HKSAR Government Scholarship Fund

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HKSAR Government Scholarship Fund

Financial statements for the year ended 31 August 2021

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Report of the Director of Audit

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Independent Auditor’s Report

To the Permanent Secretary for Education Incorporated

Opinion

I certify that I have audited the financial statements of the HKSAR Government Scholarship Fund set out on pages 4 to 21, which comprise the statement of financial position as at 31 August 2021, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In my opinion, the financial statements give a true and fair view of the financial position of the HKSAR Government Scholarship Fund as at 31 August 2021, and of its financial performance and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have been properly prepared in accordance with section 8(3) of the Permanent Secretary for Education Incorporation Ordinance (Cap. 1098).

Basis for opinion

I conducted my audit in accordance with section 8(5) of the Permanent Secretary for Education Incorporation Ordinance and the Audit Commission auditing standards. My responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of my report. I am independent of the HKSAR Government Scholarship Fund in accordance with those standards, and I have fulfilled my other ethical responsibilities in accordance with those standards. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

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Responsibilities of the Permanent Secretary for Education Incorporated for the financial statements

The Permanent Secretary for Education Incorporated is responsible for the preparation of the financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and section 8(3) of the Permanent Secretary for Education Incorporation Ordinance, and for such internal control as the Permanent Secretary for Education Incorporated determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Permanent Secretary for Education Incorporated is responsible for assessing the HKSAR Government Scholarship Fund’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting.

Auditor’s responsibilities for the audit of the financial statements

My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Audit Commission auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with the Audit Commission auditing standards, I exercise professional judgment and maintain professional skepticism throughout the audit. I also:

— identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;

— obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose

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of expressing an opinion on the effectiveness of the HKSAR Government Scholarship Fund’s internal control;

— evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Permanent Secretary for Education Incorporated;

— conclude on the appropriateness of the Permanent Secretary for Education Incorporated’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the HKSAR Government Scholarship Fund’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the HKSAR Government Scholarship Fund to cease to continue as a going concern; and

— evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

Ms Hildy Chan Audit Commission

Assistant Director of Audit 6th Floor, High Block

for Director of Audit Queensway Government Offices

66 Queensway

23 February 2022 Hong Kong

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Note 2021 2020 INCOME

Interest income 3 37,647 39,020

Dividend income 4 39,057 39,840

Net realised and revaluation gains 320,166 145,443

Net exchange gains 619 15,188

397,489

239,491 EXPENDITURE

Scholarship grants 5 (96,341) (102,758)

Operating expenses 6 (9,382) (6,085)

(105,723)

(108,843)

SURPLUS FOR THE YEAR 291,766 130,648

OTHER COMPREHENSIVE INCOME

291,766

130,648

The accompanying notes 1 to 15 form part of these financial statements.

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 AUGUST 2021

(Expressed in thousands of Hong Kong dollars)

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Note 2021 2020 ASSETS

Cash at bank 54 24

Deposits with banks and other financial institutions

having a maturity of three months or less when placed 7 49,690 212,535 Deposits with banks and other financial institutions

having a maturity of more than three months when placed 7 452,187 137,821

Securities 8 2,471,897 2,363,849

Derivative financial instruments 9 1,930 1,259

Receivables and other assets 10 57,503 36,041

Placement with the Exchange Fund 11 658,396 634,904 3,691,657

3,386,433 LIABILITIES

Derivative financial instruments 9 (919) (1,994) Payables and other liabilities 12 (20,096) (5,563)

(21,015)

(7,557)

NET ASSETS 3,670,642 3,378,876

Representing:

FUND BALANCE

Accumulated surplus 3,670,642 3,378,876

The accompanying notes 1 to 15 form part of these financial statements.

23 February 2022

Permanent Secretary for Education Incorporated Trustee of the HKSAR Government Scholarship Fund HKSAR GOVERNMENT SCHOLARSHIP FUND

STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 2021

(Expressed in thousands of Hong Kong dollars)

(Ms Michelle Li)

Permanent Secretary for Education

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2021 2020 ACCUMULATED SURPLUS

Balance at beginning of year 3,378,876 3,248,228 Total comprehensive income for the year 291,766 130,648

Balance at end of year 3,670,642 3,378,876

The accompanying notes 1 to 15 form part of these financial statements.

