ANNUAL REPORT 2016 March 2017 Contents Section I Important Notice and Paraphrase .................................................................................. 1 Section II Company Profile and Main Finnaical Indexes ............................................................. 3 Section III Summary of Company Business .................................................................................. 7 Section IV Discussion and Analysis of Operation ........................................................................... 9 Section V Important Events .......................................................................................................... 21 Section VI Changes in shares and particular about shareholders ............................................... 29 Section VII Preferred Stock……………………………………………………………………… 35 Section VIII Particulars about Directors, Supervisors,Senior Executives and Employees ...... 36 Section IX Corporate Governance ................................................................................................. 47 Section X Corporate Bond .............................................................................................................. 55 Section XI Financial Report ............................................................................................................ 56 Section XII Documents available for reference ........................................................................... 170 Shandong Airlines Co., Ltd. Annual Report 2016 Section I. Important Notice and Paraphrase Board of Directors, Supervisory Committee, all directors, supervisors and senior executives of Shandong Airlines Co., Ltd. (hereinafter referred to as the Company) hereby confirm that there are no any fictitious statements, misleading statements, or important omissions carried in this report, and shall take all responsibilities, individual and/or joint, for the reality, accuracy and completion of the whole contents. Sun Xiujiang, Principal of the Company, Xu Guojian, person in charger of accounting works and Sun Jingping, person in charge of accounting organ (accounting principal) hereby confirm that the Financial Report of 2016 Annual Report is authentic, accurate and complete. Other directors attending the Meeting for annual report deliberation except for the followed: Name of director absent Title for absent director Reasons for absent Attorney Wang Mingyuan Director Work causes Xu Chuanyu China Securities Journal, Securities Times, Hong Kong Commercial Daily and Juchao Website (www.cninfo.com.cn) are the media for information disclosure appointed by the Company, all information under the name of the Company disclosed on the above said media shall prevail, and Investors are advised to exercise caution of investment risks. The profit distribution plan that deliberated and approved by the Board is: based on total stock issued 400,000,000 shares, distributed 3.0 Yuan (tax included) bonus in cash for every 10-share hold by all shareholders, 0 shares bonus issued (tax included) and no capitalizing of common reserves carried out. 1 Shandong Airlines Co., Ltd. Annual Report 2016 Paraphrase Items Refers to Contents The Company, Company Refers to Shandong Airlines Co., Ltd. Shandong Aviation Group; the first largest shareholder and controlling SDA Refers to shareholder of the Company Air China Refers to Air China Limited, the second largest shareholder of the Company 2 Shandong Airlines Co., Ltd. Annual Report 2016 Section II Company Profile and Main Finnaical Indexes I. Company information Short form of the stock Shanhang-B Stock code 200152 Stock exchange for listing Shenzhen Stock Exchange Name of the Company (in 山东航空股份有限公司 Chinese) Short form of the Company (in 山东航空 Chinese) Foreign name of the Company (if SHANDONG AIRLINES CO.,LTD. applicable) Short form of foreign name of the SDA Company (if applicable) Legal representative Sun Xiujiang Registrations add. Yaoqiang International Airport, Jinan, Shandong Code for registrations add 250107 Offices add. SDA Bldg., No. 5746, Er Huan East Road, Jinan, Shandong Codes for office add. 250014 Company website http://www.shandongair.com.cn Email zqb@shandongair.com.cn II. Person/Way to contact Secretary of the Board Rep. of security affairs Name Dong Qiantang Fan Peng 1/F, Tiangong Office Building, North of 3/F, Tiangong Office Building, North of Red-crowed cranes Hotel, Yaoqiang Red-crowed cranes Hotel, Yaoqiang Contacts add. International Airlines, Licheng District, International Airlines, Licheng District, Jinan, Shandong Jinan, Shandong Tel. 0531-82085939 0531-82085586 Fax. 0531-85698767 ext. 8679 0531-85698767 ext. 8679 Email dongqt@shandongair.com.cn fanp@shandongair.com.cn 3 Shandong Airlines Co., Ltd. Annual Report 2016 III. Information disclosure and preparation place Newspaper appointed for information In China: China Securities Journal, Securities Times disclosure overseas: Hong Kong Commercial Daily Website for annual report publish appointed by http://www.cninfo.com.cn CSRC Office of Board (3/F, Tiangong Office Building, North of Red-crowed Preparation place for annual report cranes Hotel, Yaoqiang International Airlines, Licheng District, Jinan, Shandong) IV. Registration changes of the Company Organization code 91370000720721201F Changes of main business since listing (if No change. applicable) Previous changes for controlling shareholders (if No change. applicable) V. Other relevant information CPA engaged by the Company Name of CPA Ruihua Certified Public Accountants (LLP) 5-11/F, West Tower, China Oversea Property Plaza, NO. 7 Building of No. 8 West Offices add. for CPA Binhe Rd., Dongcheng District, Beijing Signing Accountants Yang Yunhui, Guo Yuefeng Sponsor engaged by the Company for performing continuous supervision duties in reporting period □ Applicable √ Not applicable Financial consultant engaged by the Company for performing continuous supervision duties in reporting period □ Applicable √ Not applicable VI. Main accounting data and financial indexes Whether it has retroactive adjustment or re-statement on previous accounting data for accounting policy changed and accounting error correction or not □ Yes √ No 2016 2015 Changes over last year 2014 Operating income (RMB) 13,742,365,545.56 12,108,963,139.11 13.49% 11,570,296,757.48 Net profit attributable to shareholders of the listed 532,834,567.17 532,260,993.04 0.11% 287,851,542.09 company(RMB) 4 Shandong Airlines Co., Ltd. Annual Report 2016 Net profit attributable to shareholders of the listed company 409,577,360.28 387,733,814.57 5.63% 146,403,043.43 after deducting non-recurring gains and losses(RMB) Net cash flow arising from 2,427,055,988.42 2,424,457,843.01 0.11% 1,459,828,215.31 operating activities(RMB) Basic earnings per share 1.33 1.33 0.00% 0.72 (RMB/Share) Diluted earnings per share 1.33 1.33 0.00% 0.72 (RMB/Share) 2.34 percentage points Weighted average ROE 14.88% 17.22% 10.33% down Changes over end of End of 2016 End of 2015 End of 2014 last year Total assets (RMB) 12,741,974,788.53 12,748,902,597.96 -0.05% 12,118,867,620.51 Net assets attributable to shareholder of listed company 3,836,172,828.06 3,365,013,204.57 14.00% 2,878,120,380.35 (RMB) VII. Difference of the accounting data under accounting rules in and out of China 1. Difference of the net profit and net assets disclosed in financial report, under both IAS (International Accounting Standards) and Chinese GAAP (Generally Accepted Accounting Principles) The Company had no difference of the net profit or net assets disclosed in financial report, under either IAS (International Accounting Standards) or Chinese GAAP (Generally Accepted Accounting Principles) in the period. 2. Difference of the net profit and net assets disclosed in financial report, under both foreign accounting rules and Chinese GAAP (Generally Accepted Accounting Principles) The Company had no difference of the net profit or net assets disclosed in financial report, under either foreign accounting rules or Chinese GAAP (Generally Accepted Accounting Principles) in the period. VIII. Quarterly main financial index In RMB First quarter Second quarter Third quarter Fourth quarter Operating income 3,219,038,263.72 3,090,711,026.50 4,281,345,876.23 3,151,270,379.11 Net profit attributable to 245,104,203.92 38,585,284.73 561,083,160.10 -311,938,081.58 shareholders of the listed company Net profit attributable to 211,053,323.68 -8,590,154.76 543,592,573.16 -336,478,381.80 5 Shandong Airlines Co., Ltd. Annual Report 2016 shareholders of the listed company after deducting non-recurring gains and losses Net cash flow arising from 269,904,370.90 754,591,361.32 1,307,244,115.90 95,316,140.30 operating activities Whether there are significant differences between the above-mentioned financial index or its total number and the relevant financial index disclosed in the company’s quarterly report and semi-annual report □Yes √ No IX. Items and amounts of extraordinary profit (gains)/loss √Applicable □Not applicable In RMB Item Amount in 2016 Amount in 2015 Amount in 2014 Note Gains/losses from the disposal of non-current asset (including the write-off that accrued for impairment of -3,391,225.20 44,170,859.84 -5,392,037.39 assets) Governmental subsidy reckoned into current gains/losses (not including the subsidy enjoyed in quota or ration 149,937,201.77 113,608,585.59 161,105,606.12 according to national standards, which are closely relevant to enterprise’s business) Losses/gains from changes of fair values occurred in holding transaction financial assets and transaction financial liabilities, and investment income obtaining from the disposal of transaction financial assets and 937,568.04 -5,042,991.37 -3,363,887.84 transaction financial liabilities and financial assets available for sales, excluded effective hedging business relevant with normal operations of the Company Other non-operating income and expenditure except for 17,172,191.25 25,300,508.74 36,398,186.39 the aforementioned items Less: impact on income tax 41,398,528.97 33,509,784.33 47,299,368.62 Total 123,257,206.89 144,527,178.47 141,448,498.66 -- In reporting period, the Company has no particular about items defined as recurring profit (gain)/loss according to the lists of extraordinary profit (gain)/loss in Q&A Announcement No.1 on Information Disclosure for Companies Offering Their Securities to the Public --- Extraordinary Profit/loss 6 Shandong Airlines Co., Ltd. Annual Report 2016 Section III Summary of Company Business I. Main businesses of the company in the reporting period Our Company and its subsidiaries are mainly engaged in provision of airline transportation service. The details of our operation scope are set out in the notes to financial statements. For more than two decades, the Company has always been giving first priority to "ensure safety, pay close attention to efficiency, strive to punctuality and quality service". As of the end of 2016, the Company has 100 airplanes like Boeing B737 series, and enters into the ranks of large airlines. At present, the Company takes Jinan as the headquarters base, and sets up five branches (base) in Qingdao, Yantai, Xiamen, Chongqing, and Beijing, establishes four flight bases in Urumqi, Guiyang, Kunming, and Haikou, builds an airline network which cuts through south and north and connects east to west, and builds the triangle base pattern among Shandong, Xiamen, and Chongqing. The Company elaborately creates the "honest and kind" brand characteristics, which is increasingly blending in the enterprise blood along with the growth of fleet size and airline network. The Company has been awarded the title of the “most valuable top 500 brands of China” for successive nine years. In 2016, the brand value of the Company increased by RMB 5.313 billion as compared to previous year to RMB 28.528 billion, making it rank No.101 among the most valuable top 500 brands of China, with 4 positions improved than last year. Creating a solid foundation of safety management by reinforcing operation management, continous optimized the route network and fleet structure, continue to improve the level of marketing management, implemented refined cost control and focus on perfecting the HR construction, the sustainable grwoth ability achived a steady improvement in 2016 II. Major changes in main assets 1. Major changes in main assets Major assets Note of major changes Monetary fund The maturity loan are paid in the Period Dividend receivable Dividend payment for year of 2014 are collected in the Period from Sichuan Airlines Advance payment The prepaid rents growth due to the increase of lease aircrafts in the Year Deductable temporary difference increased due to the accrued expenses growth in the Deferred tax assets Period Balance at period-end decline mainly because the operation leasing resulted from aircraft Other non-current assets leaseback are have no income in the Period 2. Main overseas assets □ Applicable √ Not applicable 7 Shandong Airlines Co., Ltd. Annual Report 2016 III. Core competitive-ness analysis No change 8 Shandong Airlines Co., Ltd. Annual Report 2016 Section IV Discussion and Analysis of Operation 1. Introduction The security sitation remained stable in year of 2016, operating quality continues to improve, main business maintain profitablity and service quality improved steadily, operation business are achieved the targets that predicted as a whole. (I) Continue to deepen security management In 2016, transportation segment, our principal business, has guaranteed 170,100 safe flights for 353,000 hours, representing increases of 12.5% and 9.5% respectively as compared to previous year. There is no civil aircraft incident or worse occurred due to the reason of the Company or external engagement. Safety quality evaluation indicator was 10.29. The Company continues to improve its security management policy, innovate a safety supervision mechanism, strengthen the safety production capacity and pay close attention to safety style rectification. (II) Optimized and improve the operation control and decision-making mechanism Our punctuation rate throughout the year was 80.09%, representing an increase of 6.95 percentage points over last year, ranking the 2nd position among the major airline companies. 42 flights for significant missions and special III (inclusive) were ensured, with punctuation rate of 98%. The Company reinforce management of flight normality, the normal rate for first flight in the whole year achived as 88%; optimized the operation decision-making mechanism, actively implement technological innovation. Implemented 143 times HUD LVTO in the whole year, and realized the effective support of technical factors to operation efficiency. (III) Drive on structure optimization and cost control In 2016, we completed a total turnover of 2.667 billion tons per kilometer, total passengers of 19.205 million and freights transportation of 155,600 tons, representing increases of 19.6%, 14.0% and 8.9% respectively. In addition, we realized operating income of RMB 13.742 billion, representing an increase of 13.49% year on year; total profit of RMB 709 million, representing a decrease of 0.23% year on year. The occupation rate of our passenger flights was 77.90%, with an increase of 2.02 percentage points year on year, the loading rate of freight flights was 40.94%, with an increase of 5.36 percentage points year on year. The Company strengthen organization of production resources, positively advancing construction of direct marketing channel, and digging deep into customer value, actively winning synergize, achieved cost advantage strategy, innovation development ability of the investment enterprise is enhanced. (IV) Promoting service quality and brand building The overall comment on passenger satisfaction investigation reached at 96.33, increasing 2.17 points year on year. Customer’s effective complain rate was 0.165 per ten thousand people. We ranking fouth in aspect of services in the civil aviation authoritative media, and hornor the prize of Best Airline in Civil Aviation Service. The Company hornor the China’s 500 Most Valuable Brands for nine consecutive years with brand value up to over 28.528 billion Yuan, a 5313 million Yuan grownt over last year, ranked 4 to enhance the ranking of the top 101st. Optimized the service management mechanism, continue to building the quality service brand-Lu Yan, and vigorously promote the construction of service team. Operation data summary: Index 2016 2015 Changes Total t-km load rate (10 thousand 266710.41 222944.98 19.63% t-km) Volume of passenger traffic (10 1920.52 1684.55 14.01% thousand passengers) 9 Shandong Airlines Co., Ltd. Annual Report 2016 Cargo & mail traffic volume (10 15.56 14.29 8.89% thousand tons) Flying km (one million km) 212.61 182.53 16.48% Flying hours(10 thousand hours) 35.30 31.37 12.53% Number of flight (10 thousand 17.01 15.54 9.46% times) PLF(passenger load factor) 77.90% 75.88% 2.02 percentage points up Cargo&Mail OLF (overall load 40.94% 35.58% 5.36 percentage points up factor) In the Period, totally ten B737-800 aircrafts are introduced by the Company and five B737-300 aircrafts are out of services. Up to 31 December 2016, the Company operates 100 aircrafts in total and the fleet distribution below: Model Numbers Average service age (Year) 737-700 3 737-800 95 4.7-year CRJ-700 2 II. Main business analysis 1. Introduction See “I. Introduction” in “Discussion and Analysis of Operation”. 