PRINCIPAL ACCOUNTING POLICIES (Policies) | 12 Months Ended |
Dec. 31, 2013 |
PRINCIPAL ACCOUNTING POLICIES [Abstract] | ' |
Basis of presentation and use of estimates | ' |
a. Basis of presentation and use of estimates |
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The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). |
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The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Significant accounting estimates reflected in the Group’s financial statements mainly include assumptions used in the computation of share-based compensation, allowance for doubtful accounts, assumption of redemption rate utilized in customer loyalty program, assumptions and inputs used in fair value measurement of financial liabilities, assumptions used to measure impairment of long-lived assets, intangible asset with indefinite life and goodwill, useful lives of long-lived assets, determination of fair value of identifiable assets and liabilities acquired through business combinations, recognition of non-controlling interests, and valuation allowance of deferred tax assets. Such accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Group’s consolidated financial statements, and actual results could differ materially from these estimates. |
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As of December 31, 2013, the Group’s current liabilities exceeded its current assets by approximately RMB 95.2 million. As of December 31, 2013, the Group’s credit facilities was RMB 850 million and these facilities are available to be drawn down if needed. The Group believes that by closely monitoring and appropriately allocating its cash resources, together with drawing down the above credit facilitates, if needed, it is able to maintain a sufficient cash position and liquidity status in the foreseeable future. |
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Basis of consolidation and accounting for investments | ' |
b. Basis of consolidation and accounting for investments |
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The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation. |
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A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to appoint or remove the majority of the members of the board of directors; to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders. |
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Accounting Standards Codification (“ASC”) 810 “Consolidation”, which provides guidance on the identification of and financial reporting for entities over which control is achieved through means other than voting interests, which requires certain variable interest entities to be consolidated by the primary beneficiary of the entity. |
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The Company evaluates its business relationships such as those with franchisees to identify potential variable interest entities. Generally, these businesses qualify for the business scope exception under the consolidation guidance. Therefore, the Company has concluded that consolidation of any such entities is not appropriate for the periods. |
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Foreign currencies | ' |
c. Foreign currencies |
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The Group’s functional currency and reporting currency is Renminbi (“RMB”). Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (the “PBOC”) prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. All such exchange gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations. |
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The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China foreign exchange trading system market. |
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Convenience translation | ' |
d. Convenience translation |
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Translations of balances in the statements of operations, balance sheet and statement of cash flows from RMB into United States dollars (“US$”) as of and for the year ended December 31, 2013 are solely for the convenience of the reader and were calculated at the rate of US$ 1.00 =MB 6.0537, on December 31, 2013, representing the certificated exchange rate published by the Federal Reserve Board. No representation is intended to imply that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2013, or at any other rate. |
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Cash and cash equivalents | ' |
e. Cash and cash equivalents |
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Cash and cash equivalents comprise cash on hand and liquid investment which are unrestricted as to withdrawal or use, and which have original maturities of three months or less that are placed with banks or other financial institutions. Cash and cash equivalents balance as of December 31, 2012 included US$ 41,524 thousand and HK$ 0.1 thousand. Cash and cash equivalents balance as of December 31, 2013 included US$ 42,256 thousand and HK$ 0.1 thousand. |
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Restricted cash | ' |
f. Restricted cash |
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Restricted cash consists of cash proceeds from the exercise of share options by the Company’s employees which are yet to be transmitted to them, cash deposited in an escrow account for the settlement of the outstanding purchase consideration of Motel 168 acquisition, and cash reserved in specific interests reserve account (“IRA”) for term loans which was repaid in June 2013 with the early extinguishment of term loans. |
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Allowance for doubtful accounts | ' |
g. Allowance for doubtful accounts |
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Provision is made against receivables to the extent collection is considered to be doubtful. Accounts receivable and other receivables in the balance sheet are stated net of such provision, if any. For the years ended December 31, 2012 and 2013, the allowance for doubtful accounts was nil and RMB 1,558, respectively. |
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Consumables | ' |
h. Consumables |