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 AUGUST 2021

(Expressed in thousands of Hong Kong dollars)

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2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES

Surplus for the year 291,766 130,648

Adjustments for:

Interest income (37,647) (39,020)

Dividend income (39,057) (39,840)

(Increase)/Decrease in deposits with banks and other financial

institutions having a maturity of more than three months when placed (314,366) 224,480 Increase in investments in securities (108,048) (388,947) Increase in placement with the Exchange Fund (23,492) (16,551) Change in derivative financial instruments (1,746) 1,290 (Increase)/Decrease in receivables and other assets (16,864) 2,867 Increase in payables and other liabilities 14,533 2,199 Elimination of foreign exchange differences

in revaluation of cash and cash equivalents (129) 1,039

Interest received 33,301 36,337

Dividends received 38,805 40,782

NET CASH USED IN OPERATING ACTIVITIES (162,944) (44,716)

CASH AND CASH EQUIVALENTS

AT BEGINNING OF YEAR 212,559 258,314

EFFECT OF EXCHANGE RATE CHANGES 129 (1,039)

CASH AND CASH EQUIVALENTS

AT END OF YEAR 49,744 212,559

ANALYSIS OF CASH AND CASH EQUIVALENTS

49,690 212,535

Cash at bank 54 24

49,744 212,559

The accompanying notes 1 to 15 form part of these financial statements.

HKSAR GOVERNMENT SCHOLARSHIP FUND STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 AUGUST 2021

(Expressed in thousands of Hong Kong dollars)

Deposits with banks and other financial institutions having a maturity of three months or less when placed

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Notes to the financial statements

(Amounts expressed in thousands of Hong Kong dollars, unless otherwise stated.) 1. General

The HKSAR Government Scholarship Fund (the Fund) was established by a declaration of trust made on 3 March 2008 by the Permanent Secretary for Education Incorporated (the Trustee). The Fund provides scholarships to students studying in full-time sub-degree and degree or above programmes funded by the Government of the Hong Kong Special Administrative Region in recognition of their achievements and talents, to attract and retain such students to pursue their studies in Hong Kong.

2. Significant accounting policies

(a) Statement of compliance

The financial statements have been prepared in accordance with section 8(3) of the Permanent Secretary for Education Incorporation Ordinance (Cap. 1098), accounting principles generally accepted in Hong Kong, and Hong Kong Financial Reporting Standards (HKFRSs), which is a collective term that includes all applicable individual HKFRSs, Hong Kong Accounting Standards and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). A summary of the significant accounting policies adopted by the Fund is set out below.

The HKICPA has issued certain new or revised HKFRSs that are first effective or available for early adoption for the current accounting period of the Fund.

Note 2(c) provides information on the changes, if any, in accounting policies resulting from initial application of these developments to the extent that they are relevant to the Fund for the current and prior accounting periods reflected in these financial statements.

(b) Basis of preparation of the financial statements

The measurement basis used in the preparation of the financial statements is historical cost except that equity and debt securities managed by the Fund’s external investment managers (note 13(a)) and derivative financial instruments are measured at fair value as explained in the accounting policies set out in note 2(d).

The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenditure. The estimates and associated assumptions are based on experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

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The estimates and underlying assumptions are reviewed on an ongoing basis.

Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

There are no critical accounting judgements involved in the application of the Fund’s accounting policies. There are also no key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next year.

(c) Changes in accounting policies

The HKICPA has issued certain new or revised HKFRSs that are first effective for the current accounting period of the Fund. There have been no changes to the accounting policies applied in these financial statements for the years presented as a result of these developments.

The Fund has not applied any new standard or interpretation that is not yet effective for the current accounting period (note 15).

(d) Financial assets and financial liabilities (i) Initial recognition and measurement

The Fund recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial instruments are recognised on trade date, the date on which the Fund commits to purchase or sell the instruments.

