsche Lufthansa AG

"ppts"	percentage points

"PRC"	the People's Republic of China

"RMB"	Renminbi, the lawful currency of the PRC

"SFO"	the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong)

"Shandong Airlines"	Shandong Airlines Co., Ltd.

"Shandong Aviation"	Shandong Aviation Group Co., Ltd.

"Shenzhen Airlines"	Shenzhen Airlines Company Limited

"Supervisor(s)"	the supervisor(s) of the Company

"Tibet Airlines"	Tibet Airlines Company Limited

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR LIFSRSDIIFIF

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Air China Ltd. (AIRC)

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