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The Group purchases consumables for the operation of leased-and-operated hotels. Consumables include fabrics, such as towels and beddings, which need to be renewed periodically. Consumables are amortized over their useful lives, generally one year or less, from the time they are put into use and are stated at purchase price less accumulated amortization. |
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Property and equipment, net | ' |
i. Property and equipment, net |
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Property and equipment are stated at cost less accumulated depreciation and amortization and impairment losses, if any. The cost of property and equipment comprises its purchase price and any directly attributable costs, including interest cost during the period the asset is brought to its working condition and location for its intended use. |
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Depreciation and amortization of property and equipment is provided using the straight line method over their expected useful lives. The expected useful lives are as follows: |
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Buildings | 40 years | | | | | | | | | | | | | | | |
Leasehold improvements | Over the shorter of the economic useful life or the lease period | | | | | | | | | | | | | | | |
Machinery and equipment | 5 to 10 years | | | | | | | | | | | | | | | |
Furniture, fixtures and office equipment | 3 to 5 years | | | | | | | | | | | | | | | |
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Construction in progress represents leasehold improvements under construction or installation and is stated at cost. Cost comprises original cost of property and equipment, installation, construction and other direct costs. Construction in progress is transferred to property and equipment and depreciation commences when the asset is ready for its intended use. |
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Expenditures for repairs and maintenance are expensed as incurred. Gain or loss on disposal of property and equipment, if any, is recognized in the statements of operations as the difference between the net sales proceeds and the carrying amount of the underlying asset. |
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Fair value measurement | ' |
j. Fair value measurement |
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The Company adopted Accounting Standard Codification (“ASC”) 820 “Fair value measurements and disclosures” on January 1, 2008. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and the guidance details the disclosures that are required for items measured at fair value. |
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The Company measures the fair value of financial assets and liabilities using inputs from the following three levels of the fair value hierarchy. The three levels are as follows: |
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Level 1 inputs are unadjusted quoted prices in active markets for identical assets that the management has the ability to access at the measurement date. |
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Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are nor active, inputs other than quoted prices that are observable for the asset (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). |
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Level 3 includes unobservable inputs that reflect the management’s assumptions about the assumptions that market participants would use in pricing the asset. The management develops these inputs based on the best information available, including their own data. |
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The following table presents information about the Group’s financial liabilities classified as Level 3 as of December 31, 2013 and December 31, 2012. |
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| | Balance as of December 31, 2013 | |
| | | | | Fair Value Measurements | |
| | Carrying Value | | | Using Fair Value Hierarchy | |
| | | | | Level 1 | | | Level 2 | | | Level 3 | |
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Liability award of Yitel’s share option (Note 14 (c)) | | | 2,022 | | | | - | | | | - | | | | 2,022 | |
Convertible notes measured at fair value | | | 1,157,295 | | | | - | | | | - | | | | 1,157,295 | |
Total financial liability | | | 1,159,317 | | | | - | | | | - | | | | 1,159,317 | |
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| | Balance as of December 31, 2012 | |
| | | | | Fair Value Measurements | |
| | Carrying Value | | | Using Fair Value Hierarchy | |
| | | | | Level 1 | | | Level 2 | | | Level 3 | |
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Liability award of Yitel’s share option | | | 464 | | | | - | | | | - | | | | 464 | |
Convertible notes measured at fair value | | | 1,056,209 | | | | - | | | | - | | | | 1,056,209 | |
Interest rate swap transaction | | | 10,562 | | | | - | | | | - | | | | 10,562 | |
Total financial liability | | | 1,067,235 | | | | - | | | | - | | | | 1,067,235 | |
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A summary of changes in Level 3 financial liabilities for the year ended December 31, 2013 was as follows: |
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Balance at December 31, 2012 | | | 1,067,235 | | | | | | | | | | | | | |
Add: Unrealized loss - change in fair value in convertible notes (note 12) | | | 133,404 | | | | | | | | | | | | | |
Add: compensation cost in connection with Yitel hotel’s options (note 14(c)) | | | 1,558 | | | | | | | | | | | | | |
Less: Foreign exchange gains in convertible notes (note 12) | | | (32,318 | ) | | | | | | | | | | | | |
Less: Gain arising from change in fair value in interest rate swap transaction (note 12) | | | (912 | ) | | | | | | | | | | | | |
Less: Cash settlement of swap transaction (note 12) | | | (9,650 | ) | | | | | | | | | | | | |
Balance at December 31, 2013 | | | 1,159,317 | | | | | | | | | | | | | |
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Fair value of financial instruments | ' |
k. Fair value of financial instruments |