2. Revenue and cost (1) Constitute of operation revenue In RMB 2016 2015 Increase/decrease Ratio in operation Ratio in operation Amount Amount y-o-y revenue revenue Total of operation 13,742,365,545.56 100% 12,108,963,139.11 100% 13.49% revenue Air transport service 13,301,825,036.11 96.80% 11,854,182,627.68 97.89% 12.21% Logistics freight 33,858,517.79 0.25% 29,091,047.84 0.24% 16.39% service Hotel & catering 41,650,983.82 0.30% 42,367,728.65 0.35% -1.69% service Training service 19,674,789.18 0.14% 22,786,226.72 0.19% -13.65% 10 Shandong Airlines Co., Ltd. Annual Report 2016 Other (2) About the industries, products, or regions accounting for over 10% of the company’s operating income or operating profit √Applicable □Not applicable In RMB Increase/decrease Increase/decrease Increase/decrease Gross profit Operating revenue Operating cost of operating of operating cost of gross profit ratio revenue y-o-y y-o-y ratio y-o-y According to industries Air transport 3.34 percentage 13,301,825,036.11 11,811,194,516.30 11.21% 12.21% 16.60% service points down According to region 1.66 percentage Domestic 12,487,817,925.39 10,526,904,004.59 15.70% 11.90% 14.15% points down (3) Whether income from physical sales larger than income from labors or not □Yes √ No (4) Fulfillment of the company’s signed significant sales contracts up to this reporting period □ Applicable √ Not applicable (5) Constitute of operation cost Industry classification In RMB 2016 2015 Industry Y-o-y Item Ratio in operation Ratio in operation classification Amount Amount changes cost cost Aviation fuel 2,762,047,363.06 23.38% 2,735,386,308.86 27.00% 0.97% consumption Take-off & landing 1,733,798,086.35 14.68% 1,476,029,184.24 14.57% 17.46% fees Air transport Employee’s salary 1,688,090,330.49 14.29% 1,662,841,895.63 16.42% 1.52% service Depreciation of 739,645,989.16 6.26% 638,271,294.26 6.30% 15.88% aircraft and engine Other 4,887,612,747.24 41.39% 3,616,894,892.24 35.71% 35.13% Total 11,811,194,516.30 100.00% 10,129,423,575.23 100.00% 16.60% 11 Shandong Airlines Co., Ltd. Annual Report 2016 Employee’s salary 15,621,276.22 76.30% 16,413,087.85 88.55% -4.82% Logistics freight Other 4,853,089.61 23.70% 2,121,421.06 11.45% 128.77% service Total 20,474,365.83 100.00% 18,534,508.91 100.00% 10.47% Raw materials 26,422,465.79 73.68% 23,603,590.25 71.48% 11.94% Hotel & catering Employee’s salary 723,305.79 2.02% 732,820.39 2.22% -1.30% service Other 8,711,903.05 24.30% 8,686,472.97 26.30% 0.29% Total 35,857,674.63 100.00% 33,022,883.61 100.00% 8.58% Depreciation 4,849,479.99 22.36% 4,849,479.99 36.29% 0.00% Training service Other 16,837,587.39 77.64% 8,512,977.99 63.71% 97.79% Total 21,687,067.38 100.00% 13,362,457.98 100.00% 62.30% (6) Whether the changes in the scope of consolidation in Reporting Period □Yes √ No (7)Major changes or adjustment in business, product or service of the Company in Reporting Period □ Applicable √ Not applicable (8) Major sales and main suppliers Major sales of the Company Total top five clients in sales (RMB) 401,390,768.92 Proportion in total annual sales volume for top five clients 2.94% Ratio of related parties in annual total sales among the top five 2.14% clients Information of top five clients of the Company Serial Name Sales (RMB) Proportion in total annual sales 1 Unit 1 291,593,333.84 2.14% 2 Unit 2 38,848,844.35 0.28% 3 Unit 3 25,389,335.00 0.19% 4 Unit 4 23,576,733.73 0.17% 5 Unit 5 21,982,522.00 0.16% Total -- 401,390,768.92 2.94% Other situation of main clients □ Applicable √ Not applicable Main suppliers of the Company 12 Shandong Airlines Co., Ltd. Annual Report 2016 Total purchase amount from top five suppliers (RMB) 2,027,599,179.33 Proportion in total annual purchase amount for top five 29.60% suppliers Ratio of related parties in annual total sales among the top five 3.90% suppliers Information of top five suppliers of the Company Serial Name Purchases (RMB) Proportion in total annual purchase 1 Unit 1 997,579,442.73 14.56% 2 Unit 2 467,673,958.78 6.83% 3 Unit 3 266,883,899.60 3.90% 4 Unit 4 160,934,204.26 2.35% 5 Unit 5 134,527,673.96 1.96% Total -- 2,027,599,179.33 29.60% Other notes of main suppliers of the Company □ Applicable √ Not applicable 3. Expense In RMB 2016 2015 Y-o-y changes Note Sales expense 674,961,176.53 713,698,896.12 -5.43% Management expense 333,943,862.70 280,697,316.52 18.97% Financial expense 261,876,586.15 319,822,620.05 -18.12% 4. R&D investment □ Applicable √ Not applicable 5. Cash flow In RMB Item 2016 2015 Y-o-y changes Subtotal of cash in-flow from 15,542,904,192.31 13,613,162,378.72 14.18% operation activity Subtotal of cash out-flow from 13,115,848,203.89 11,188,704,535.71 17.22% operation activity Net cash flow from operation activity 2,427,055,988.42 2,424,457,843.01 0.11% Subtotal of cash in-flow from 24,837,956.42 301,916,234.92 -91.77% 13 Shandong Airlines Co., Ltd. Annual Report 2016 investment activity Subtotal of cash out-flow from 2,171,501,481.76 2,184,886,379.68 -0.61% investment activity Net cash flow from investment -2,146,663,525.34 -1,882,970,144.76 -14.00% activity Subtotal of cash in-flow from 1,517,674,080.70 2,724,719,889.03 -44.30% financing activity Subtotal of cash out-flow from 2,463,873,917.37 2,337,973,289.47 5.39% financing activity Net cash flow from financing activity -946,199,836.67 386,746,599.56 -344.66% Net increased amount of cash and -624,143,943.95 954,658,294.25 -165.38% cash equivalent Main factors of related data’s significant changes on a year-on-year basis √Applicable □Not applicable Item 2016 2015 +,- Reason for changes Cash received from other 250,348,958.09 162,874,095.46 53.71% The route subsidy and intercourse funds operating activities increased over that of last year 668,268,335.05 449,591,891.48 48.64% The corporate income tax and VAT paid in Taxes paid the Period increased over same period of last year Cash received from investment 200,800,000.00 -100.00% Dispoes investment of Qingdao Airline Co., Ltd. at same period of last year 23,018,666.90 8,790,345.41 161.86% The dividend money received in the Period Cash received from investment increased over that of last year from income invested companies Net cash received from disposal 1,819,289.52 92,325,889.51 -98.03% The revenue from dipsoal of non-current of fixed, intangible and other assets decreased over that of last year long-term assets Other cash paid concerning 1,277,063.78 2,693,748.52 -52.59% The actually delivery costs for the trading investment activities financial asstes decreased from a year earlier 296,000,000.00 1,104,981,104.70 -73.21% The loans received from financing activities Cash received from loans declined from a year earlier Impact on cash and cash 41,663,429.64 26,423,996.44 57.67% Exchange rate of RMB against foreign equivalent from changes of currency changed exchange rate III. Analysis of the non-main business □Applicable √Not applicable 14 Shandong Airlines Co., Ltd. Annual Report 2016 IV. Assets and liability 1. Major changes of assets composition In RMB End of 2016 End of 2015 Ratio in Ratio Ratio in Notes of major changes Amount Amount total changes total assets assets 4.89 percentag Monetary fund 791,255,686.65 6.21% 1,415,399,630.60 11.10% The maturity loan are paid in the Period e points down 0.52 Account percentag 322,774,169.85 2.53% 255,782,921.88 2.01% receivable e points up 0.75 Advance percentag The prepaid rents growth due to the 249,136,244.95 1.96% 154,897,777.19 1.21% payment e points increase of lease aircrafts in the Year up 0.03 Dividend payment for year of 2014 are Dividend percentag - 0.00% 4,381,900.00 0.03% collected in the Period from Sichuan receivable e points Airlines down 0.07 percentag Stock 120,965,243.56 0.95% 112,307,440.99 0.88% e points up 0.46 percentag Fixed assets 7,093,233,151.79 55.67% 7,156,258,169.93 56.13% e points down 1.48 Construction percentag 2,250,500,462.35 17.66% 2,062,310,572.89 16.18% in progress e points up 1.48 Deductable temporary difference increased Deferred tax percentag 641,785,173.89 5.04% 453,818,799.19 3.56% due to the accrued expenses growth in the assets e points Period up 15 Shandong Airlines Co., Ltd. Annual Report 2016 0.19 Balance at period-end decline mainly Other percentag because the operation leasing resulted from non-current - 0.00% 23,794,314.90 0.19% e points aircraft leaseback are have no income in the assets down Period Financial liability measured by 0.02 fair value and percentag Fair value variation of the interest swap 1,155,815.80 0.01% 3,370,447.62 0.03% with variation e points contracts in the period reckoned into down current gains/losses 0.2 percentag Note payable 0.00% 25,299,479.50 0.20% The note is in due course in the Period e points down 4.40 Corresponding operation costs increased Accounts percentag 1,688,094,861.09 13.25% 1,128,629,695.55 8.85% for the growth of process scale and payable e points production up 2.10 Advance percentag The money for sales are increased for 699,319,553.05 5.49% 432,216,409.37 3.39% payment e points advance received in the period up 0.01 Interest percentag Interest declined for some of the principal 2,430,456.90 0.02% 3,638,536.32 0.03% payable e points of long-term loans are paid in the period down Non current 3.91 liabilities due percentag The long-term loans due within one year 987,644,012.02 7.75% 1,487,011,320.66 11.66% within one e points declined year down 8.53 Long-term percentag Some of the principal of long-term loans 1,799,601,767.54 14.12% 2,887,701,872.70 22.65% loan e points are paid in the period down 0.34 Balance at period-end increased mainly Deferred percentag because the operation leasing resulted from 58,439,521.16 0.46% 15,795,524.10 0.12% income e points aircraft leaseback are have no income in the up Period Deferred 45,880,020.58 0.36% 33,192,668.48 0.26% 0.10 The fair value of financial assets available 16 Shandong Airlines Co., Ltd. Annual Report 2016 income tax percentag for sale increased at end of the Period liability e points up 0.31 Other percentag The fair value of financial assets available comprehensiv 131,880,061.76 1.04% 93,555,005.44 0.73% e points for sale increased at end of the Period e income up 2. Assets and liability measure by fair value √Applicable □Not applicable In RMB Accumulative Amount Gains/losses of Impairment Opening changes in fair purchased Sale Item changes in fair accrual in Closing amount amount value reckoned in this amount value this period into equity period Financial assets 3.Available-for-sale 139,460,673.92 50,749,408.42 183,520,082.34 190,210,082.34 financial assets Subtotal of financial 139,460,673.92 50,749,408.42 183,520,082.34 190,210,082.34 assets The above total 139,460,673.92 50,749,408.42 183,520,082.34 190,210,082.34 Financial liability 3,370,447.62 -2,214,631.82 1,155,815.80 Whether there have major changes on measurement attributes for main assets of the Company in report period or not □ Yes √No 3. Assets right restriction till end of reporting period Nil V. Investment 1. Overall situation □ Applicable √ Not applicable 2. The major equity investment obtained in Reporting Period □ Applicable √ Not applicable 17 Shandong Airlines Co., Ltd. Annual Report 2016 3. The major non-equity investment doing in Reporting Period □ Applicable √ Not applicable 4. Financial assets investment The company had no securities investment or derivative investment in the reporting period. 5. Application of raised proceeds The company had no application of raised proceeds in the reporting period. VI. Sales of major assets and equity 1. Sales of major assets The Company had no sales of major assets in the reporting period. 2. Sales of major equity □ Applicable √ Not applicable VII. Analysis of main holding company and stock-jointly companies In RMB Company Register Operating Operating Type Main business Total assets Net Assets Net profit name capital revenue profit Agency service of land service Shandong for the air cargo Airlines station, storage 30,000,000.0 128,614,323. 55,057,715.8 53,175,095.7 Subsidiary 9,703,524.33 7,442,610.48 Logistic Co., of goods and 0 53 8 3 Ltd. ground distribution service etc. Qingdao Feisheng International Aviation 51,545,500.0 72,721,199.7 70,529,737.5 Subsidiary Pilot training 7,750,205.65 203,737.25 -40,955.37 Technology 0 8 3 Development Training Co., Ltd. 18 Shandong Airlines Co., Ltd. Annual Report 2016 Shandong Rainbow Stock-jointl 50,000,000.0 -165,919,175 Corporate Air transport 1,846,637.67 -12,830.65 -12,830.65 y company 0 .66 Aircraft Co., Ltd. Particular about subsidiaries obtained or disposed in report period □ Applicable √ Not applicable VIII. Structured vehicle controlled by the Company □ Applicable √ Not applicable IX. Prospect for future development of the Company In 2017, with the continuous improvement of household consumption level and the increase of improving consumption proportion, tourism, leisure and other personalized emerging consumer demand will remain relatively vigorous. China has become the world's second largest air transport market, in 2016, Civil Aviation Administration of China issued "The 13th Five-Year Plan for China Civil Aviation", put forward the targets that the total turnover of transportation, volume of passenger traffic, and cargo and mail traffic should respectively have an annual average growth of 10.8%, 10.4% and 6.2% in the next five years. Driven by the country‘s strategies, such as “One Belt and One Road”, the city cluster development, etc., the civil aviation industry still has good prospects for development. The central economic working conference has proposed to continue to revitalize the real economy, deepen the reform of state-owned enterprises and state-owned assets, and optimize the corporate governance structure and market-oriented management mechanism, which will add new power into the development of state-owned enterprises, it should be said that the Company’s development will face favorable consumer demand and policy environment. 2017 is the key year to comprehensively implement the Company's "13th Five-Year Plan”, but also the first year that the Company operates with an air fleet of 100 airplanes. The Company will continue to consolidate the safety base, build the security baseline; strengthen the system management and control capabilities, improve the running quality; optimize the revenue and expenditure control mechanism, and strive to achieve a better benefit level; make efforts to enhance the management level and innovation strength, enrich the “honest and kind” service connotation; comprehensively strengthen the party building, and create a good organizational atmosphere. In 2017, the Company will adhere to the development concept of "innovation, coordination, green, open, share", properly handle the dialectical relationship between development scale and speed, size and benefit, speed and quality, safety and benefit, actively implement innovation-driven, structural optimization, quality and efficiency improving and collaboration, create the relatively competitive advantages, and achieve sustained and healthy development of enterprises. X. Reception of research, communication and interview 1. In the report period, reception of research, communication and interview √Applicable □Not applicable Time Way Type Basic situation index of investigation Telephone Jan.