CHINA VALVE HOLDINGS LIMITED AND SUBSIDIARIES
(Incorporated in SAMOA)
NOTES TO FINANCIAL STATEMENTS
| 1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
DESCRIPTION OF BUSINESS AND BASIS OF PREPARATION
China Valve Holdings Limited (the Company) was incorporated on June 6, 2007 in SAMOA. The Company's principal activity is investment holding and its operations are carried out in SAMOA.
Pursuant to a group reorganization, the company became the holding company of the group in September 2007 by acquiring 100% interest in China Valve Holdings Limited (incorporated in Hong Kong) ("CVHL") on September 28, 2007. CVHL established Henan Tonghai Valve Science Technology Co., Ltd. ("TVST"), a wholly-own subsidiary company in the People's Republic of China, on September 5, 2007. Later,TVST acquired 100% interests in Henan Kai Feng High Pressure Valve Co., Ltd. and Zhengzhou City Zhengdie Valve Co., Ltd., both companies incorporated in the People's Republic of China, on September 20, 2007 and October 25, 2007 respectively.
The acquisition of Henan Kai Feng Pressure Valve Co., Ltd. and Zhengzhou City Zhengdie Valve Co., Ltd. have been treated for accounting purposes as a reverse acquisition whereby these two companies are the acquiring entities for accounting reporting purposes and China Valve is the acquiring and surviving entity for legal purposes. Accordingly, the financial statements have been prepared on a consolidated basis for the periods being presented.
BASIS OF CONSOLIDATION
The consolidated financial statements include thethose of China Valve Holdings Limited, (incorporated in Samoa), China Valve Holdings Limited (incorporated in Hong Kong), Henan Tonghai Valve Science Technology Co., Ltd., Henan Kai Feng Pressure Valve Co., Ltd. and Zhengzhou City Zhengdie Valve Co., Ltd.All material intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CHINA VALVE HOLDINGS LIMITED AND SUBSIDIARIES
(Incorporated in SAMOA)
NOTES TO FINANCIAL STATEMENTS
| 1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(Continued)
PLANT AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and impairment, if any. Depreciation is calculated using the straight-line method over the estimated life of the asset, ranging from five to ten years.
CONSTRUCTION IN PROGRESS
Construction in progress represents direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction is completed and the asset is ready for its intended use.
INTANGIBLE ASSETS
Goodwill is tested for impairment on an annual basis as of the end of the Company's fiscal year, or when impairment indicators arise. The Company uses a fair-value-based approach to test for impairment. The Company evaluates the recoverability of intangible assets periodically and takes into account events and circumstances that warrant revised estimates of useful lives or that indicated that impairment exists. All of the Company's intangible assets, currently consisting only of Patents, are subject to amortization. Patents, which have a legal life of 10 years in the PRC, are being amortized over 5 years as management has determined that five years is the estimated useful life of the Patents currently owned by the Company.
LONG-LIVED ASSETS
The Company periodically reviews the carrying amount of its long-lived assets for impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow.
INVENTORY
The Company values its inventory at the lower of cost or market, determined on a weighted average method, or net realizable value.
CHINA VALVE HOLDINGS LIMITED AND SUBSIDIARIES
(Incorporated in SAMOA)
NOTES TO FINANCIAL STATEMENTS
| 1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(Continued)
FOREIGN CURRENCY TRANSACTIONS & TRANSLATION
The Company uses Renminbi ("RMB") as the functional currency. Transactions denominated in currencies other than RMB are translated into RMB at the applicable rates of exchange prevailing at the dates of the transactions. Monetary assets and liabilities denominated in other currencies are translated into RMB at rates of exchange at the balance sheet dates. Exchange gains or losses arising from changes in exchange rates subsequent to the transaction dates for monetary assets and liabilities denominated in other currencies are included in the determination of net income for the respective period
As the Company's functional currency is the Renminbi, assets and liabilities are translated into U.S. dollars at the exchange rate on the balance sheet date. Income and expense items are translated at average rates of exchange prevailing during each period.
REVENUE RECOGNITION
Revenues are recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer.
RETIRMENT BENEFIT COSTS
Amounts payable for the PRC state managed retirement benefit programs are expensed in the financial statements following the accrual basis of accounting.
INCOME TAXES
Income taxes are accounted for under an asset and liabilityapproach that requires the expected future tax consequences of temporary differences between book and tax basis of assets and liabilities be recognized as deferred tax assets and liabilities. Generally accepted accounting principles require us to evaluatethe realizability of our net deferred tax assets on an ongoing basis.
A valuation allowance is recorded to reduce the net deferred tax assets to an amount that will more likely than not be realized. Significant factors considered by management in assessing the need for a valuation allowance include our historical operating results, the length of time over which the differences will be realized, tax planning opportunities and expectations for future earnings. In the consideration of the realizability of net deferred tax assets, recent losses must be given substantially more weight than any projections of future profitability.
CHINA VALVE HOLDINGS LIMITED AND SUBSIDIARIES
(Incorporated in SAMOA)
NOTES TO FINANCIAL STATEMENTS
| 1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(Continued)
RELATED PARTIES
Parties are considered to be related to the company if the company has the ability, directly or indirectly, to control the party, or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the company and the party are subject to common control or common significance. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities which are under the significant influence of related parties of the company where those parties are individuals, and post-employment benefit plans which are for the benefits of employees of the company or of any entity that is a related party of the company.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments, including cash, cash equivalents, accounts receivable, and accounts payable are carried atcost, which approximates their fair value because of the short-term maturity of these instruments.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consists entirely of foreign currency translation adjustments.
CHINA VALVE HOLDINGS LIMITED AND SUBSIDIARIES
(Incorporated in SAMOA)
NOTES TO FINANCIAL STATEMENTS
| 2. | INVESTMENTS SUBSIDIARIES |
As at September30, 2007, details of the subsidiaries are as follows:
| Name of subsidiaries | Place of Incorporation | Issued and Paid-up capital | | Percentage of Interest | | Principal activity |
| | | | | | | |
| China Valve Holdings | Hong Kong | HK$10,000 | | | 100% | | Investment holding |
| Limited | | | | direct | | |
| | | | | | | | |
| Henan Tonghai Valve | PRC | HK$10,000,000 | | | 100% | | Product design and development |
| Science Technology Co., Limited | | | | | indirectly | | |
| | | | | | | | |
Henan Kai Feng High Pressure Valve Co., Limited | PRC | RMB 60,000,000 | | | 100% | | Import and export |
| | | | | indirectly | | |
| | | | | | | | |
Zhengzhou City Zhengdie Valve Co., Limited | PRC | RMB 33,768,100 | | | 100% | | Import and export |
| | | | | indirectly | | |
The Group's share capital as at September30, 2007shown on the consolidated balance sheet represents the aggregate nominal value of the share capital of Henan Kai Feng High Pressure Valve Co., Limited and Zhengzhou City Zhengdie Valve Co., Limited as at that date.
The Company has authorized capital of US$1,000,000 divided into 1,000,000 shares of par value US$1 each upon incorporation.