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The following table presents information about the composition of the Group’s financial instruments and the relevant fair value considerations. |
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Items | | Fair value consideration | | | | | | | | | | | | | | |
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Cash and cash equivalents | | Carrying values of these items approximate their estimated fair values due to the short-term nature of these financial instruments. | | | | | | | | | | | | | | |
Restricted cash | | | | | | | | | | | | | | |
Receivables | | | | | | | | | | | | | | |
Payables | | | | | | | | | | | | | | |
Accruals | | | | | | | | | | | | | | |
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Term loans | | The carrying values of term loans approximate their fair values as all the borrowings carry variable interest rates which approximate rates currently offered by the Group's bankers for similar debt instruments of comparable maturities. | | | | | | | | | | | | | | |
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Financial liability | | Fair value of financial liability associated with the issuance of convertible notes in 2010 is measured using Level 3 inputs, which is measured using a binomial model. Fair value of the financial liability associated with the interest rate swap transaction in 2011 is measured using level 3 inputs, which is measured using the discounted cash flow method (Refer to Note 12). | | | | | | | | | | | | | | |
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Business combinations | ' |
l. Business combinations |
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U.S. GAAP requires that business combinations be accounted for under the acquisition purchase method. From January 1, 2009, the Group adopted ASC805 “Business Combinations”. Following this adoption, the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the entity acquired, the difference is recognized directly in the statements of operations. |
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The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets and forecasted life cycle and forecasted cash flows over that period. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material. |
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Jointly controlled entity | ' |
m. Jointly controlled entity |
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Investment in a jointly controlled entity is accounted for by the equity method of accounting as the Group has the ability to exercise significant influence but does not own a majority equity interest. Under this method, the Group’s income (loss) from investment is recognized in the consolidated statements of operations. Unrealized gains on transactions between the Group and the jointly controlled entity are eliminated to the extent of the Group’s interest in the jointly controlled entity, if any; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Group’s share of losses in the jointly controlled entity equals or exceeds its interest in the jointly controlled entity, the Group does not recognize further losses, unless the Group has incurred obligations or made payments on behalf of the jointly controlled entity. |
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The Group reviews its investment in the jointly controlled entity to determine whether a decline in fair value below the carrying value is other than temporary at period end. The primary factors the Group considers in its determination are the length of time that the fair value of the investment is below the Group’s carrying value and the financial condition, operating performance and near term prospects of the investee. In addition, the Group considers the reason for the decline in fair value, including general market conditions, industry-specific or investee-specific reasons, and changes in valuation subsequent to the balance sheet date and the Group’s intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other than temporary, the carrying value of the security is written down to fair value. There were no impairment losses for its investment in the jointly controlled entity in the years ended December 31, 2011, 2012 and 2013. |
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Goodwill | ' |
n. Goodwill |
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Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is not amortized, but rather is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that it might be impaired. The Group adopted Accounting Standards Update (“ASU”) 2011-08, Intangibles-Goodwill and other (Topic350), since 2012, which gives the Group an option to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, goodwill is then tested following a two-step process. The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. |
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Management performs a goodwill impairment assessment under one single reporting unit. They assess qualitative factors firstly by comparing the fair value of the reporting unit with its carrying amount, including goodwill. Management determines that quoted market price (the Home Inns stock price) is the best evidence of fair value and uses it as the basis of the fair value measurement (in accordance with ASC 350-20-35-22). As of December 31, 2012 and 2013, the market capitalization of Home Inns well exceeded the carrying amount of the reporting unit. No impairment of goodwill was recognized for the years ended December 31, 2011, 2012 and 2013. |
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Intangible assets, net | ' |
o. Intangible assets, net |
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Intangible assets consist primarily of intangible assets acquired in business combinations and software purchased from third parties. Intangible assets acquired through business combinations are recognized as assets separate from goodwill if they satisfy either the “contractual-legal” or “separability” criterion. Intangible assets, including brand, favorable lease agreements and certain franchise agreements existing as of the date of acquisition, are recognized and measured at fair value upon acquisition. |