- Dec. 2016 Individual Operation of the Company and no material required communication Receive corporate shareholders and individual investors, 2016-03-25 Field research Other well-knowed operation of the Company without materials required 19 Shandong Airlines Co., Ltd. Annual Report 2016 Reception of news media, legal person’s shareholders and 2016-06-24 Field research Other individual investor, operation of the Company and annual report required Receive corporate shareholders, well-knowed operation of the 2016-12-21 Field research Other Company without materials required Reception (times) 42 Number of hospitality 0 Number of individual reception 47 Number of other reception 5 Disclosed, released or let out major No undisclosed information 20 Shandong Airlines Co., Ltd. Annual Report 2016 Section V. Iimportant Events I. Profit distribution plan of common stock and capitalizing of common reserves plan Formulation, Implementation and Adjustment of common stock Profit Distribution Policy Especially Cash Dividend policy during the Reporting Period √Applicable □Not applicable The Company implemented a positive profit distribution plan, and also attaches importance to the reasonable return for investors as well as taking sustainable development of the Company into consideration. The bonus distribution plan for year of 2015 was approved in 2015 Annual General Meeting dated 24 June 2016, that is, based on total stock issued 400,000,000 shares, distributed 2.5 Yuan (tax included) bonus in cash for every 10-share hold by all shareholders. Total dividend of RMB 100 million, and completed on 17 August 2016. Specific statement of cash bonus Whether or not it corresponds to regulation of Article of Association or requirement of AGM: Y Whether or not the bonus standards and ratio are clear and well-defined: Y Whether or not relevant decision-making procedures and mechanism are perfect: Y Whether or not independent directors fulfill their duties and play corresponding roles: Y Whether or not minority shareholders have opportunity to express their views and demands, legal Y interest of minority has been protected or not: As for the cash bonus policy adjusted or changed, conditions and procedures whether exercise Y regulated and transparency or not: Profit distribution plan (pre-plan) of common stock and capitalizing of common reserves plan (pre-plan) in latest three years (including the reporting period) 2014: distributed 2.0 Yuan (tax included) bonus for every 10 shares in cash based on total stock issued 400,000,000 shares ended as 31 December 2014; 2015: distributed 2.5 Yuan (tax included) bonus for every 10 shares in cash based on total stock issued 400,000,000 shares ended as 31 December 2015; 2016: distributed 3.0 Yuan (tax included) bonus for every 10 shares in cash based on total stock issued 400,000,000 shares ended as 31 December 2014; Cash dividend of common stock in latest three years (including the reporting period) In RMB Ratio in net profit Net profit attributable to attributable to common stock common stock Year for bonus Amount for cash Amount for cash Proportion for cash shareholders of listed shareholders of shares bonus (tax included) bonus by other ways bonus by other ways company in consolidation listed company statement for bonus year contained in consolidation 21 Shandong Airlines Co., Ltd. Annual Report 2016 statement 2016 120,000,000.00 532,834,567.17 22.52% 0.00 0.00% 2015 100,000,000.00 532,260,993.04 18.79% 0.00 0.00% 2014 80,000,000.00 287,851,542.09 27.79% 0.00 0.00% The Company gains profits in reporting period and the retained profit of common stock shareholders provided by parent company is positive but no plan of cash dividend proposed of common stock □ Applicable √ Not applicable II. Profit distribution plan and capitalizing of common reserves plan for the Period √Applicable □Not applicable Bonus shares for every 10-share (Share) 0 Dividends for every 10-share (RMB) (Tax 3.00 included) Shares transferred from every 10 shares (Share) 0 Equity base of distribution plan (Share) 400,000,000 Total cash dividend(RMB) (Tax included) 120,000,000 Distributable profits (RMB) 2,831,810,326.96 Ratio of cash dividend in total profit distribution 100.00% Cash dividend The Company is in a development stage and has the arrangement of major capital expenses, ratio of cash dividend in profit distribution should reach a minimum of 20% while the profit distributed. III. Implementation of commitment 1. Commitments completed in Period and those without completed till end of the Period from actual controller, shareholders, related parties, purchaser and companies √Applicable □Not applicable Commitment Commitment Implementatio Commitments Accepter Type Contents time period n In February 2004, China Commitment National Aviation Holding of horizontal Company (CNAHC) entered Commitments in report competition, into a equity transfer Strictly Long-term of acquisition or Air China related agreement with SDA , that is 2004-12-06 implement effective equity change transaction promise “to avoiding timely and capital horizontal competition with occupying the Company through reasonable business 22 Shandong Airlines Co., Ltd. Annual Report 2016 arrangement”; in December, being approved, the equity assignee was replaced by Air China, and all rights and obligations under the agreement was transfer to Air China as the party who implemented the commitments Commitment Controlling of horizontal shareholder—SDA provide a Commitments make in competition, commitment letter of avoiding Strictly Long-term initial public offering or SDA related horizontal competition to the 2000-09-12 implement effective re-financing transaction Company in year of 2000 timely and capital when the Company initial occupying public offering shares Completed on time Y (Y/N) 2. Concerning assts or project of the Company, which has profit forecast, and reporting period still in forecasting period, explain reasons of reaching the original profit forecast □ Applicable √ Not applicable IV. Non-operational fund occupation from controlling shareholders and its related party No non-operational fund occupation from controlling shareholders and its related party in period. V. Explanation from Board of Directors, Supervisory Committee and Independent Directors (if applicable) for “Qualified Opinion” that issued by CPA □ Applicable √ Not applicable VI. Particulars about the changes in aspect of accounting policy, estimates and calculation method compared with the financial report of last year No particulars about the changes in aspect of accounting policy, estimates or calculation method in Period. VII. Major accounting errors within reporting period that needs retrospective restatement No major accounting errors within reporting period that needs retrospective restatement for the Company in the period. VIII. Compare with last year’s financial report; explain changes in consolidation statement’s scope No changes in consolidation statement’s scope for the Company in the period. 23 Shandong Airlines Co., Ltd. Annual Report 2016 IX. Appointment and non-reappointment (dismissal) of CPA Accounting firm appointed Name of domestic accounting firm Ruihua CPAs (LLP) Remuneration for domestic accounting firm (in 10 130 thousand Yuan) Continuous life of auditing service for domestic 4 accounting firm Name of domestic CPA Yang Yunhui, Guo Yuefeng Whether re-appointed accounting firms in this period or not □ Yes √ No Appointment of internal control auditing accounting firm, financial consultant or sponsor √Applicable □Not applicable Take consistency into consideration, the Company also engaged Ruihua CPAs (LLP) as the audit institution for internal control for year of 2016, and auditing efficiency of internal control and issued the audit report of internal control of 2016 for the Company. The auditing charge for internal control was RMB 0.4 million. X. Particular about suspended and delisting after annual report disclosed □ Applicable √ Not applicable XI. Bankruptcy reorganization No bankruptcy reorganization for the Company in reporting period XII. Significant lawsuits and arbitrations of the Company No significant lawsuits and arbitrations occurred in the reporting period XIII. Penalty and rectification No penalty and rectification for the Company in reporting period. XIV Integrity of the company and its controlling shareholders and actual controllers □ Applicable √ Not applicable XV. Implementation of the company’s stock incentive plan, employee stock ownership plan or other employee incentives During the reporting period, the company has no stock incentive plan, employee stock ownership plan or other employee incentives that have not been implemented. 24 Shandong Airlines Co., Ltd. Annual Report 2016 XVI. Material related transactions 1. Related transaction with daily operation concerned √Applicable □Not applicable Approv Proporti Whethe Market ed Trading on in the r to price of Related Related transacti Means Index Related Related Pricing amount amount exceed similar Date of transacti transacti Dealing on of of transactio relations principl (in 10 of the the transacti disclosu on on price amount paymen disclos n parties hip e thousan same approve on re type content (in 10 ts ure d Yuan) transacti d availabl thousan on amount e d Yuan) Rent of office Controll Labor and Cash ing Market 29,933, 2,993.3 29,933, 2016-03 2016-1 SDA service board & 7.11% 3,200 No settleme sharehol price 839.56 8 839.56 -25 1 received lodging nt der expense s Shandong Subsidia Xiangyu ry of Air Labor Mainten Cash controlli Market 62,803, 6,280.3 62,803, 2016-03 2016-1 Technolo service ance 3.94% 7,000 No settleme ng price 828.70 8 828.70 -25 1 gy received charge nt sharehol Service der Co., ltd Shandong Subsidia Taikoo ry of Airplane Labor Cash Aircraft controlli mainten Market 53,489, 53,489, 2016-03 2016-1 service 5,348.9 3.36% 7,600 No settleme Engineeri ng ance price 045.18 045.18 -25 1 received nt ng Co., sharehol charge Ltd. der 2nd Ground Labor Cash largest service Market 27,902, 2,790.2 27,902, 2016-03 2016-1 Air China service 1.58% 2,800 No settleme sharehol expense price 903.35 9 903.35 -25 1 received nt der s Sichuan Subsidia Internatio ry of Labor Mainten Cash nal Market 266,883 26,688. 266,883 2016-03 2016-1 2nd service ance 16.75% 20,000 Yes settleme Airlines price ,899.60 39 ,899.60 -25 1 largest received charge nt Engine sharehol maintena 25 Shandong Airlines Co., Ltd. Annual Report 2016 nce Co., der Ltd. Beijing Subsidia Aircraft ry of Labor Mainten Cash Maintena 2nd Market 46,912, 4,691.2 46,912, 2016-03 2016-1 service ance 2.95% 4,100 Yes settleme nce largest price 099.74 1 099.74 -25 1 received charge nt Engine sharehol Co., Ltd der Beijing Subsidia Aircraft ry of Ground Labor Cash Maintena 2nd service Market 28,354, 2,835.4 28,354, 2016-03 2016-1 service 1.64% 2,100 Yes settleme nce largest expense price 445.95 4 445.95 -25 1 received nt Engine sharehol s Co., Ltd der Subsidia Shandong Charge ry of Airline Provide for use Cash controlli Market 17,193, 1,719.3 100.00 17,193, 2016-03 2016-1 NewAir labor of media 1,200 Yes settleme ng price 467.69 5 % 467.69 -25 1 Media service resource nt sharehol Co., Ltd. s der 2nd Other Agreem Cash largest related Wet 282,331 28,233. 100.00 282,331 2016-03 2016-1 Air China ent 37,886 No settleme sharehol transacti lease ,884.00 19 % ,884.00 -25 1 price nt der on Frequent 2nd Other passeng Agreem Cash largest related 130,718 13,071. 100.00 130,718 2016-03 2016-1 Air China er ent 7,000 Yes settleme sharehol transacti ,573.22 86 % ,573.22 -25 1 cooperat price nt der on ion 94,652. Total -- -- -- 92,886 -- -- -- -- -- 39 Details of return of sales in significant N/A amount Report the actual implementation of the normal related transactions which were projected about their total Implemented by the agreement amount by types during the reporting period (if any) Reasons for major difference between trading price and market reference N/A price (if applicable) 26 Shandong Airlines Co., Ltd. Annual Report 2016 2. Related transactions by assets acquisition and sold No related transactions by assets acquisition and sold for the Company in reporting period 3. Main related transactions of mutual investment outside No main related transactions of mutual investment outside for the Company in reporting period 4. Contact of related credit and debt No contact of related credit and debt for the Company in reporting period 5. Other related transactions No other related transaction for the Company in reporting period XVII. Major contract and implantation 1. Trusteeship, contract and leasing No trusteeship, contract or leasing for the Company in reporting period 2. Major guarantee No guarantee for the Company in reporting period 3. Entrust others to cash asset management No trust financing or entrusted loans for the Company in reporting period 4. Other material contracts No other material contracts for the Company in reporting period XVIII. Social responsibility 1. Execution of social responsibility of targeted poverty alleviation □ Applicable √ Not applicable 2. Execution of other social responsibility The Company attaches great importance to the construction of corporate social responsibility and the corporate mission to be shouldered, adheres to the organic unity of "three responsibilities"- economy, politics, and society, blends the social responsibility into the Company's development strategy and management process. Standing on the height of promoting the Company's sustainable development, the Company positively takes social responsibilities, gives full play to the role of state-owned enterprises, actively takes the initiative to assume and fulfill social responsibilities, tirelessly creates profits to return shareholders; creates value to return to the society; creates services to return passengers; creates opportunities to return employees. The Company also actively carries out the action of "caring the earth, green flight", vigorously implements the energy-saving emission reduction work, constantly pursues the high unity of commercial profits and social responsibilities, and achieves the simultaneous increase of economic benefits and social benefits. 27 Shandong Airlines Co., Ltd. Annual Report 2016 As a listed company, it is the most basic social responsibility for the Company to protect interests of shareholders, especially minority shareholders. Pursuant to the Company Law, Securities Law and Governance Rules of Listed Companies, the Company continues to improve its corporate governance structure and establish wholesome internal control system, forming the decision-making and operation system with the general meeting, board of directors, board of supervisors and senior management as the principals, thus to protect the legal interests of all the shareholders, especially minority shareholders. In 2016, the Company further implemented the arrangements and instruction relating to energy saving and emission reduction issued by the CAAC and local governments. It continued to explore its potential in saving energy in terms of production and operation, promote implementation of various related policies and reduce carbon emission by aircrafts. Shandong Airline has established assessment and incentive rules in respect of the works relating to energy saving and emission reduction, continued to amend the relevant working manual, strengthened procedure management, and carried out numbers of relevant works including optimization of routes, application of ground power source and bridge loading equipments, aircraft slimming and selection of energy-oriented aircrafts, which recorded good achievements. We report energy consumption data to municipal government and the CAAC on a monthly basis, and regularly monitor completion of energy consumption index. In 2017, the Company will continue to uphold the business philosophy of "people first" , and strive to create the core value of "security, responsibility, integrity and harmony". Attach importance to the implementation of social responsibility, create value for shareholders, meanwhile, actively assume social responsibility, establish the green low-carbon concept and strengthen energy conservation awareness in the process of production and operation and business development, and achieve the healthy and harmonious development between Company and employees, Company and society, and Company and environment. Listed company and its subsidiary belongs to the key pollution enterprise listed by Department of Environmental Protection No Whether the social responsibility report released □Yes √ No XIX. Explanation on other significant events Significant events of the Company and announcement are published on China Securities Journal, Securities Times, Hong Kong Commercial Daily and Juchao Website (http: //www.cninfo.com.cn) , more details can be found in the above said media. XX. Significant event of subsidiary of the Company □ Applicable √ Not applicable 28 Shandong Airlines Co., Ltd. Annual Report 2016 Section VI. Changes in Shares and Particulars about Shareholders I. Changes in shares 1. Changes in shares In Share Before changes (+,-) After