At initial recognition, financial assets and financial liabilities are measured at fair value plus or minus, in the case of a financial asset or financial liability not measured at fair value through surplus or deficit (equivalent to “fair value through profit or loss” under HKFRS 9), transaction costs that are directly attributable to the acquisition of the financial assets or the issue of the financial liabilities. Transaction costs of financial instruments measured at fair value through surplus or deficit are expensed immediately.

(ii) Classification and subsequent measurement

Financial instruments measured at fair value through surplus or deficit

These comprise equity and debt securities managed by the Fund’s external investment managers (note 13(a)), and derivative financial instruments.

They are subsequently measured at fair value. Changes in fair value are recognised in surplus or deficit in the period in which they arise.

Derivative financial instruments used by the Fund to manage its risks associated with foreign currency fluctuations do not qualify for hedge accounting. They are presented as assets when the fair value is positive and as liabilities when the fair value is negative.

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These comprise cash at bank, deposits with banks and other financial institutions, receivables and other assets, and placement with the Exchange Fund. They are held for the collection of contractual cash flows which represent solely payments of principal and interest. They are subsequently measured at amortised cost using the effective interest method. The measurement of loss allowances for these financial assets is based on the expected credit loss model as described in note 2(d)(vi).

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating and recognising the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial asset or financial liability to the gross carrying amount of the financial asset or to the amortised cost of the financial liability. When calculating the effective interest rate, the Fund estimates cash flows by considering all contractual terms of the financial instrument but does not consider the expected credit losses. The calculation includes all fees received or paid between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Financial liabilities measured at amortised cost

These comprise payables and other liabilities. They are subsequently measured at amortised cost using the effective interest method.

The Fund reclassifies a financial asset when and only when it changes its business model for managing the assets. A financial liability is not reclassified.

(iii) Fair value measurement principles

The Fund measures equity and debt securities managed by the Fund’s external investment managers (note 13(a)) and derivative financial instruments at fair value at each reporting date. Fair value is 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. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either (a) in the principal market for the asset or liability, or (b) in the absence of a principal market, in the most advantageous market for the asset or liability; and the Fund has access to these markets at the measurement date.

The fair value of an asset or a liability is measured with those assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest.

The Fund uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable

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inputs. The Fund measures fair values using the following fair value hierarchy that reflects the significance of inputs used in making the measurements:

Level 1 – fair values are quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 – fair values are determined with inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices);

and

Level 3 – fair values of financial instruments are determined with inputs that are not based on observable market data (unobservable inputs).

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Fund determines whether transfers between levels in the hierarchy should be reflected in the financial statements by re-assessing categorisation (based on the level of input that is most significant and relevant to the fair value measurement as a whole) at the reporting date.

(iv) Derecognition

A financial asset is derecognised when the contractual rights to receive the cash flows from the financial asset expire, or where the financial asset together with substantially all the risks and rewards of ownership have been transferred.

A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or when it expires.

(v) Offsetting

Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position where there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liabilities simultaneously.

(vi) Impairment of financial assets

For financial assets measured at amortised cost, the Fund measures the expected credit losses to determine the loss allowance required to be recognised. Financial assets measured at fair value through surplus or deficit are not subject to the expected credit loss assessment.

Expected credit losses are a probability-weighted estimate of credit losses.

They are based on the difference between the contractual cash flows due in accordance with the contract and the cash flows that the Fund expects to receive, discounted at the effective interest rate. They are measured on either of the following bases:

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— 12-month expected credit losses (for financial instruments for which there has not been a significant increase in credit risk since initial recognition):

these are losses that are expected to result from possible default events within the 12 months after the reporting date; and

— lifetime expected credit losses (for financial instruments for which there has been a significant increase in credit risk since initial recognition):

these are losses that are expected to result from all possible default events over the expected life of the financial instruments.

In assessing whether the credit risk of a financial instrument has increased significantly since initial recognition, the Fund compares the risk of default occurring on the financial instrument assessed at the reporting date with that assessed at the date of initial recognition. In making this assessment, the Fund considers that a default event occurs when (i) the borrower is unlikely to pay its credit obligations to the Fund in full; or (ii) the financial asset is 90 days past due. The Fund considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort.