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Except brand, intangible assets arising from business combinations are amortized on a straight-line base over the remaining operating lease term, the franchise agreement term, or estimated life of customer relationship. The estimated useful lives of amortized intangibles are reassessed if circumstances occur that indicate the useful lives have changed. |
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The trademarked Motel 168 brand was registered in PRC China with remaining legal life of 5 years and can be renewed with minimal costs. Motel 168 is a well-recognized brand in the economy hotel industry in PRC China. The useful life of the brand is indefinite. The Group evaluates indefinite-lived intangible asset each reporting period to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, the asset is tested for impairment. ASC 350 “Intangibles—Goodwill and Other,” provides that intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. |
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Purchased software is stated at cost less accumulated amortization and impairment, if any, and is amortized on the straight-line basis over its estimated useful life of 5 years. |
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No impairment of intangible assets was recognized for the years ended December 31, 2011, 2012 and 2013. |
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Impairment of long-lived assets and definite-lived intangible assets | ' |
p. Impairment of long-lived assets and definite-lived intangible assets |
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Long-lived assets and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that carrying amount of an asset may not be recoverable. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of long-lived assets and definite-lived intangible assets and significant negative industry or economic trends. Impairments are recognized based on the difference between the fair value of the asset and its carrying value in the event that the carrying amount exceeds the estimated future undiscounted cash flow attributed to such assets. Fair value is generally measured based on either quoted market prices, if available, or discounted cash flow analyses. Additionally, determining fair values requires probability weighting the cash flows to reflect expectations about possible variations in their amounts or timing and the selection of an appropriate discount rate. Although cash flow estimates are based on relevant information available at the time the estimates are made, estimates of future cash flows are, by nature, highly uncertain and may vary significantly from actual results. Any write-downs would be treated as permanent reductions in the carrying amounts of the assets and an operating loss would be recognized. The impairment losses on property and equipment recognized for the years ended December 31, 2011, 2012 and 2013 were RMB 1,705, RMB 12,641 and RMB 621, respectively. |
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Employee benefits | ' |
q. Employee benefits |
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The employees of the Group’s PRC subsidiaries are entitled to staff welfare benefits including medical care, housing fund, unemployment insurance and pension benefits. These entities are required to accrue for these benefits based on certain percentages of the employees’ salaries, subject to certain ceilings, in accordance with the relevant PRC regulations and make contributions to the government-sponsored plans out of the amounts accrued. Employee benefits expense was RMB 180,145, RMB 215,251 and RMB 230,331 for the years ended December 31, 2011, 2012 and 2013, respectively. Amounts accrued and included in salaries and welfare payable and other unpaid and accruals in the balance sheets were RMB 11,913 and RMB 10,060 for the years ended December 31, 2012 and 2013, respectively. |
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Accruals for customer reward program | ' |
r. Accruals for customer reward program |
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The Group invites its customers to participate in a customer reward program. Prior to November 14, 2004, membership was free of charge. A one-time membership fee was charged after that date for new members. Members enjoy discounts on room rates, priority in hotel reservation, and accumulate membership points for their paid stays, which can be redeemed for membership upgrades, room night awards and other gifts. The estimated incremental costs to provide membership upgrades, room night awards and other gifts are accrued and recorded as accruals for customer reward program as members accumulate points and recognized as sales and marketing expenses in the statements of operations. As members redeem awards or their entitlements expire, the provision is reduced correspondingly. |
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After the acquisition of Motel 168, the terms under the Motel 168’s customer reward program have been updated to conform to that of Home Inns’ customer reward program. |
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As of December 31, 2012 and 2013, the accruals for customer reward program amounted to RMB 5,499 and RMB 21,811, respectively. The expenses for the customer rewards program were (reversed) / recognized by RMB (16,307), RMB 289, and RMB 16,312 for the years ended December 31, 2011, 2012 and 2013, respectively. |
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The Group estimates the liabilities under the customer rewards program based on accumulated membership points and the estimate of probability of redemption in accordance with the historical redemption pattern. If actual redemption differs significantly from their estimate, it will result in an adjustment to the liability and the corresponding expenses. |
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Deferred Revenue | ' |
s. Deferred Revenue |