changes Capitalizati Bonu Subtot Amount Ratio New issue on of public Other Amount Ratio s al reserve I. Unlisted shares 260,000,000 65.00% 260,000,000 65.00% 1. Sponsor shares 168,601,000 42.15% 168,601,000 42.15% Including: State-owned 168,402,000 42.10% 168,402,000 42.10% shares Domestic corporate 199,000 0.05% 199,000 0.05% shares 4. Preferred stock or other 91,399,000 22.85% 91,399,000 22.85% II. Listed shares 140,000,000 35.00% 140,000,000 35.00% 2. Domestically listed 140,000,000 35.00% 140,000,000 35.00% foreign shares III. Total shares 400,000,000 100.00% 400,000,000 100.00% 2. Changes of restricted shares □ Applicable √ Not applicable II. Securities issue and listing 1. Security offering (without preferred stock) in Reporting Period □ Applicable √ Not applicable 2. Changes of total shares and shareholders structure as well as explanation on changes of assets and liability structure □ Applicable √ Not applicable 3. Existing internal staff shares □ Applicable √ Not applicable 29 Shandong Airlines Co., Ltd. Annual Report 2016 III. Shareholders and actual controller 1. Number of shareholders of the Company and share-holding In Share Total preference Total common Total common shareholders with Total preference shareholders stock stock voting rights with voting rights recovered at shareholders at shareholders 15,801 15,759 recovered at end of 0 end of last month before 0 end of last month in reporting reporting period (if annual report disclosed (if before annual period-end applicable) (found in applicable) (found in note8) report disclosed note8) Particulars about shares held above 5% by shareholders or top ten shareholders Amount Number of shares pledged/frozen Total Amount of Proportio shareholders Changes in of listed Full name of Nature of n of unlisted at the end report outstandi Shareholders shareholder shares outstandi State of share Amount held of report period ng shares ng shares period held held Shandong Aviation State-owned 168,004, 42.00% 168,004,000 0 0 Group legal person 000 State-owned 91,200,0 Air China Limited 22.80% 91,200,000 0 0 legal person 00 BBH A/C VANGUARD Foreign EMERGING 0.74% 2,960,917 2,271,396 0 2,960,917 legal person MARKETS STOCK INDEX FUND Foreign NORGES BANK 0.63% 2,520,800 2,520,800 0 2,520,800 legal person WANXIANG INTERNATIONAL Foreign 0.62% 2,490,000 10,000 0 2,490,000 INVESTMENT legal person CORPORATION Domestic 侯春虎 nature 0.41% 1,651,345 1,651,345 0 1,651,345 person VANGUARD TOTAL Foreign 0.40% 1,582,720 105,900 0 1,582,720 INTERNATIONAL legal person STOCK INDEX 30 Shandong Airlines Co., Ltd. Annual Report 2016 FUND Domestic 陈经建 nature 0.38% 1,519,400 24,600 0 1,519,400 person Domestic 姚明 nature 0.33% 1,300,000 1,300,000 0 1,300,000 person Domestic 叶渠发 nature 0.30% 1,180,169 45,619 0 1,180,169 person 1. Shandong Aviation Group(SDA) is the first largest shareholder of the Company, who holds the shares of the Company on behalf of the State with unlisted shares; 2. Air China Limited is the second largest shareholder of the Company, who holds the shares of Explanation on related the Company on behalf of the State with unlisted shares; relationship or concerted action 3. Among the above top ten shareholders, Air China Limited is the first largest shareholder of the among the abovementioned SDA, and there exists no associated relationship between SDA and Air China and the other shareholders shareholders, and they don’t belong to the consistent actionist regulated by the Management Regulation of Information Disclosure on Change of Shareholding for Listed Companies with the other shareholders. Shareholding of top 10 circulated shareholders Type of shares Shareholders Amount of listed shares held at end of the Period Type Amount BBH A/C VANGUARD Domestically EMERGING MARKETS STOCK 2,960,917 listed foreign 2,960,917 INDEX FUND shares Domestically NORGES BANK 2,520,800 listed foreign 2,520,800 shares Domestically WANXIANG INTERNATIONAL 2,490,000 listed foreign 2,490,000 INVESTMENT CORPORATION shares Domestically 侯春虎 1,651,345 listed foreign 1,651,345 shares VANGUARD TOTAL Domestically INTERNATIONAL STOCK 1,582,720 listed foreign 1,582,720 INDEX FUND shares Domestically 陈经建 1,519,400 listed foreign 1,519,400 shares 31 Shandong Airlines Co., Ltd. Annual Report 2016 Domestically 姚明 1,300,000 listed foreign 1,300,000 shares Domestically 叶渠发 1,180,169 listed foreign 1,180,169 shares GUOTAI JUNAN Domestically SECURITIES(HONGKONG) 1,008,665 listed foreign 1,008,665 LIMITED shares Domestically 邓红伟 880,000 listed foreign 880,000 shares Expiation on associated relationship or consistent actors The Company is not aware of their associated relationship among the top ten shareholders of within the top 10 un-restrict circulation share, and is unknown whether other circulation shareholders belong to the consistent shareholders and between top 10 actionist regulated by the Management Regulation of Information Disclosure on Change of un-restrict shareholders and top 10 shareholders Shareholding for Listed Companies. The top ten common stock shareholders or top ten common stock shareholders with un-restrict shares held of the Company have no buy-back agreement dealing in reporting period. 2. Controlling shareholders Nature of controlling shareholders: local state-owned holding Type of controlling shareholders: legal person Legal person/person in Controlling shareholders Date of foundation Organization code Main operation business charge of the unit Investment and management of air transport industry and aviation maintenance industry; conference and exhibition services; office services; daily necessities, Shandong Aviation Group Xu Chuanyu 1995-02-09 91370000614071647W handicrafts, sales of souvenirs, rental housing; lodging, food and beverage services, retail of tobacco products (restricted to be operated only by the branches) Equity of other domestic/oversea listed N/A company control by 32 Shandong Airlines Co., Ltd. Annual Report 2016 controlling shareholder as well as stock-joint in report period No changes of controlling shareholder for the Company in reporting period. 3. Actual controller Nature of actual controller: local state-owned assets management Type of actual controller: legal person Legal person/person in Actual controller Date of foundation Organization code Main operation business charge of the unit Investment and management of air transport industry and aviation maintenance industry; conference and exhibition services; office services; daily Shandong Aviation Group Xu Chuanyu 1995-02-09 91370000614071647W necessities, handicrafts, sales of souvenirs, rental housing; lodging, food and beverage services, retail of tobacco products (restricted to be operated only by the branches) Equity of other foreign/domestic listed company that controlled N/A by actual controller in reporting period No changes of actual controllers for the Company in reporting period Property right and controlling relationship between the actual controller and the Company is as follow: Shandong Aviation Group 42% Shandong Airlines Co., Ltd. 4. Particulars about other legal person shareholders with over 10% shares held √Applicable □Not applicable Legal Date of Main operation business or Legal person shareholder person/person in Register capital foundation management activities charge of the unit 33 Shandong Airlines Co., Ltd. Annual Report 2016 Domestic and overseas transportation business such as periodic and un-periodic aviation passenger, cargo, letter and baggage; domestic and overseas official flight business; airplane management business; repairing of aerostat; business agent Air China Limited Cai Jianjiang 2006-03-27 RMB 13,084,751,000 among air companies; ground service and air courier services related with the main operations (excluding letter and articles with the nature of letters); tax-free commodities in airplane; retail business of the aircraft goods; selling agent of aviation accident insurance 5. Limitation and reducing the holdings of shares of controlling shareholders, actual controllers, restructuring side and other commitment subjects □ Applicable √ Not applicable 34 Shandong Airlines Co., Ltd. Annual Report 2016 Section VII. Preferred Stock The Company had no preferred stock in the reporting. 35 Shandong Airlines Co., Ltd. Annual Report 2016 Section VIII. Particulars about Directors, Supervisors and Senior Executives and Employees I. Changes of shares held by directors, supervisors and senior executives Increasin Decreasin Shares g shares g shares Shares held at Other Working Start dated held in held in held at End date of Name Title Sex Age of office period-be changes status office term this this period-en term gin (Share) period period d(Share) (Share) (Share) (Share) Sun Currently Chairman M 55 2016-01-18 2019-03-23 0 0 0 0 0 Xiujiang in office Xu Deputy Currently M 53 2016-12-20 2019-03-23 0 0 0 0 0 Chuanyu Chairman in office Miao Director, Currently M 46 2016-03-24 2019-03-23 0 0 0 0 0 Liubin GM in office Jiang Currently Director M 58 2016-03-24 2019-03-23 0 0 0 0 0 Chengda in office Director, deputy Xu GM & Currently M 53 2012-06-28 2019-03-23 0 0 0 0 0 Guojian Chief in office accountan t Wang Currently Mingyua Director M 52 2012-06-28 2019-03-23 0 0 0 0 0 in office n Li Currently Director F 54 2012-06-28 2019-03-23 0 0 0 0 0 Xiuqin in office Wang Currently Director F 59 2012-06-28 2019-03-23 0 0 0 0 0 Jieming in office Lv Independ Currently Hongbin ent M 51 2016-03-24 2019-03-23 0 0 0 0 0 in office g director Independ Duan Currently ent M 45 2016-03-24 2019-03-23 0 0 0 0 0 Yalin in office director Wu Independ Currently M 38 2016-03-24 2019-03-23 0 0 0 0 0 Chaopen ent in office 36 Shandong Airlines Co., Ltd. Annual Report 2016 g director Chairman of Wang Superviso Currently M 52 2013-10-28 2019-03-23 0 0 0 0 0 Wuping ry in office Committe e Xue Superviso Currently M 56 2012-06-28 2019-03-23 0 0 0 0 0 Ruitao r in office Dong Superviso Currently M 45 2016-03-24 2019-03-23 0 0 0 0 0 Hong r in office Zhou Superviso Currently F 42 2012-06-28 2019-03-23 0 0 0 0 0 Qiaoyan r in office Deputy Zhang Currently GM, chief M 59 2013-10-28 2019-03-23 0 0 0 0 0 Qingshe in office pilot Wang Deputy Currently M 52 2014-03-20 2019-03-23 0 0 0 0 0 Xianlin GM in office Zhou Deputy Currently M 53 2013-07-31 2019-03-23 0 0 0 0 0 Lixin GM in office Dong Secretary Currently Qiantan of the M 55 2012-06-28 2019-03-23 0 0 0 0 0 in office g Board Deputy Currently Yu Bo M 44 2016-02-04 2019-03-23 0 0 0 0 0 GM in office Dong Deputy Currently M 48 2016-09-30 2019-03-23 0 0 0 0 0 Jianmin GM in office Zhou Safety Currently M 55 2016-09-30 2019-03-23 0 0 0 0 0 Ning Director in office Ma Deputy Currently F 42 2016-09-30 2019-03-23 0 0 0 0 0 Xiaoli GM in office Independ Wang Office ent M 74 2012-06-28 2016-03-24 0 0 0 0 0 Kaiyuan leaving director Ping Independ Office Xiaofen ent M 68 2012-06-28 2016-03-24 0 0 0 0 0 leaving g director Independ Office Li Chun ent M 60 2012-06-28 2016-03-24 0 0 0 0 0 leaving director 37 Shandong Airlines Co., Ltd. Annual Report 2016 Qu Independ Office Wenzho ent M 45 2012-06-28 2016-03-24 0 0 0 0 0 leaving u director Zhang Superviso Office M 52 2012-06-28 2016-03-24 0 0 0 0 0 Kai r leaving Ma Deputy Office Chong M 52 2012-06-28 2016-11-26 0 0 0 0 0 Chairman leaving Xian Total -- -- -- -- -- -- 0 0 0 0 0 II. Changes of directors, supervisors and senior executives Name Title Type Date Reasons Appointment Sun Xiujiang Chairman 2016-01-18 Election and dismissal Appointment Yu Bo Deputy GM 2016-02-04 Work adjustment and dismissal Appointment Former GM, and elected as new Director and GM Miao Liubin Director, GM 2016-03-24 and dismissal after general election Appointment Jiang Chengda Director 2016-03-24 Elected as new director on general election and dismissal Independent Appointment Elected as new independent director on general Lv Hongbing 2016-03-24 director and dismissal election Independent Appointment Elected as new independent director on general Duan Yalin 2016-03-24 director and dismissal election Independent Appointment Elected as new independent director on general Wu Chaopeng 2016-03-24 director and dismissal election Former independent director, no longer serves as Wang Kaiyuan N/A Stepped down 2016-03-24 independent director after change the term of office Former independent director, no longer serves as Ping Xiaofeng N/A Stepped down 2016-03-24 independent director after change the term of office Former independent director, no longer serves as Li Chun N/A Stepped down 2016-03-24 independent director after change the term of office Former independent director, no longer serves as Qu Wenzhou N/A Stepped down 2016-03-24 independent director after change the term of office Appointment Dong Hong Supervisor 2016-03-24 Elected as new supervisor on general election and dismissal Former supervisor, no longer serves as supervisor Zhang Kai N/A Stepped down 2016-03-24 after change the term of office 38 Shandong Airlines Co., Ltd. Annual Report 2016 Appointment Dong Jianmin Deputy GM 2016-09-30 Work adjustment and dismissal Appointment Zhou Ning Safety Director 2016-09-30 Work adjustment and dismissal Appointment Ma Xiaoli Deputy GM 2016-09-30 Work adjustment and dismissal Deputy Appointment Xu Chuanyu 2016-12-20 Election Chairman and dismissal III. Post-holding Professional background, major working experience and present main responsibilities in Company of directors, supervisors and senior executive at the present in latest five years Name Main working experience Sun Xiujiang 2014.12-2013.08 Director of Hualu Holdings Co., Ltd, Deputy GM and Member of CPC Committee of Hualu Holdings Co., Ltd. 2013.08-2015.05 Deputy Party Secretary and Secretary of Committee for Discipline Inspection of SDA 2013.10-2016.01 Director of the Company 2015.05-present Party Secretary of SDA 2015.09-present Deputy Chairman of SDA 2016.01-present Chairman of the Company Xu Chuanyu 2012.03-present Chief Safety Officer of Air China 2012.12-present Chief flight engineer of China National Aviation Holding 2016.11-present President, Chariman and deputy Secretary of the Party of Shandong Airlines 2016.12-present Deputy Chairman of the Company Miao Liubin 2007.08-2012.05 GM of Flight Dept. of the Company 2011.03-2014.03 Deputy GM of the Company 2013.10-2014.03 Safety Director of the Company 2014.03-present GM of the Company 2006.03-present Director of the Company Jiang Chengda 2008.05-2013.09 Operate Director of th Company 2011.04-2013.09 Deputy GM of the Company 2013.09-2016.01 Deputy secretary of the Company 2013.09-present Member of Party Committee, deputy president of Shandong Airlines, the Secretary of Committee for Discipline Inspection and Labor Union Chairment 2016.01-present Party Secretary of the Company 2016.03-present Director of the Company Xu Guojian 2007.10-2010.01 General Manager of Financial Dividend in Engineer Technology Branch of Air China 2010.01-present Deputy GM and Chief Accountant of the Company 2010.04-present Director of the Company Wang 2011.02-present Member of the Party Committee and Deputy Chairman of Air China Mingyuan 2006.03-present Director of the Company 39 Shandong Airlines Co., Ltd. Annual Report 2016 Li Xiuqing 2010.03-present Director of Assets Management Department of Shandong Economic Development and Investment Company 2016.05-present Deputy GM of Shandong Economic Development & Investment Company 2012.06-present Director of the Company Wang Jieming 2003.02-present Director of Planning Financial Department of Shandong Economic Development and Investment Company 2016.05-present CFO of the Shandong Economic Development & Investment Company 2006.03-present Director of the Company Lv Hongbing He has worked as director of the Shanghai Wanguo Law Firm, president of Shanghai Bar Association and member of the 6th Issuance Examination Committee of CSRC. Now he serves as chief executive partnert of Grandall Law Firm. And also works as party members and deputy director of the All-China Lawyers Association, member of the 12th Committee of Shanghai, the Chinese People’s Political Consultative Conference, deputy chief of Committee for Social and Legal Affairs, Shanghai International Economic and Trade Arbitration Commission, Shanghai International Arbitration Center, Shanghai Arbitration Commission, arbitrator of Shanghai Arbitration Court, advisor of Restructuring Committee of CSRC, the member of Listing Committee of SSE. He holds the Chinese Lawyer Qualification Certificate. 