A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

(e) Revenue recognition (i) Interest income

Interest income is recognised in surplus or deficit on an accrual basis, using the effective interest method.

(ii) Dividend income

Dividend income from equity securities is recognised in surplus or deficit when the share price is quoted ex-dividend.

(iii) Net realised and revaluation gains/losses

Realised gains or losses on financial instruments are recognised in surplus or deficit when the financial instruments are derecognised. Changes in fair value of financial instruments measured at fair value through surplus or deficit are recognised as revaluation gains or losses in surplus or deficit in the period in which they arise.

(f) Scholarship grants recognition

Scholarship grants are recognised as expenditure when they are approved.

(g) Foreign currency translation

Foreign currency transactions during the year are translated into Hong Kong dollars at the spot exchange rates at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into Hong Kong dollars

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at the closing exchange rates at the reporting date. All foreign currency translation differences are recognised as net realised and revaluation gains or losses in surplus or deficit.

(h) Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents include cash at bank and deposits with banks and other financial institutions having a maturity of three months or less when placed.

3. Interest income

2021 2020

Interest income from:

— placement with the Exchange Fund 28,432 21,655

— debt securities measured at fair value through surplus or deficit denominated in:

- Hong Kong dollar 668 1,014

- other currencies 7,150 8,839

7,818 9,853

— deposits denominated in:

- Hong Kong dollar 843 1,939

- other currencies 554 5,573

1,397 7,512

37,647 39,020

4. Dividend income

2021 2020

Dividend income from equity securities listed:

— in Hong Kong 14,446 16,260

— outside Hong Kong 24,611 23,580

39,057 39,840

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2021 2020

Scholarship grants to institutions 96,341 102,758

6. Operating expenses

2021 2020

Fees for investment managers 6,271 3,949

Fees for custodian 2,779 1,777

Investment transaction costs 331 246

Others 1 113

9,382 6,085

7. Deposits with banks and other financial institutions

2021 2020

Fixed deposits denominated in:

— Hong Kong dollar 389,054 54,880

— other currencies 78,133 262,629

Call deposits and balances with the custodian denominated in:

— Hong Kong dollar 4,105 1,152

— other currencies 30,585 31,695

501,877 350,356 Less: Deposits with banks and other financial

institutions having a maturity of more than three

months when placed (452,187) (137,821)

Deposits with banks and other financial institutions

having a maturity of three months or less when placed 49,690 212,535

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8. Securities

2021 2020

Financial assets measured at fair value through surplus or deficit

Equity securities listed:

— in Hong Kong 701,082 700,962

— outside Hong Kong 1,210,185 1,101,677

Debt securities denominated in:

— Hong Kong dollar 38,807 68,856

— other currencies 521,823 492,354

2,471,897 2,363,849

9. Derivative financial instruments

2021 2020

Assets Liabilities Assets Liabilities Forward currency contracts,

at fair value 1,930 919 1,259 1,994

All these forward currency contracts would mature within one year and had a total notional amount of HK$1,144.2 million as at 31 August 2021 (2020: HK$1,102.8 million). The notional amounts of these contracts indicate the volume of outstanding transactions and do not represent the amounts at risk.

10. Receivables and other assets

2021 2020

Proceeds receivable from investments sold 3,285

Accrued interest from placement with

the Exchange Fund 20,601 15,661

Other interest and dividends receivable 5,383 5,725

Other receivables 28,234 14,655

57,503 36,041

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The balance of the placement with the Exchange Fund amounted to HK$658.4 million (2020: HK$634.9 million), being the principal sums of HK$580.8 million (2020: HK$580.8 million) plus interest paid but not yet withdrawn at the reporting date of HK$77.6 million (2020: HK$54.1 million). The term of the placement is six years from the date of placement, during which the amount of principal sums cannot be withdrawn.

Interest on the placement is payable at a fixed rate determined every January. The rate is the average annual investment return of the Exchange Fund’s Investment Portfolio for the past six years or the average annual yield of three-year Government Bond for the previous year subject to a minimum of zero percent, whichever is the higher. The interest rate has been fixed at 4.7% for the calendar year 2021 and at 3.7% for the calendar year 2020.