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Deferred revenue generally consists of advances received from customers for room stays, initial franchise fees received prior to the Group fulfilling its commitments to the franchisee, and cash received from sale of membership programs. Non-current portion of deferred revenue represents cash received from initial franchise fees and sales of membership program, which is recognized after one year from the balance sheet date. |
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Revenue recognition | ' |
t. Revenue recognition |
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Revenues from leased-and-operated hotels represent primarily room rentals and food and beverage sales from the leased-and-operated hotels. Such revenues are recognized when goods are delivered and services are provided. |
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Revenues from franchised-and-managed hotels are derived from franchise agreements where the franchisees are required to pay (i) an initial franchise fee and (ii) on-going management and service fees based on a percentage of revenue which approximates 3% to 6% of the room revenues of the franchised hotels. The franchise fee is an initial one-time fee. For the franchise agreements signed under Home Inns brand, Yitel brand and Motel 168 brand after its acquisition by the Group, the franchise fee is recognized as revenue when the franchised hotel opens for business, becomes non-refundable, and the Group has fulfilled all its commitments and obligations including the assistance to the franchisees in property design, leasehold improvement construction project management, systems installation, personnel recruiting and training. For the franchise agreements signed under Motel 168 brand prior to its acquisition by the Group, the franchise fee is recorded as deferred revenue when cash is received and recognized as revenue during the franchising period which usually is 5 years as the franchisees have the refund right which elapses proportionally within 5 years. On-going management and service fees are recognized when the underlying service revenue is recognized by the franchisees’ operations. Other revenues generated from franchise agreements include system maintenance and support fee and central reservation system usage fee, which are recognized when services are provided. |
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Prior to the second quarter of 2011, revenue from one-time membership fees was deferred when received and was recognized when membership records showed no activity after a year. With sufficient historical information and accumulative knowledge on membership activity pattern, the Group estimated that average life of memberships is approximately two years. Therefore, the change in accounting estimate is applied prospectively, and revenue from one-time membership fees has been recognized over two years on a straight line basis since April 1, 2011. For the years ended December 31, 2011, 2012 and 2013, the Group recognized revenue of RMB 79,367, RMB 172,148 and RMB 178,822 from one-time membership fees, respectively. |
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The Group continues to monitor the membership activity pattern and reassess average life of memberships at each period end to ensure estimate of revenue recognition period is reasonable. |
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Business tax and related surcharge | ' |
u. Business tax and related surcharge |
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The Group is subject to business tax and related surcharges on the services provided in the PRC. Such tax is levied based on turnover at a total approximate rate of 5.6% and is recorded as a reduction of revenues. |
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Leased-and-operated hotel costs | ' |
v. Leased-and-operated hotel costs |
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Leased-and-operated hotel costs include all direct costs incurred in the operation of the leased-and-operated hotels and consist primarily of property rentals and related expenses, utility costs, personnel compensation, amortization of guest room consumables, amortization of leasehold improvements, depreciation of equipment, consumables, food and beverage costs. |
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Sales and marketing expenses | ' |
w. Sales and marketing expenses |
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Sales and marketing expenses consist primarily of advertising related expenses, expenses associated with the Group’s membership reward program, payroll and related compensation for the Group’s sales and marketing personnel and entertainment expenses relating to marketing activities. Advertising related expenses, including promotion expenses and production costs of marketing materials, are charged to the statements of operations as incurred and amounted to RMB 21,944, RMB 24,068 and RMB 29,221 for the years ended December 31, 2011, 2012 and 2013, respectively. |
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Share-based compensation | ' |
x. Share-based compensation |
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The Group accounts for share-based compensation arrangements with employees in accordance with ASC 718 “Compensation – Stock Compensation”. It requires the Group to measure at the grant date the fair value of the stock-based award and recognize compensation expense, net of estimated forfeitures, on a straight-line basis, over the requisite service period. The Group uses the Black-Scholes option pricing model to determine the fair value of stock options. The requisite service period is the vesting period, which is generally 4 years. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. |
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A subsidiary of the Company grants share options which contained an exercise price denominated in US$. The Group determined it should account for the U.S. dollar denominated share options granted to employees and directors of the subsidiary as liability awards as the Company’s functional currency is RMB and the underlying shares denominated in U.S. dollar has not been publicly traded. All grants of share-based awards to employees and directors classified as liability are remeasured at the end of each reporting period with an adjustment for fair value recorded to the current period expense in order to properly reflect the cumulative expense based on the current fair value of the vested rewards over the vesting periods. |