2016.03-present Independent director of the Company Duan Yalin He has worked as VP of the management dept. in Shenzhen Stock Exchange, deputy president of Donghai Securities Co., Ltd., and president of Donghai Innovation Product Investment Co., Ltd. and he also worked as the frst member of China Securiteis Regulatory Commission and Fixed Return Specialized Committee of the SAC, the standing director of National Debt Association of China and CNIBA. Now he serves as president of Shanghai Fortune Investment Management Center and independent director of Shanghai Jingjiang International Industrial Investment Co., Ltd. 2016.03-present Independent director of the Company Wu Chaopeng He serves as the professor and doctoral supervisor in School of Managemetn Accounting and Finance of the Xiamen University. And serves as menber of the Chinerse Accounting Association Professional Committee of International Academic Exchanges, associate editor of the International journals – China Accounting and Finance Review, the member of a Chinese Research Council of Modern Management and chief expert of the key issues of philosophy & social science research of Ministry of Education. 2016.03-present Independent director of the Company Wang Wuping 2009.02-2013.09 GM of Financial Dept. of the Company 2013.09-present Chief Accountant and GM of Financial Dept of SDA 2013.10-present Chairman of Supervisory Committee of the Company Xue Ruitao 2009.03-2013.09 GM of Financial Dept of SDA 2013.09-present GM of Planning & Investment Management Dept. of SDA 2009.06-present Supervisor of the Company Dong Hong 2007.01-present Senior manager of the assets management dept. of Air China 2016.03-present Supervisor of the Company Zhou Qiaoyan 2003.03-2012.05 Deputy GM of Cabin Service Dept. of the Company 2012.05-present Secretary of Party General Branch of Cabin Dept. of the Company 2006.03-present Employee supervisor of the Company Zhang Qingshe 2001.10-present Chief Pilot of the Company 2013.10-present Deputy GM of the Company 40 Shandong Airlines Co., Ltd. Annual Report 2016 Wang Xianlin 2009.02-2016.09 Safety Director of the Company 2013.10-present Deputy GM of the Company Zhou Lixin 2007.11-2013.07 Deputy GM of Centralized Purchasing Dept. of Air China and Member of the Party Committee 2013.07-present Deputy GM of the Company Dong Qiantang 2009.02-2011.03 General Manager of Enterprise Management of the Company 2011.03-present Director of the General Office of the Company 2009.06-present Secretary of the Board of the Company Yu Bo 2013.09-2014.10 Vice chief engineer 2010.01-2015.07 GM of Engineering Technology enterprise of the Company 2014.10-2016.02 Chief engineer of the Company 2016.02-present Deputy GM of the Company Dong Jianmin 2007.08-2012.05 Deputy GM of Flight Dept. of the Company 2012.06-2016.09 Employee supervisor of the Company 2012.05-present GM of Flight Dept. of the Company 2016.09-present Deputy GM of the Company Zhou Ning 2007.08-2014.05 GM of the Operation Standards Dept. of the Company 2013.03-present GM of the Aviation Safety Management Dept. of the Company 2016.09-present Chief Safety Officer of the Company Ma Xiaoli 2010.01-present GM of the Marketing Commission of the Company 2016.09-present Deputy GM of the Company Post-holding in shareholder’s unit √Applicable □Not applicable Whether receiving Name of Start dated of office End date of remuneration from Name shareholder’s Position term office term shareholder’s units units or not Party Secretary, Deputy Sun Xiujiang SDA 2015-05-01 Y President Chairman, President and SDA 2016-11-01 N Xu Chuanyu Deputy Party Secretary Air China Safety Director 2012-12-01 Y Member of the Party Jiang Chengda SDA 2013-09-01 N Committee, Deputy President Wang Member of the Party Air China 2011-12-01 Y Mingyuan Committee, Deputy President Member of the Party Wang Wuping SDA 2013-09-01 Y Committee, Chief Accountant GM of Planning & Investment Xue Ruitao SDA 2013-09-01 Y Management Dept. 41 Shandong Airlines Co., Ltd. Annual Report 2016 Senior manager of Assets Dong Hong Air China 2007-01-01 Y management dept. Post-holding in other unit √Applicable □Not applicable Whether receiving Start dated of office End date of Name Name of other units Position remuneration term office term from other units or not Xu Chuanyu Air China Inner Mongolia Chairman 2015-06-01 N Shenzhen Airlines Director 2010-04-01 N Wang Air Macau Director 2007-03-01 N Mingyuan Air China Hong Kong Chairman 2011-04-01 N Development Co., Ltd. Shandong Economic Development Li Xiuqin GM 2016-05-01 Y & Investment Company Shandong Economic Development Wang Jieming CFO 2016-05-01 Y & Investment Company Air Macau Supervisor 2015-09-01 N Zhejiang Aviation Services Co., Director 2007-04-01 N Ltd. Dong Hong Shanghai Air China Aviation Director 2015-06-01 N Services Co., Ltd. China National Aviation Finance Supervisor 2015-12-01 N Co., Ltd. Punishment of securities regulatory authority in recent three years to the company’s current and outgoing directors, supervisors and senior management during the reporting period □ Applicable √ Not applicable IV. Remuneration for directors, supervisors and senior executives Decision-making procedures, recognition basis and payment for directors, supervisors and senior executives The remuneration for directors, supervisors and senior management is paid according to relevant rules on time, and the remuneration of directors and supervisors holding a post in shareholder units or other units is paid by relevant units; allowances standard for independent directors is deliberated and approved by shareholders’ general meeting and will determine based on actual working days; Remuneration of the senior management is approved by the remuneration and appraisal committee of the board, the Company will pay to senior management with their owned working situation and performance appraisal results based on the evaluation on individual performance from internal “temporary method of performance appraisal” of the Company. Director Mr. Zhang Xingfu, Chairman of Supervisory Committee Mr. Wang Wuping together with Supervisor Mr. Xue Ruitao drew their remunerations from Shandong Aviation Group (SDA), the controlling shareholder of the Company, not from the Company; 42 Shandong Airlines Co., Ltd. Annual Report 2016 Deputy Chairman Mr. Xu Chuanyu, Director Mr. Wang Mingyuan and Supervisor Mr. Dong Hong received remuneration from Air China instead of the Company; Director Ms. Li Xiuqing, Ms. Wang Jieming drew their remunerations from Shandong Caijin Investment Company instead of the Company. Remuneration for directors, supervisors and senior executives in reporting period In 10 thousand Yuan Whether Total remuneration Post-holding remuneration Name Title Sex Age obtained from status obtained from the related party of Company the Company Currently in Miao Liubin Director, GM M 46 125.1 N office Director, secretary of the party Currently in Jiang Chengda committee and labor union M 58 104.91 N office chairman Director, Deputy GM and Chief Currently in Xu Guojian M 53 95.41 N Accountant office Currently in Lv Hongbing Independent director M 51 5.85 N office Currently in Duan Yalin Independent director M 45 5.85 N office Currently in Wu Chaopeng Independent director M 38 5.85 N office Currently in Zhou Qiaoyan Supervisor F 42 53.63 N office Zhang Currently in Deputy GM, Chief Pilot M 59 123.54 N Qingshe office Currently in Wamh Xianlin Deputy GM M 52 107.77 N office Currently in Zhou Lixin Deputy GM M 53 91.44 N office Dong Currently in Secretary of the Board M 55 94.23 N Qiantang office Currently in Yu Bo Deputy GM M 44 91.33 N office Currently in Dong Jianmin Deputy GM M 48 77.65 N office Zhou Ning Safety Director M 55 Currently in 69.16 N 43 Shandong Airlines Co., Ltd. Annual Report 2016 office Currently in Ma Xiaoli Deputy GM F 42 63.31 N office Li Chun Independent director M 60 Office leaving 1.79 N Qu Wenzhou Independent director M 45 Office leaving 1.79 N Total -- -- -- -- 1,118.61 -- Delegated equity incentive for directors, supervisors and senior executives in reporting period □ Applicable √ Not applicable V. Employees of the Company 1. Numbers of the employee, professional constitution and education background Total serving staff (person) 9,467 Retired staff with charges paid by the parent company and main 161 subsidiaries (person) Professional constitution Type Number Flight personnel 1,372 Steward 2,418 Security guard 449 Maintenance personnel 1,203 Transport control personnel 300 Salesman 637 Freight personnel 107 Ground attendant 627 Financial personnel 158 Others 2,196 Total 9,467 Education background Type Number Graduate (Master, doctor) and above 345 Bachelor degree 5,906 Junior college and below 3,216 Total 9,467 44 Shandong Airlines Co., Ltd. Annual Report 2016 2. Remuneration policy In order to meet the needs of the development strategy of the Company, establish the income distribution system which is compatible with the modern enterprise system, establish effective incentive and restraint mechanisms, improve the internal fairness of income distribution, gradually improve the market competitiveness, further stimulate the enthusiasm of staff, and promote the Company’s sustainable development, the Company has developed a pay policy which is suitable for the Company’s development status by combining with the actual situation of the Company. The pay policy follows three basic principles: adhere to the principle of unity of incentives and constraints; adhere to the principle of efficiency growth matching with wage growth; insist on taking post value as the basis, reflect the principle of "pay the post value, pay the individual ability, and pay the performance contribution". Combining with the industry characteristics and taking the employee on ground positions, pilots, and stewards (security) as the basis, the Company has respectively set up pay policies suitable for these three types of personnel, and established the job performance wage system with performance contribution as the core on the basis of respecting the post value. 3. Training plan In 2016, the Company implemented a total of 310 training projects, reaching the annual training completion rate of 98.41%. Staff education expenses reached 11,882,300 yuan. As of the end of 2016, the Company employed 406 lecturers, including 40 full-time lecturers, 366 part-time lecturers, and internally developed 34 courses (excluding qualification) in total. The lecturers taught 11380 hours in a full year, 39.24 hours per person. Concerning source, sharing resource, exploring potential, and reinforcing leadership have run through the training of 2016, and started the energized engine for the Company’s talent growth. First, concern source, build talent base. Complete the preach into the school, acceptance into the Company,summer internship and other work for the order-based students who are going to take joint training, continue to expand the school-enterprise cooperation control mode, improve the training quality of order-based students. Second, share resources, release learning boundaries. Develop the Company's excellent courses and promote, and continuously enhance the staff ‘s professional ability and professional quality. Optimize the lecturer management, optimize the lecturer control mode, promote the cadres to go to the platform, hold condolences on the Teacher's Day, establish lecturer database to share with various departments. Third, explore potential, help professional talents to grow. Organize training camps for new employees, and 45 Shandong Airlines Co., Ltd. Annual Report 2016 accelerate the transformation of new employees to professionals and Shanhang people. Organize EF English learning activities, and promote international personnel training. Fourth, reinforce leadership, train core talents. Develop leadership learning map according to the Company's development strategy, establish the "training - retraining" training mechanism, and organize the first training class 1 and retraining classes 3 to reserve core talents for the Company’s development. Fifth, optimize management and control mode, improve the training system. Revise the Company’s training management manual, and ensure the efficiency of training management practices. In 2017, the Company will continue to optimize the training management system. Refine the training needs analysis, share resources, reduce costs and increase benefits, and speed up the transformation of training results. Continue to carry out re-training classes for employed managers and upgrade classes for reserve cadres to improve the cadres leadership by multiple channels. Establish international personnel training mechanism, help the Company to do international personnel training from multiple dimensions, including professional quality, foreign language ability, cultural integration, and foreign exchange. Revise and improve the lecturer system and activate the lecturer team so as to make them become the inheritor, passers and leaders of wisdom for the Company. Innovate the presentation form of curriculum, promote the applications of new media and new methods, such as micro class, flipped class, etc., and constantly enrich the course contents. 4. Labor outsourcing □ Applicable √ Not applicable 46 Shandong Airlines Co., Ltd. Annual Report 2016 Section IX. Corporate Governance I. Basic state of corporate governance During the report period, the Company constantly completes the corporate governance structure, standardize the company operation in accordance with “Corporation Law”, “Security Law”, “Governance Principles of Listed Company”, “Listing Rules of Shenzhen Stock Exchange”, “Basic Norms of Enterprise internal control” and requirements of other related laws and regulations, feasibly gives play to guidance and supervisory role of “Three meetings” in corporate governance and information disclosure so as to further improve the corporate governance level. (I) Shareholders and general meeting During the reporting period, the Company convened the AGM of 2015 and two extraordinary meeting, all proposals are deliberated and approved. The Company strictly follows the procedures ruled by the Articles of Association and Rules of Procedure for General Meeting to convene the general meeting of stockholders, deliberate the motion and make policy, and ensure all shareholders, especially the medium and small shareholders, can enjoy equal status and fully exercise their rights. And attorney was appointed by general meeting to witness the meeting and issued legal opinion for its validity. (II) Directors and the board of directors (BOD) During the report period, BOD convoked regular and interim meetings to deliberate the company’s major issues by taking the principles of being responsible for the stockholders' meeting and actively maintaining the shareholders’ benefits and strictly following the relevant laws and regulations and the procedures ruled by the Articles of Association and Rules of Procedure for Board of Directors. The Company have 11 Board Meetings in the year of 2016, deliberated proposals as periodic report, profit distribution and election at expiration of office terms, Meeting convening and voting procedures are legally effective, and the resolution notice are being released on time in order to guarantee the right-to-kown and supervise of the shareholders, promote the standard operation for the Company. (III) Supervisors and board of supervisors During the report period, the board of supervisors of the Company convoked six meetings and attended all the general meetings of stockholders and board meetings the Company convoked in 2016. The convening, convoking and motion consideration and decision-making of the supervisor meeting were implemented in strict accordance with the procedures ruled by the Articles of Association and Rules of Procedure for Board of Supervisors, all supervisors attended the board of supervisors as required, seriously performed their duties, supervised and made opinions on the major events, related transaction and financial situation of the Company, and maintained the legitimate rights and interests of the Company and the shareholders. (IV) Information disclosure management The Company attached great importance to the information disclosure, strictly supervised all layers to disclose information timely and fairly as required so as to ensure that the disclosure is true, accurate and complete, the Company totally disclosed 4 regular reports and 31 interim announcements in 2016. The Company is the first train units for information disclosure of Shenzhen Stock Exchange, continued to maintain the good information disclosure quality, and got evaluation of “excellent” in the Shenzhen Stock Exchange listing corporation information disclosure in 2015-2016. (V) Registration and management for inside information insider In accordance with