12. Payables and other liabilities

2021 2020

Unsettled purchases of investments 16,781 3,853

Other payables and accruals 3,315 1,710

20,096 5,563

13. Financial risk management

(a) Investment management and control

The Trustee may invest moneys of the Fund in accordance with section 5 of the Permanent Secretary for Education Incorporation Ordinance. She has appointed the Director of Accounting Services to manage the investments of the Fund.

The Steering Committee, established under the declaration of trust, may advise the Trustee on policies and procedures governing the operation and development of the Fund. The Investment Committee, established under the declaration of trust, may advise the Trustee on the formulation of policies for and the monitoring of the investments of the Fund. Members of both the Steering Committee and the Investment Committee are appointed by the Secretary for Education.

The Fund’s investment aims to maintain capital and generate recurrent income to support the annual grants of scholarships.

The investment performance of the Fund is monitored through the Investment Committee which meets regularly to review investment reports prepared by the Director of Accounting Services and to interview the Fund’s external investment managers. The Investment Committee also formulates guidelines on asset allocation in order to meet the investment objective.

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The investment management and control of the Fund are set out in a documented risk management and investment strategy and are reviewed on a regular basis by the Investment Committee.

(b) Market risk

Market risk is the risk that changes in market variables, such as equity prices, interest rates and currency exchange rates may affect the fair value or cash flows of a financial instrument.

(i) Equity price risk

Equity price risk is the risk of loss arising from changes in equity prices. The Fund’s investments in equity securities are subject to the equity price risk inherent in all equity securities, i.e. the value of holdings may fall as well as rise. As at 31 August 2021, the equity securities were included in securities as shown in note 8. The risk is primarily addressed through diversification of investment portfolio in accordance with a documented risk management and investment strategy, and the Fund monitors the risk on a continuous basis.

It was estimated that, as at 31 August 2021, a 10% increase/decrease in the market bid prices of the equity securities, with all other variables held constant, would increase/decrease the surplus for the year by HK$191.1 million (2020: HK$180.3 million).

(ii) Interest rate risk

Interest rate risk refers to the risk of loss arising from changes in market interest rates. This can be further classified into fair value interest rate risk and cash flow interest rate risk.

Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. Since a substantial portion of the Fund’s debt securities and all of its deposits with banks and other financial institutions bear interest at fixed rates, their fair values will fall when market interest rates increase. Investments in debt securities are made in accordance with a documented risk management and investment strategy, and the Fund monitors the fair value interest rate risk on a continuous basis.

It was estimated that, as at 31 August 2021, a 100 basis points increase/decrease in interest rates, with all other variables held constant, would decrease/increase the surplus for the year by HK$41.8 million (2020: HK$53.7 million). As regards deposits with banks and other financial institutions, since they are all stated at amortised cost, their carrying amounts will not be affected by changes in market interest rates.

Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Fund does not have a significant exposure to cash flow interest rate risk because only a small portion of its debt securities bear interest at rates determined by reference to market interest rates.

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Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in currency exchange rates. The Fund’s investments denominated in currency other than Hong Kong dollar are exposed to currency risk. The Fund only makes investments denominated in Hong Kong dollar, US dollar, Renminbi and currencies of countries whose foreign currency long-term debt has a high credit rating. The Fund’s exposure to currency risk is handled in accordance with a documented risk management and investment strategy, and the Fund monitors the risk on a continuous basis.

The net exposure to each currency at the reporting date arising from recognised assets and liabilities after taking into account the effect of forward currency contracts is shown below:

2021 2020

Hong Kong dollar 2,140,732 1,763,458

US dollar 872,451 1,037,203

Euro 207,506 215,696

Japanese yen 131,976 123,385

Renminbi 78,323

Pound sterling 65,792 88,151

Others 173,862 150,983

3,670,642 3,378,876 It was estimated that, as at 31 August 2021, with all other variables held constant:

 a 0.5% increase/decrease in the exchange rate of US dollar against Hong Kong dollar would increase/decrease the surplus for the year by HK$4.4 million (2020: HK$5.2 million); and

 a 5% increase/decrease in the exchange rates of other currencies against Hong Kong dollar would increase/decrease the surplus for the year by HK$32.9 million (2020: HK$28.9 million).