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Leases | ' |
y. Leases |
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The Company leases certain property and equipment. |
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Leases of property and equipment are classified as operating leases when substantially all the risks and rewards of ownership of assets remain with the lessor. Payments made under operating leases net of any incentives received from the lessor are charged to the consolidated statements of operations on a straight-line basis over the terms of the underlying lease. |
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Leases of property and equipment are classified as finance leases when the Company has substantially all the risks and rewards of ownership. Finance leases are capitalized at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in finance lease liabilities. The interest element of the finance cost is charged to the statements of operations over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property and equipment acquired under finance leases are depreciated over the lease term if the lease does not meet the transfer of ownership criterion or the bargain purchase option criterion. If the lease meets either the transfer of ownership criterion or the bargain purchase option criterion, then the related assets are depreciated over the useful life of the assets. |
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Fixed assets capitalized under finance leases are depreciated in accordance with the Group’s policy for the depreciation of fixed assets. |
Borrowing costs | ' |
z. Borrowing costs |
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Interests incurred in connection with term loan used for acquisition of Motel 168 are expensed as incurred. The upfront fee incurred in connection with the term loan are amortized and recorded as interest expenses over the loan period (Refer to Note 11). |
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Interest cost incurred on funds used to construct leasehold improvements during the active construction period is capitalized. For the years ended December 31, 2011, 2012 and 2013, there was no capitalized interest cost. |
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Pre-operating expenditure | ' |
aa. Pre-operating expenditure |
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Pre-operating expenditure represents start-up costs, other than amounts capitalized as leasehold improvements, for leased-and-operated hotels are charged to the consolidated statements of operations in the period in which it is incurred. |
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Taxation | ' |
ab. Taxation |
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The provision for income taxes is based on the income and expense amounts recorded in our consolidated statements of operations. Income tax expenses are recorded using the liability method. Deferred tax assets or liabilities are recognized for the estimated future tax effects attributable to temporary differences and tax loss carry forwards. Deferred tax assets and liabilities are recognized and measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in statements of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the amount of deferred tax assets if it is considered more likely than not that such assets will not be realized. |
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In order to assess uncertain tax positions, the Group applies a more likely than not threshold and a two-step approach for the tax position measurement and financial statement recognition. For the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is greater than 50% likely to be realized upon settlement. As of December 31, 2012 and 2013, there were no uncertain tax positions. |
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Non-operating income | ' |
ac. Non-operating income |
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Other non-operating income primarily consists of financial subsidies received from provincial and local governments for operating a business in their jurisdictions and compliance with specific policies promoted by the local governments. During the years ended December 31, 2011, 2012 and 2013, the Group received financial subsidies of RMB 22,356, RMB 43,248 and RMB 52,751, respectively, from various local PRC government authorities. There are no defined rules and regulations to govern the criteria necessary for companies to receive such benefits, and the amount of financial subsidy is determined at the discretion of the relevant government authorities. Such amounts are recorded as other non-operating income when received as there is no additional condition attached to the subsidies. |
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Statutory reserves | ' |
ad. Statutory reserves |
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The Group’s subsidiaries incorporated in the PRC are required to set aside 10% of their net income, after offsetting accumulated losses from prior years, and before profit distributions to the investors, as reported in its statutory accounts on an annual basis to the Statutory Surplus Reserve Fund. Once the total Statutory Surplus Reserve Fund reaches 50% of the registered capital of the respective subsidiaries, further appropriations are discretionary. The Statutory Surplus Reserve Fund can be used to increase the registered capital and eliminate future losses of the respective companies under PRC regulations. The Group’s Statutory Surplus Reserve Fund is not distributable to shareholders except in the event of liquidation. |
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Appropriations to the Statutory Surplus Reserve Fund are accounted for as a transfer from retained earnings to statutory reserves. During the years ended December 31, 2011, 2012 and 2013, the Group made total appropriations to these statutory reserves of RMB 31,749, RMB 32,695 and RMB 48,475, respectively. During the year ended December 31, 2012, the Group made a reversal of RMB 141 from the statutory reserve due to disposal of a subsidiary. |