the “Rules about establishing registration and management system for inside information insider in listed companies” issued by the China Securities Regulatory Commission in October 2011 and the requirements of “Regulatory circulars 47 Shandong Airlines Co., Ltd. Annual Report 2016 about further accomplishing the registration and management system for inside information insider” issued by Shandong Securities Regulatory Bureau in November 2011, and combining with actual situation of the Company, the Company formulated “Management system for report of inside information insider and submission of external information”. The board of directors of the Company fully realized the seriousness and complexity of preventing insider trading, took various measures to implement the regulatory requirement, comprehensively strengthened the management to inside information, completed the registration and management system for inside information, and feasibly and effectively prevented relevant personnel from insider trading at the very beginning. In reporting period, the Company recording lists of person with knowledge of inside information completely as it stands and relevant file of the time for knowing inside information etc., relevant lists of person with knowledge of inside information are reported to Shandong Security Regulatory Bureau of CSRC and Shenzhen Stock Exchange for the record. No person with knowledge of inside information conduct insider trading with such information or advise others conduct such insider trading; no inside information being disclosed and caused the Company and investor a bad influence or damage; and no situation of a regulatory approach by supervision department being found. There are no differences between the actual condition of corporate governance and relevant regulations about corporate governance for listed company from CSRC. II. Independency of the Company relative to controlling shareholders’ in aspect of businesses, personnel, assets, institution and finance The company and its controlling shareholders Shandong Aviation Group has been separated totally in business, personnel, assets, institution and finance, possessing independent complete business and independent operation ability. (I) In business aspect: The Company’s business has difference with its controlling shareholder’s. The Company engaged in manufacturing management independently without dependency with controlling shareholders and other related enterprise. (II) In personnel aspect: The Company is totally independent with its controlling shareholders in labor, personnel and salary management. Directors, supervisors and senior management in accordance with the Articles of Association and relevant laws and regulations, and through the legal procedures of election or employment, no situation of the controlling shareholders in accordance with legal procedures intervention Company’s personnel appointment and removing. The senior management is not in double office performance in the listed company and the controlling shareholders and they all get salaries from the Company. (III) In asset aspect: The property right relationship between the Company and controlling shareholders is clear and the assets of a corporation are totally independent of the controlling shareholders. The Company has full control and domination without assets and funds occupied by controlling shareholders and interests of the Company being damaged. (IV) In institution aspect: The Company established an organization independent with the controlling shareholders, the board of directors and the supervisory committee operated independently without superior and subordinate relationship with the organization established in controlling shareholders and affiliate enterprises. (V) In finance aspect: The Company has an independent financial department and independent financial accounting system. Owns standard and independent accounting mechanism and financial management system as well as independent bank account, furthermore, paying tax in accordance with the law. III. Horizontal Competition □ Applicable √ Not applicable IV. In the report period, the Company held annual shareholders’ general meeting and extraordinary shareholders’ general meeting 1. Annual Shareholders’ General Meeting in the report period Ratio of investor Session of meeting Type Date Date of disclosure Index of disclosure participation 48 Shandong Airlines Co., Ltd. Annual Report 2016 First Extraordinary Extraordinary Shareholders Meeting of shareholders 65.25% 2016-03-24 2016-03-25 No.: 2016-13 2016 meeting Annual General Annual General 65.86% 2016-06-23 2016-06-24 No.: 2016-21 Meeting 2015 Meeting Second Extraordinary Extraordinary Shareholders Meeting of shareholders 67.17% 2016-12-20 2016-12-21 No.: 2016-30 2016 meeting 2. Request for extraordinary general meeting by preferred stockholders whose voting rights restore □ Applicable √ Not applicable V. Responsibility performance of independent directors in report period 1. The attending of independent directors to Board meetings and shareholders’ general meeting The attending of independent directors Times of Board Whether absent Name of Times of Times of meeting Times of present Times of the Meeting for independent attending by entrusted supposed to in person Absence the second time director communication presence attend in the in a row or not report period Wang Kaiyuan 3 0 0 0 3Y Ping Xiaofeng 3 1 2 0 0N Li Chun 3 1 2 0 0N Qu Wenzhou 8 2 6 0 0N Lv Hongbing 8 1 6 1 0N Duan Yalin 8 2 6 0 0N Wu Chaopeng 8 2 6 0 0N Times presented in shareholders’ general meeting by independent 3 directors Explanation of absent the Board Meeting for the second time in a row Independent director Mr. Wang Kaiyuan has applied for his resignation in March 2014. 2. Objection for relevant events from independent directors Independent directors has no objections for relevant events in reporting period 3. Other explanation about responsibility performance of independent directors Whether the opinions from independent directors have been adopted or not √ Yes □ No 49 Shandong Airlines Co., Ltd. Annual Report 2016 Explanation on advice that accepted/not accepted from independent directors During the reporting period, four independent directors of the company conscientiously fulfilled the responsibilities given by the laws and regulations, "Articles of Association" and the " Working System of the Independent Directors", checked and guided the company’s production and operation, attended the board meetings the general meeting of stockholders, made independent opinion on the relevant motions such as the related transactions, changes in accounting policies, and the impairment of assets, diligently fulfilled their duties in the daily work and important decision-making of the board of directors, dutifully and earnestly maintained the interests of the company and all shareholders. VI. Responsibility performance of subordinate special committee of the Board in report period The Board set up three specialized committees: the Audit Committee, the Remuneration and Appraisal Committee, and the Strategy and Nomination Committee. In 2016, all specialized committees held 6 meetings, thereinto, 4 meetings of the Audit Committee and 2 meeting of the Remuneration and Appraisal Committee. The specialized committees of the board of directors performed their duties by strictly following the requirements of China Securities Regulatory Commission and Shenzhen Stock Exchange, the "Articles of Association", and the rules of procedure of the committees, and played an important role in the scientific decision-making of the board of directors. (I) Duty performing of the audit committee of the board During the reporting period, the audit committee of the board paid close attention to the internal control system construction and the related transaction; made opinion on changing and reappointing the accounting firm; regularly checked the financial report of the company; the audit committee of the board of directors effectively performed the responsibilities, diligently did their duties in the annual financial report audit work, gave full play to the supervisory role, and maintained the independence of audit in auditing of the 2016 annual financial report. (II) Duty performing of the remuneration and appraisal committee of the board During the reporting period, the remuneration and appraisal committee of the board investigated the remuneration policy and program for the directors and senior management, did annual performance appraisal to the duty performing of directors and senior management according to related assessment criterion; checked and approved the 2016 annual report about the remuneration disclosure of the directors and the senior management, and thought the remuneration amount of relevant personnel disclosed in the 2016 annual report was true and accurate. (III) Duty performing of the strategy and nomination committee of the board During the reporting period, the strategy and nomination committee of the board made opinions on changes of the directors and senior executive members, verified the qualification of related personnel, and did not find directors or senior management whose qualifications don’t comply with laws, regulations or requirements of the Articles of Association. VII. Works from Supervisory Committee Supervisory committee has no objection about supervision events in reporting period VIII. Appraisal and incentive mechanism for senior executives In accordance with the “temporary method of performance appraisal”, the Company checks and evaluated the individual performance, and paid merit based on appraisal results to enhance the incentive efficiency. IX. Internal Control 50 Shandong Airlines Co., Ltd. Annual Report 2016 1. Details of major defects in IC appraisal report that found in reporting period □Yes √ No 2. Appraisal Report of Internal Control Disclosure date of full internal 2017-03-29 control evaluation report Disclosure index of full internal Published on Juchao Website (http://www.cninfo.com.cn) dated on 29 March 2017. control evaluation report The ratio of the total assets of units included in the scope of evaluation accounting for the total assets on the 100.00% company's consolidated financial statements The ratio of the operating income of units included in the scope of evaluation accounting for the 100.00% operating income on the company's consolidated financial statements Defects Evaluation Standards Category Financial Reports Non-financial Reports Material defect: defect that, severally or jointly with other defects, will lead to material wrong reporting in financial reports being not able to prevented or found or rectified in a timely Occurrence of the followings shall be manner. Occurrence of the followings will be deemed as material defect, otherwise as deemed as material defect: major defect or general defect subject to (1) inefficiency of environment control; the level of influence. (2) fraud of directors, supervisors and senior (1) breach of national laws, regulations management; or regulatory documents; (3) The external auditor finds material wrong (2) procedure for making significant Qualitative criteria reporting in current financial statement, decisions is not scientific; while the Company has not found such (3) absence of system may lead to reporting during its operation; invalid system; (4) The material defect identified and reported to (4) Material or major defects are not the management fails to be rectified in a likely to rectify; reasonable time period; (5) Other issues that materially affect (5) The audit committee and audit department of the Company. the Company exercise invalid supervision upon internal control; (6) Other defects which may affect financial statement users to make correct judgment. 51 Shandong Airlines Co., Ltd. Annual Report 2016 Major defect: defect that, severally or jointly with other defects, will lead to wrong reporting in financial reports being not able to prevented or found or rectified in a timely manner which still needs attention from the management though it doesn’t reach or exceed material defect as described above. General defect: other internal control related defects that do not constitute material defects or major defect (1)potential wrong reporting in operating income: Material defect: 0.5% of the total operating income ≤ wrong reporting; Major defect: 0.2% of the total operating income ≤ wrong reporting<0.5% of the total operating income; General defect: wrong reporting<0.2% of the (1)direct property loss: total operating income. Material defect: over RMB10 million; (2) potential wrong reporting in total profit: Major defect: RMB1 million-RMB10 Material defect: 5% of the total profit≤ wrong million (inclusive); reporting; General defect: RMB1 million or below Major defect: 2% of the total profit≤ wrong (2)negative influences: reporting<5% of the total profit; Material defect: materially and adversely General defect: wrong reporting<2% of the total affect the Company, and disclosed to the profit. Quantitative criteria public via announcement; (3) potential wrong reporting in total assets: Major defect: receive punishment from Material defect: 0.5% of the total assets ≤ wrong national authorities, while has no reporting; material negative influence over the Major defect: 0.2% of the total assets ≤ wrong Company; reporting<0.5% of the total assets; General defect: receive punishment from General defect: wrong reporting<0.2% of the provincial or below authorities, while has total assets. no negative influence over the Company. (4) potential wrong reporting in owners’ equity: Material defect: 0.5% of the total owners’ equity ≤ wrong reporting; Major defect: 0.2% of the total owners’ equity ≤ wrong reporting < 0.5% of the total owners’ equity; General defect: wrong reporting<0.2% of the total owners’ equity. Amount of significant defects in 0 financial reports Amount of significant defects in 0 non-financial reports 52 Shandong Airlines Co., Ltd. Annual Report 2016 Amount of important defects in 0 financial reports Amount of important defects in 0 non-financial reports X. Auditing report of internal control √Applicable □Not applicable Deliberation section of auditing report of IC To the Shareholders of Shandong Airlines Co., Ltd.: We have audited the effectiveness of internal control of financial report under the name of Shandong Airlines Co., Ltd. (“the Company”) dated 31 December 2016 in accordance with relevant requirements of “Internal Control Audit Guideline for Enterprises” and China Standards on Auditing and Quality Control I. Company's responsibility for internal control The Company is responsible for the establishment & perfection and efficiency implementation of internal control as well as evaluated its effectiveness, regulated by “Basic Standard of Internal Control for Enterprises”, “Application Guidelines of Internal Control for Enterprises” and “Evaluation Guidelines of Internal Control for Enterprises”. II. Auditor's responsibility Our responsibility is to express an audit opinion on effectiveness of internal control of financial report based on our audit. And disclosed the major defects noted in internal control of non-financial report. III. Inherent limitations of internal control Internal control has an inherent limitations, and there is possibility of in-prevention and false reported. Furthermore, internal control will comes to inappropriate due to the changes of circumstances, or the controlling policy and procedure maintenance will fail in implementation; there has a certain risk in presuming the efficiency of future internal control based on internal control’s audit results. IV. Audit opinions on internal control of financial report In our opinion, Shandong Airlines Co., Ltd. maintain an efficiency of internal control of financial report, in all major aspects, as of 31 December 2016 based on relevant regulations and “Basic Standard of Internal Control for Enterprises”. Ruihua CPAs (LLP) Chinese CPA: Yang Yunhui BeijingChina Chinese CPA:Guo Yuefeng 28 March 2017 Disclosure details of audit report of Disclosed internal control Disclosure date of audit report of 2017-03-29 internal control (full-text) Index of audit report of internal Published on Juchao Website (http://www.cninfo.com.cn) dated 29 March 2017 control (full-text) 53 Shandong Airlines Co., Ltd. Annual Report 2016 Opinion type of auditing report of Standard unqualified IC whether the non-financial report No had major defects Issued a modified audit opinions for internal control □Yes √ No Auditing report of internal control issued by CPA shows