(c) Credit risk

Credit risk is the risk that an issuer or a counterparty will cause a financial loss to the Fund by failing to discharge an obligation. Cash at bank, deposits with banks and other financial institutions, debt securities, derivative financial instruments, receivables and other assets, and placement with the Exchange Fund are potentially subject to credit risk. The Fund selects issuer or counterparty with good credit standing, strong financial strength and sizeable capital. The Fund also limits the individual exposure, in accordance with a documented risk management and investment strategy, and monitors credit risk on a continuous basis.

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While the financial assets measured at amortised cost are subject to the impairment requirements, the Fund has estimated that their expected credit losses are immaterial and considers that no loss allowance is required.

The credit quality of cash at bank, deposits with banks and other financial institutions and debt securities at the reporting date, analysed by the ratings designated by Moody’s or their equivalents, is shown below:

2021 2020

Cash at bank and deposits with banks and other financial institutions, by credit rating:

Aa1 to Aa3 171,104 96,012

A1 to A3 330,827 254,368

501,931 350,380

Debt securities, by credit rating:

Aaa 185,495 124,957

Aa1 to Aa3 114,770 161,993

A1 to A3 194,017 177,306

Baa1 to Baa3 63,710 96,549

Ba1 to Ba3 405

B1 to B3 2,638

560,630 561,210 The maximum exposure to credit risk of the financial assets of the Fund at the reporting date is equal to their carrying amounts.

(d) Liquidity risk

Liquidity risk is the risk that the Fund will encounter difficulty in meeting obligations associated with financial liabilities. The Fund monitors the liquidity requirements on a continuous basis and maintains a level of short-term deposits and cash to pay scholarships and operating expenses as necessary. Hence the Fund does not have significant exposure to liquidity risk.

As at 31 August 2021, the remaining contractual maturities of all financial liabilities, based on contractual undiscounted cash flows and the earliest date on which the Fund can be required to pay, were one year or less (2020: six months or less).

(e) Other financial risk

The Fund is exposed to financial risk arising from change in the interest rate on the placement with the Exchange Fund which is determined every January (note 11).

It was estimated that, as at 31 August 2021, a 50 basis points increase/decrease in

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surplus for the year by HK$3.3 million (2020: HK$3.2 million).

14. Fair values of financial instruments

The fair value of financial instruments classified under Level 1 is based on the quoted market prices of these financial instruments at the reporting date, without any deduction for estimated future selling costs.

In the absence of such quoted prices, the fair value of financial instruments classified under Level 2 is estimated using present value or other valuation techniques which maximise the use of observable data, using inputs based on market conditions existing at the reporting date.

(a) Financial instruments measured at fair value on a recurring basis

The carrying value of financial instruments measured at fair value at the reporting date according to the fair value hierarchy is shown below:

2021 Level 1 Level 2 Total

Assets

Financial assets measured at fair value through surplus or

deficit 1,911,267 560,630 2,471,897

Derivative financial instruments 1,930 1,930 1,911,267 562,560 2,473,827

Liabilities

Derivative financial instruments 919 919

2020 Level 1 Level 2 Total

Assets

Financial assets measured at fair value through surplus or

deficit 1,802,639 561,210 2,363,849

Derivative financial instruments — 1,259 1,259 1,802,639 562,469 2,365,108 Liabilities

Derivative financial instruments — 1,994 1,994 No financial assets or liabilities were classified under Level 3. There were no transfers between Level 1 and Level 2 during the year.

(b) Financial instruments not measured at fair value on a recurring basis

All other financial instruments are stated in the statement of financial position at amounts equal to or not materially different from their fair values.

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15. Possible impact of amendments, new standards and interpretations issued but not yet effective for the year ended 31 August 2021

Up to the date of issue of these financial statements, the HKICPA has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended 31 August 2021 and which have not been early adopted in these financial statements.

The Fund is in the process of making an assessment of the expected impact of these amendments, new standards and interpretations in the period of initial application. So far, it has concluded that the adoption of them is unlikely to have a significant impact on the financial statements.

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