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Dividends | ' |
ae. Dividends |
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Dividends are recognized when declared. The Group has not declared or paid any dividends to its shareholders except for the noncontrolling interests. |
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Current PRC regulations permit PRC companies to pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, the Company’s PRC subsidiaries can only distribute dividends after they have met the PRC requirements for appropriation to statutory reserves (Note 2(ad)). Restricted net assets of the Company’s PRC subsidiaries not distributable in the form of dividends to the parent as a result of the aforesaid PRC regulations were RMB 3,461,710 as of December 31, 2013. In addition to the typical statutory reserves of the Company’s PRC subsidiaries, the restricted net assets also include RMB 3,254,818 paid in capital. |
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Earnings per share | ' |
af. Earnings per share |
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In accordance with ASC 260 “Earnings Per Share”, basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. The Company’s convertible bonds issued in 2007 and convertible notes issued in 2010 are not participating securities because the terms of the agreements do not provide any participating rights to the holders before conversion. Diluted earnings per share is calculated by dividing net income attributable to ordinary shareholders as adjusted for the monetary effect of instruments that are dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the year. Ordinary equivalent shares consist of the ordinary shares issuable upon the conversion of convertible bonds and convertible notes (using the if-converted method) the vesting of restricted stock and ordinary shares issuable upon the exercise of outstanding share options (using the treasury stock method). |
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Segment reporting | ' |
ag. Segment reporting |
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The Company follows “Disclosures about Segment of an Enterprise and Related Information” for its segment reporting. The Group operates and manages its business as a single segment. The Company’s chief operation decision-maker (“CODM”) reviews operating results to make decision about allocating resources and assessing performance for the entire company. |
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The Group primarily generates its revenues from customers in the PRC, and assets of the Group are also located in PRC. Accordingly, no geographical segments are presented. |
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Recent accounting pronouncements | ' |
ah. Recent accounting pronouncements |
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In February of 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The amendments in this ASU require an entity to provide information about amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income (for example, where amounts are reclassified to inventory), an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the amendments are effective with prospective application for reporting periods beginning after December 15, 2012. The Company adopted this ASU beginning on January 1, 2013, and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements. |
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In March of 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. The amendments in the ASU clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss, similar tax loss, or tax credit carryforward, except as noted in the following sentence. To the extent a net operating loss, similar tax loss, or tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such a purpose, then under this exception the unrecognized tax benefit is to be presented in the financial statements as a liability and should not be combined with (netted with) the deferred tax asset(s). The assessment of whether a deferred tax asset is “available” is based on the unrecognized tax benefit and deferred tax asset amounts that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company does not expect the adoption of this ASU to have a materially impact on the Company’s consolidated financial statements. |
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Certain risks and concentration | ' |
ai. Certain risks and concentration |
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Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. As of December 31, 2012 and 2013, substantially all of the Company’s cash was held in major financial institutions located in the PRC, Hong Kong and the United States of America, which management considers being of high credit quality. China does not have an official deposit insurance program, nor does it have an agency similar to The Federal Deposit Insurance Corporation (FDIC) in the United States. However, the Group believes that the risk of failure of any of these PRC banks is remote. Bank failure is extremely uncommon in China and the Group believes that those Chinese banks that hold the Company’s cash, cash equivalents and long term time deposit are financially sound based on public available information. |
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Accounts receivable are typically not collateralized and are denominated in RMB, and are derived from revenues earned from operations arising in the PRC. |
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No individual customer accounted for more than 10% of net revenues for the years ended December 31, 2011, 2012 and 2013. No individual customer accounted for more than 10% of accounts receivable at December 31, 2012 and 2013. |
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Commitments and Contingencies | ' |
aj. Commitments and Contingencies |
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Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. |
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