the same opinion as self-evaluation report issued by the Board √ Yes □ No 54 Shandong Airlines Co., Ltd. Annual Report 2016 Section X. Corporation bonds Whether or not the Company public offering corporation bonds in stock exchange, which undue or without payment in full at maturity on the approval date for annual report disclosed No 55 Shandong Airlines Co., Ltd. Annual Report 2016 Section XI. Financial Report I. Audit report Type of audit opinion Standard unqualified Date for audited report signed 2017-03-28 Name of audit institution Ruihua Certified Public Accountants (LLP) Auditors' Report No. Ruihua Shen Zi [2017] No.4845002 CPA YangYunhui, Guo Yuefeng Auditor’s Report To the Shareholders of Shandong Airlines Co., Ltd.: We have audited the effectiveness of internal control of financial report under the name of Shandong Airlines Co., Ltd. (“the Company”) dated 31 December 2016 in accordance with relevant requirements of “Internal Control Audit Guideline for Enterprises” and China Standards on Auditing and Quality Control I. Company's responsibility for internal control The Company is responsible for the establishment & perfection and efficiency implementation of internal control as well as evaluated its effectiveness, regulated by “Basic Standard of Internal Control for Enterprises”, “Application Guidelines of Internal Control for Enterprises” and “Evaluation Guidelines of Internal Control for Enterprises”. II. Auditor's responsibility Our responsibility is to express an audit opinion on effectiveness of internal control of financial report based on our audit. And disclosed the major defects noted in internal control of non-financial report. III. Inherent limitations of internal control Internal control has an inherent limitations, and there is possibility of in-prevention and false reported. Furthermore, internal control will comes to inappropriate due to the changes of circumstances, or the controlling policy and procedure maintenance will fail in implementation; there has a certain risk in presuming the efficiency of future internal control based on internal control’s audit results. IV. Audit opinions on internal control of financial report In our opinion, Shandong Airlines Co., Ltd. maintain an efficiency of internal control of financial report, in all major aspects, as of 31 December 2016 based on relevant regulations and “Basic Standard of Internal Control for Enterprises”. Ruihua CPAs (LLP) Chinese CPA: Yang Yunhui BeijingChina Chinese CPA:Guo Yuefeng 28 March 2017 56 Shandong Airlines Co., Ltd. Annual Report 2016 II. Financial Statement Statement in Financial Notes are carried in RMB/CNY 1. Consolidated Balance Sheet Prepared by Shandong Airlines Co., Ltd 2016-12-31 In RMB Item Closing balance Opening balance Current assets: Monetary funds 791,255,686.65 1,415,399,630.60 Settlement provisions Capital lent Financial liability measured by fair value and with variation reckoned into current gains/losses Derivative financial liability Notes receivable Accounts receivable 322,774,169.85 255,782,921.88 Accounts paid in advance 249,136,244.95 154,897,777.19 Insurance receivable Reinsurance receivables Contract reserve of reinsurance receivable Interest receivable Dividend receivable 4,381,900.00 Other receivables 351,000,324.78 280,489,032.02 Purchase restituted finance asset Inventories 120,965,243.56 112,307,440.99 Divided into assets held for sale Non-current asset due within one year Other current assets 59,685,735.09 46,425,506.53 Total current assets 1,894,817,404.88 2,269,684,209.21 Non-current assets: Loans and payments on behalf 57 Shandong Airlines Co., Ltd. Annual Report 2016 Finance asset available for sales 271,872,182.34 221,122,773.92 Held-to-maturity investment Long-term account receivable Long-term equity investment Investment property Fixed assets 7,093,233,151.79 7,156,258,169.93 Construction in progress 2,250,500,462.35 2,062,310,572.89 Engineering material Disposal of fixed asset Productive biological asset Oil and gas asset Intangible assets 114,203,753.20 115,405,609.56 Expense on Research and Development Goodwill Long-term expenses to be 475,562,660.08 446,508,148.36 apportioned Deferred income tax asset 641,785,173.89 453,818,799.19 Other non-current asset 23,794,314.90 Total non-current asset 10,847,157,383.65 10,479,218,388.75 Total assets 12,741,974,788.53 12,748,902,597.96 Current liabilities: Short-term loans Loan from central bank Absorbing deposit and interbank deposit Capital borrowed Financial liability measured by fair value and with variation reckoned into 1,155,815.80 3,370,447.62 current gains/losses Derivative financial liability Notes payable 25,299,479.50 Accounts payable 1,688,094,861.09 1,128,629,695.55 Accounts received in advance 699,319,553.05 432,216,409.37 Selling financial asset of repurchase Commission charge and commission payable 58 Shandong Airlines Co., Ltd. Annual Report 2016 Wage payable 454,375,029.19 455,788,600.48 Taxes payable 138,661,805.16 105,147,871.19 Interest payable 2,430,456.90 3,638,536.32 Dividend payable 11,940.00 11,940.00 Other accounts payable 401,854,436.21 355,629,762.77 Reinsurance payables Insurance contract reserve Security trading of agency Security sales of agency Divided into liability held for sale Non-current liabilities due within 1 987,644,012.02 1,487,011,320.66 year Other current liabilities Total current liabilities 4,373,547,909.42 3,996,744,063.46 Non-current liabilities: Long-term loans 1,799,601,767.54 2,887,701,872.70 Bonds payable Including: preferred stock Perpetual capital securities Long-term account payable 2,534,202,090.26 2,366,241,176.93 Long-term wages payable 94,130,651.51 84,214,087.72 Special accounts payable Projected liabilities Deferred income 58,439,521.16 15,795,524.10 Deferred income tax liabilities 45,880,020.58 33,192,668.48 Other non-current liabilities Total non-current liabilities 4,532,254,051.05 5,387,145,329.93 Total liabilities 8,905,801,960.47 9,383,889,393.39 Owner’s equity: Share capital 400,000,000.00 400,000,000.00 Other equity instrument Including: preferred stock Perpetual capital securities Capital public reserve 75,410,363.70 75,410,363.70 59 Shandong Airlines Co., Ltd. Annual Report 2016 Less: Inventory shares Other comprehensive income 131,880,061.76 93,555,005.44 Reasonable reserve Surplus public reserve 423,424,327.64 370,981,095.40 Provision of general risk Retained profit 2,805,458,074.96 2,425,066,740.03 Total owner’s equity attributable to 3,836,172,828.06 3,365,013,204.57 parent company Minority interests Total owner’s equity 3,836,172,828.06 3,365,013,204.57 Total liabilities and owner’s equity 12,741,974,788.53 12,748,902,597.96 Legal Representative: Sun Xiujiang Person in charge of Accounting Works: Xu Guojian Person in charge of Accounting Institution: Sun Jingping 2. Balance Sheet of Parent Company In RMB Item Closing balance Opening balance Current assets: Monetary funds 761,645,065.66 1,401,853,786.39 Financial liability measured by fair value and with variation reckoned into current gains/losses Derivative financial liability Notes receivable Accounts receivable 322,884,254.40 251,589,118.43 Account paid in advance 248,747,945.46 153,733,245.51 Interest receivable Dividends receivable 4,381,900.00 Other receivables 394,481,947.14 323,753,261.30 Inventories 120,965,243.56 112,307,440.99 Divided into assets held for sale Non-current assets maturing within one year Other current assets 59,685,735.09 46,425,506.53 Total current assets 1,908,410,191.31 2,294,044,259.15 60 Shandong Airlines Co., Ltd. Annual Report 2016 Non-current assets: Available-for-sale financial assets 271,872,182.34 221,122,773.92 Held-to-maturity investments Long-term receivables Long-term equity investments 106,000,685.43 106,000,685.43 Investment property Fixed assets 7,000,694,540.06 7,055,065,593.26 Construction in progress 2,250,424,462.35 2,062,234,572.89 Project materials Disposal of fixed assets Productive biological assets Oil and natural gas assets Intangible assets 100,261,260.93 101,074,925.84 Research and development costs Goodwill Long-term deferred expenses 475,562,660.08 446,508,148.36 Deferred income tax assets 641,017,982.18 453,010,410.16 Other non-current assets 23,794,314.90 Total non-current assets 10,845,833,773.37 10,468,811,424.76 Total assets 12,754,243,964.68 12,762,855,683.91 Current liabilities: Short-term borrowings Financial liability measured by fair value and with variation reckoned into 1,155,815.80 3,370,447.62 current gains/losses Derivative financial liability Notes payable 25,299,479.50 Accounts payable 1,702,743,063.11 1,139,113,395.22 Accounts received in advance 693,918,823.76 425,229,854.14 Wage payable 450,079,741.59 449,749,937.20 Taxes payable 137,221,799.65 103,940,014.68 Interest payable 2,430,456.90 3,638,536.32 Dividend payable 11,940.00 11,940.00 Other accounts payable 425,862,312.50 380,180,859.11 61 Shandong Airlines Co., Ltd. Annual Report 2016 Divided into liability held for sale Non-current liabilities due within 1 987,644,012.02 1,487,011,320.66 year Other current liabilities Total current liabilities 4,401,067,965.33 4,017,545,784.45 Non-current liabilities: Long-term loans 1,799,601,767.54 2,887,701,872.70 Bonds payable Including: preferred stock Perpetual capital securities Long-term account payable 2,534,202,090.26 2,366,241,176.93 Long-term wages payable 94,130,651.51 84,214,087.72 Special accounts payable Projected liabilities Deferred income 58,439,521.16 15,795,524.10 Deferred income tax liabilities 45,880,020.58 33,192,668.48 Other non-current liabilities Total non-current liabilities 4,532,254,051.05 5,387,145,329.93 Total liabilities 8,933,322,016.38 9,404,691,114.38 Owners’ equity: Share capita 400,000,000.00 400,000,000.00 Other equity instrument Including: preferred stock Perpetual capital securities Capital public reserve 86,911,168.71 86,911,168.71 Less: Inventory shares Other comprehensive income 131,880,061.76 93,555,005.44 Reasonable reserve Surplus reserve 422,763,623.11 370,320,390.87 Retained profit 2,779,367,094.72 2,407,378,004.51 Total owner’s equity 3,820,921,948.30 3,358,164,569.53 Total liabilities and owner’s equity 12,754,243,964.68 12,762,855,683.91 Legal Representative: Sun Xiujiang Person in charge of Accounting Works: Xu Guojian 62 Shandong Airlines Co., Ltd. Annual Report 2016 Person in charge of Accounting Institution: Sun Jingping 3. Consolidated Profit Statement In RMB Item Current Period Last Period I. Total operating income 13,742,365,545.56 12,108,963,139.11 Including: Operating income 13,742,365,545.56 12,108,963,139.11 Interest income Insurance gained Commission charge and commission income II. Total operating cost 13,216,283,996.73 11,569,608,100.59 Including: Operating cost 11,890,173,404.59 10,199,586,342.94 Interest expense Commission charge and commission expense Cash surrender value Net amount of expense of compensation Net amount of withdrawal of insurance contract reserve Bonus expense of guarantee slip Reinsurance expense Operating tax and extras 46,017,200.74 50,222,475.22 Sales expenses 674,961,176.53 713,698,896.12 Administration expenses 333,943,862.70 280,697,316.52 Financial expenses 261,876,586.15 319,822,620.05 Losses of devaluation of asset 9,311,766.02 5,580,449.74 Add: Changing income of fair 2,214,631.82 -1,810,736.85 value(Loss is listed with “-”) Investment income (Loss is listed 17,359,703.12 35,503,600.77 with “-”) Including: Investment income on -17,729,201.91 affiliated company and joint venture Exchange income (Loss is listed with “-”) 63 Shandong Airlines Co., Ltd. Annual Report 2016 III. Operating profit (Loss is listed with 545,655,883.77 573,047,902.44 “-”) Add: Non-operating income 168,716,626.89 139,759,804.28 Including: Disposal gains of 68,054.80 454,266.84 non-current asset Less: Non-operating expense 4,998,459.07 1,799,031.90 Including: Disposal loss of 3,459,280.00 1,402,588.79 non-current asset IV. Total Profit (Loss is listed with “-”) 709,374,051.59 711,008,674.82 Less: Income tax expense 176,539,484.42 178,747,681.78 V. Net profit (Net loss is listed with “-”) 532,834,567.17 532,260,993.04 Net profit attributable to owner’s of 532,834,567.17 532,260,993.04 parent company Minority shareholders’ gains and losses VI. Net after-tax of other comprehensive 38,325,056.32 34,631,831.18 income Net after-tax of other comprehensive income attributable to owners of parent 38,325,056.32 34,631,831.18 company (I) Other comprehensive income items which will not be reclassified 263,000.00 -5,281,000.00 subsequently to profit of loss 1. Changes as a result of re-measurement of net defined benefit 263,000.00 -5,281,000.00 plan liability or asset 2. Share of the other comprehensive income of the investee accounted for using equity method which will not be reclassified subsequently to profit and loss (II) Other comprehensive income items which will be reclassified 38,062,056.32 39,912,831.18 subsequently to profit or loss 1. Share of the other comprehensive income of the investee accounted for using equity method which will be reclassified subsequently to profit or loss 2. Gains or losses arising 38,062,056.32 39,912,831.18 64 Shandong Airlines Co., Ltd. Annual Report 2016 from changes in fair value of available-for-sale financial assets 3. Gains or losses arising from reclassification of held-to-maturity investment as available-for-sale financial assets 4. The effect hedging portion of gains or losses arising from cash flow hedging instruments 5. Translation differences arising on translation of foreign currency financial statements 6. Other Net after-tax of other comprehensive income attributable to minority shareholders VII. Total comprehensive income 571,159,623.49 566,892,824.22 Total comprehensive income 571,159,623.49 566,892,824.22 attributable to owners of parent Company Total comprehensive income attributable to minority shareholders VIII. Earnings per share: (i) Basic earnings per share 1.33 1.33 (ii) Diluted earnings per share 1.33 1.33 Legal Representative: Sun Xiujiang Person in charge of Accounting Works: Xu Guojian Person in charge of Accounting Institution: Sun Jingping 4. Profit Statement of Parent Company In RMB Item Current Period Last Period I. Operating income 13,715,153,317.42 12,088,523,588.18 Less: Operating cost 11,883,288,895.95 10,195,787,859.35 Operating tax and extras 44,130,493.73 49,894,195.77 Sales expenses 674,961,176.53 713,698,896.12 Administration expenses 326,189,363.91 272,307,927.95 Financial expenses 261,933,134.34 319,882,738.89 Losses of devaluation of asset 9,476,555.32 5,517,603.31 65 Shandong Airlines Co., Ltd. Annual Report 2016 Add: Changing income of fair 2,214,631.82 -1,810,736.85 value(Loss is listed with “-”) Investment income (Loss is 17,359,703.12 35,503,600.77 listed with “-”) Including: Investment income -17,729,201.91 on affiliated company and joint venture II. Operating profit (Loss is listed 534,748,032.58 565,127,230.71 with “-”) Add: Non-operating income 168,710,639.01 139,759,441.46 Including: Disposal gains of 64,854.80 453,904.02 non-current asset Less: Non-operating expense 4,994,421.07 1,663,627.60 Including: Disposal loss of 3,455,242.00 1,388,386.05 non-current asset III. Total Profit (Loss is listed with 698,464,250.52 703,223,044.57 “-”) Less: Income tax expense 174,031,928.07 175,920,664.61 IV. Net profit (Net loss is listed with 524,432,322.45 527,302,379.96 “-”) V. Net after-tax of other comprehensive 38,325,056.32 34,631,831.18 income (I) Other comprehensive income items which will not be reclassified 263,000.00 -5,281,000.00 subsequently to profit of loss 1. Changes as a result of re-measurement of net defined benefit 263,000.00 -5,281,000.00 plan liability or asset 2. Share of the other comprehensive income of the investee accounted for using equity method which will not be reclassified subsequently to profit and loss (II) Other comprehensive income items which will be reclassified 38,062,056.32 39,912,831.18 subsequently to profit or loss 1. Share of the other comprehensive income of the investee accounted for using equity method which will be reclassified subsequently to profit or loss 66 Shandong Airlines Co., Ltd. Annual Report 2016 2. Gains or losses arising from changes in fair value of 38,062,056.32 39,912,831.18 available-for-sale financial assets 3. Gains or losses arising from reclassification of held-to-maturity investment as available-for-sale financial assets 4. The effect hedging portion of gains or losses arising from cash flow hedging instruments 5. Translation differences arising on translation of foreign currency financial statements 6. Other VI. Total comprehensive income 562,757,378.77 561,934,211.14 VII. Earnings per share: (i) Basic earnings per share (ii) Diluted earnings per share Legal Representative: Sun Xiujiang Person in charge of Accounting Works: Xu Guojian Person in charge of Accounting Institution: Sun Jingping 5. Consolidated Cash Flow Statement In RMB Item Current Period Last Period I. Cash flows arising from operating activities: Cash received from selling commodities and providing labor 15,292,555,234.22 13,450,288,283.26 services Net increase of customer deposit and interbank deposit Net increase of loan from central bank Net increase of capital borrowed from other financial institution Cash received from original insurance contract fee Net cash received from reinsurance 67 Shandong Airlines Co., Ltd. Annual Report 2016 business Net increase of insured savings and investment Net increase of amount from disposal financial assets that measured by fair value and with variation reckoned into current gains/losses Cash received from interest, commission charge and commission Net increase of capital borrowed Net increase of returned business capital Write-back of tax received Other cash received concerning 250,348,958.09 162,874,095.46 operating activities Subtotal of cash inflow arising from 15,542,904,192.31 13,613,162,378.72 operating activities Cash paid for purchasing commodities and receiving labor 9,817,458,407.43 8,591,292,349.65 service Net increase of customer loans and advances Net increase of deposits in central bank and interbank Cash paid for original insurance contract compensation Cash paid for interest, commission charge and commission Cash paid for bonus of guarantee slip Cash paid to/for staff and workers 2,335,621,670.49 1,917,771,707.59 Taxes paid 668,268,335.05 449,591,891.48 Other cash paid concerning 294,499,790.92 230,048,586.99 operating activities Subtotal of cash outflow arising from 13,115,848,203.89 11,188,704,535.71 operating activities Net cash flows arising from operating 2,427,055,988.42 2,424,457,843.01 activities II. Cash flows arising from investing 68 Shandong Airlines Co., Ltd. Annual Report 2016 activities: Cash received from recovering 200,800,000.00 investment Cash received from investment 23,018,666.90 8,790,345.41 income Net cash received from disposal of fixed, intangible and other long-term 1,819,289.52 92,325,889.51 assets Net cash received from disposal of subsidiaries and other units Other cash received concerning investing activities Subtotal of cash inflow from investing 24,837,956.42 301,916,234.92 activities Cash paid for purchasing fixed, 2,170,224,417.98 2,182,192,631.16 intangible and other long-term assets Cash paid for investment Net increase of mortgaged loans Net cash received from subsidiaries and other units obtained Other cash paid concerning 1,277,063.78 2,693,748.52 investing activities Subtotal of cash outflow from investing 2,171,501,481.76 2,184,886,379.68 activities Net cash flows arising from investing -2,146,663,525.34 -1,882,970,144.76 activities III. Cash flows arising from financing activities Cash received from absorbing investment Including: Cash received from absorbing minority shareholders’ investment by subsidiaries Cash received from loans 296,000,000.00 1,104,981,104.70 Cash received from issuing bonds Other cash received concerning 1,221,674,080.70 1,619,738,784.33 financing activities Subtotal of cash inflow from financing 1,517,674,080.70 2,724,719,889.03 69 Shandong Airlines Co., Ltd. Annual Report 2016 activities Cash paid for settling debts 2,074,680,400.72 1,940,752,605.33 Cash paid for dividend and profit 200,798,539.33 222,540,239.21 distributing or interest paying Including: Dividend and profit of minority shareholder paid by subsidiaries Other cash paid concerning 188,394,977.32 174,680,444.93 financing activities Subtotal of cash outflow from financing 2,463,873,917.37 2,337,973,289.47 activities Net cash flows arising from financing -946,199,836.67 386,746,599.56 activities IV. Influence on cash and cash equivalents due to fluctuation in 41,663,429.64 26,423,996.44 exchange rate V. Net increase of cash and cash -624,143,943.95 954,658,294.25 equivalents Add: Balance of cash and cash 1,415,399,630.60 460,741,336.35 equivalents at the period -begin VI. Balance of cash and cash 791,255,686.65 1,415,399,630.60 equivalents at the period -end Legal Representative: Sun Xiujiang Person in charge of Accounting Works: Xu Guojian Person in charge of Accounting Institution: Sun Jingping 6. Cash Flow Statement of Parent Company In RMB Item Current Period Last Period I. Cash flows arising from operating activities: Cash received from selling commodities and providing labor 15,258,749,693.82 13,429,749,687.19 services Write-back of tax received Other cash received concerning 249,661,725.51 162,801,165.42 operating activities Subtotal of cash inflow arising from 15,508,411,419.33 13,592,550,852.61 70 Shandong Airlines Co., Ltd. Annual Report 2016 operating activities Cash paid for purchasing commodities and receiving labor 9,826,140,303.09 8,600,632,282.93 service Cash paid to/for staff and workers 2,315,580,568.87 1,901,307,673.50 Taxes paid 661,815,142.14 443,278,621.72 Other cash paid concerning 294,240,359.26 220,894,486.70 operating activities Subtotal of cash outflow arising from 13,097,776,373.36 11,166,113,064.85 operating activities Net cash flows arising from operating 2,410,635,045.97 2,426,437,787.76 activities II. Cash flows arising from investing activities: Cash received from recovering 200,800,000.00 investment Cash received from investment 23,018,666.90 8,790,345.41 income Net cash received from disposal of fixed, intangible and other long-term 1,816,869.52 92,325,246.19 assets Net cash received from disposal of subsidiaries and other units Other cash received concerning investing activities Subtotal of cash inflow from investing 24,835,536.42 301,915,591.60 activities Cash paid for purchasing fixed, 2,169,865,832.31 2,181,604,686.27 intangible and other long-term assets Cash paid for investment Net cash received from subsidiaries and other units Other cash paid concerning 1,277,063.78 2,693,748.52 investing activities Subtotal of cash outflow from investing 2,171,142,896.09 2,184,298,434.79 activities Net cash flows arising from investing -2,146,307,359.67 -1,882,382,843.19 activities 71 Shandong Airlines Co., Ltd. Annual Report 2016 III. Cash flows arising from financing activities Cash received from absorbing investment Cash received from loans 296,000,000.00 1,104,981,104.70 Cash received from issuing bonds Other cash received concerning 1,221,674,080.70 1,619,738,784.33 financing activities Subtotal of cash inflow from financing 1,517,674,080.70 2,724,719,889.03 activities Cash paid for settling debts 2,074,680,400.72 1,940,752,605.33 Cash paid for dividend and profit 200,798,539.33 222,540,239.21 distributing or interest paying Other cash paid concerning 188,394,977.32 174,680,444.93 financing activities Subtotal of cash outflow from financing 2,463,873,917.37 2,337,973,289.47 activities Net cash flows arising from financing -946,199,836.67 386,746,599.56 activities IV. Influence on cash and cash equivalents due to fluctuation in 41,663,429.64 26,423,996.44 exchange rate V. Net increase of cash and cash -640,208,720.73 957,225,540.57 equivalents Add: Balance of cash and cash 1,401,853,786.39 444,628,245.82 equivalents at the period -begin VI. Balance of cash and cash 761,645,065.66 1,401,853,786.39 equivalents at the period -end Legal Representative: Sun Xiujiang Person in charge of Accounting Works: Xu Guojian Person in charge of Accounting Institution: Sun Jingping 7. Statement of Changes in Owners’ Equity (Consolidated) This Period In RMB This Period Item Owners’ equity attributable to parent company Minorit Total Other Capital Less: Other Reason Surplus Provisio Retaine y owners’ Share 72 Shandong Airlines Co., Ltd. Annual Report 2016 capital equity instrument reserve Invento compre able reserve n of d profit interests equity ry hensive reserve general Perpet shares income risk ual Prefer capita red Other l stock securi ties 400,00 2,425,0 3,365,0 I. Balance at the 75,410, 93,555, 370,981 0,000. 66,740. 13,204. end of the last year 363.70 005.44 ,095.40 00 03 57 Add: Changes of accounting policy Error correction of the last period Enterprise combine under the same control Other II. Balance at the 400,00 75,410, 93,555, 370,981 2,425,0 3,365,0 beginning of this 0,000. 66,740. 13,204. 363.70 005.44 ,095.40 year 00 03 57 III. Increase/ Decrease in this 38,325, 52,443, 380,391 471,159 year (Decrease is 056.32 232.24 ,334.93 ,623.49 listed with “-”) (i) Total 38,325, 532,834 571,159 comprehensive 056.32 ,567.17 ,623.49 income (ii) Owners’ devoted and decreased capital 1.Common shares invested by shareholders 2. Capital invested by holders of other equity instruments 3. Amount reckoned into owners equity with share-based payment 4. Other (III) Profit 52,443, -152,44 -100,00 distribution 232.24 3,232.2 0,000.0 73 Shandong Airlines Co., Ltd. Annual Report 2016 4 0 1. Withdrawal of 52,443, -52,443, surplus reserves 232.24 232.24 2. Withdrawal of general risk provisions 3. Distribution for -100,00 -100,00 owners (or 0,000.0 0,000.0 shareholders) 0 0 4. Other (IV) Carrying forward internal owners’ equity 1. Capital reserves conversed to capital (share capital) 2. Surplus reserves conversed to capital (share capital) 3. Remedying loss with surplus reserve 4. Other (V) Reasonable reserve 1. Withdrawal in the report period 2. Usage in the report period (VI)Others IV. Balance at the 400,00 75,410, 131,880 423,424 2,805,4 3,836,1 end of the report 0,000. 58,074. 72,828. 363.70 ,061.76 ,327.64 period 00 96 06 Last Period In RMB Last Period Owners’ equity attributable to the parent Company Other Minorit Item Less: Other Provisio Total equity instrument Reason y Share Capital Invento compre Surplus n of Retaine interest owners’ able equity capital Prefer Perpet reserve ry hensive reserve general d profit s red ual Other reserve shares income risk stock capita 74 Shandong Airlines Co., Ltd. Annual Report 2016 l securi ties 400,00 2,025,5 2,878,1 I. Balance at the 75,410, 58,923, 318,250 0,000. 35,984. 20,380. end of the last year 363.70 174.26 ,857.40 00 99 35 Add: Changes of accounting policy Error correction of the last period Enterprise combine under the same control Other II. Balance at the 400,00 75,410, 58,923, 318,250 2,025,5 2,878,1 beginning of this 0,000. 35,984. 20,380. 363.70 174.26 ,857.40 year 00 99 35 III. Increase/ Decrease in this 34,631, 52,730, 399,530 486,892 year (Decrease is 831.18 238.00 ,755.04 ,824.22 listed with “-”) (i) Total 34,631, 532,260 566,892 comprehensive 831.18 ,993.04 ,824.22 income (ii) Owners’ devoted and decreased capital 1.Common shares invested by shareholders 2. Capital invested by holders of other equity instruments 3. Amount reckoned into owners equity with share-based payment 4 Other -132,73 (III) Profit 52,730, -80,000, 0,238.0 distribution 238.00 000.00 0 1. Withdrawal of 52,730, -52,730, surplus reserves 238.00 238.00 2. Withdrawal of 75 Shandong Airlines Co., Ltd. Annual Report 2016 general risk provisions 3. Distribution for -80,000, -80,000, owners (or 000.00 000.00 shareholders) 4. Other (IV) Carrying forward internal owners’ equity 1. Capital reserves conversed to capital (share capital) 2. Surplus reserves conversed to capital (share capital) 3. Remedying loss with surplus reserve 4. Other (V) Reasonable reserve 1. Withdrawal in the report period 2. Usage in the report period (VI)Others IV. Balance at the 400,00 75,410, 93,555, 370,981 2,425,0 3,365,0 end of the report 0,000. 66,740. 13,204. 363.70 005.44 ,095.40 period 00 03 57 Legal Representative: Sun Xiujiang Person in charge of Accounting Works: Xu Guojian Person in charge of Accounting Institution: Sun Jingping 8. Statement of Changes in Owners’ Equity (Parent Company) This Period In RMB This Period Other Other Total Item equity instrument Less: Share Capital comprehe Reasonab Surplus Retaine Inventory owners’ capital Preferre Perpetu reserve nsive le reserve reserve d profit al Other shares equity d stock income capital 76 Shandong Airlines Co., Ltd. Annual Report 2016 securiti es 2,407,3 I. Balance at the 400,000, 86,911,16 93,555,00 370,320,3 3,358,164 78,004. end of the last year 000.00 8.71 5.44 90.87 ,569.53 51 Add: Changes of accounting policy Error correction of the last period Other II. Balance at the 400,000, 2,407,3 86,911,16 93,555,00 370,320,3 3,358,164 beginning of this 78,004. 000.00 8.71 5.44 90.87 ,569.53 year 51 III. Increase/ Decrease in this 38,325,05 52,443,23 371,989 462,757,3 year (Decrease is 6.32 2.24 ,090.21 78.77 listed with “-”) (i) Total 38,325,05 524,432 562,757,3 comprehensive 6.32 ,322.45 78.77 income (ii) Owners’ devoted and decreased capital 1.Common shares invested by shareholders 2. Capital invested by holders of other equity instruments 3. Amount reckoned into owners equity with share-based payment 4. Other -152,44 (III) Profit 52,443,23 -100,000, 3,232.2 distribution 2.24 000.00 4 1. Withdrawal of 52,443,23 -52,443, surplus reserves 2.24 232.24 2. Distribution for -100,00 -100,000, owners (or 0,000.0 000.00 shareholders) 0 3. Other 77 Shandong Airlines Co., Ltd. Annual Report 2016 (IV) Carrying forward internal owners’ equity 1. Capital reserves conversed to capital (share capital) 2. Surplus reserves conversed to capital (share capital) 3. Remedying loss with surplus reserve 4. Other (V) Reasonable reserve 1. Withdrawal in the report period 2. Usage in the report period (VI)Others IV. Balance at the 400,000, 2,779,3 86,911,16 131,880,0 422,763,6 3,820,921 end of the report 67,094. 000.00 8.71 61.76 23.11 ,948.30 period 72 Last period In RMB Last period Other equity instrument Other Total Item Share Perpetu Less: Retaine Capital comprehe Reasonab Surplus Inventory owners’ capital Preferre al reserve nsive le reserve reserve d profit capital Other shares equity d stock income securiti es 2,012,8 I. Balance at the 400,000, 86,911,16 58,923,17 317,590,1 2,876,230 05,862. end of the last year 000.00 8.71 4.26 52.87 ,358.39 55 Add: Changes of accounting policy Error correction of the last period Other 78 Shandong Airlines Co., Ltd. Annual Report 2016 II. Balance at the 400,000, 2,012,8 86,911,16 58,923,17 317,590,1 2,876,230 beginning of this 05,862. 000.00 8.71 4.26 52.87 ,358.39 year 55 III. Increase/ Decrease in this 34,631,83 52,730,23 394,572 481,934,2 year (Decrease is 1.18 8.00 ,141.96 11.14 listed with “-”) (i) Total 34,631,83 527,302 561,934,2 comprehensive 1.18 ,379.96 11.14 income (ii) Owners’ devoted and decreased capital 1.Common shares invested by shareholders 2. Capital invested by holders of other equity instruments 3. Amount reckoned into owners equity with share-based payment 4. Other -132,73 (III) Profit 52,730,23 -80,000,0 0,238.0 distribution 8.00 00.00 0 1. Withdrawal of 52,730,23 -52,730, surplus reserves 8.00 238.00 2. Distribution for -80,000, -80,000,0 owners (or 000.00 00.00 shareholders) 3. Other (IV) Carrying forward internal owners’ equity 1. Capital reserves conversed to capital (share capital) 2. Surplus reserves conversed to capital (share capital) 3. Remedying loss with surplus reserve 79 Shandong Airlines Co., Ltd. Annual Report 2016 4. Other (V) Reasonable reserve 1. Withdrawal in the report period 2. Usage in the report period (VI)Others IV. Balance at the 400,000, 2,407,3 86,911,16 93,555,00 370,320,3 3,358,164 end of the report 78,004. 000.00 8.71 5.44 90.87 ,569.53 period 51 Legal Representative: Sun Xiujiang Person in charge of Accounting Works: Xu Guojian Person in charge of Accounting Institution: Sun Jingping 80 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 (All amounts are expressed in CNY unless otherwise stated) Note 1 Corporation profile Shandong Airlines Co., Ltd. (hereafter, the Company) is a foreign-invested limited liability company incorporated in the People’s Republic of China. The Company was incorporated through the restructuring project jointly initiated by Shandong Airlines Group Co., Ltd. (hereafter, SDA Group), Inspur Co., Ltd. (previously known as Inspur Electronic Information Industry Group Company (浪潮电子信息产业集团公司), Shandong Hualu Group Co., Ltd, Shandong Group Corp. of Fisheries Enterprises and Luyin Investment Group (鲁银投资集团 股份有限公司) following the approval (LuTiGaiQiZi(1999)No.88 (鲁体改企字(1999)第 88 号)) granted by the Economic Reform Commission of Shandong Province (山东省经济体制改革委员会) on July 29th, 1999. Shandong Airlines Group Co., Ltd. acquired 259,204,000 state-owned corporate shares (国有法人股), with CNY 1.00 at par, of the Company by transferring its air transportation operation and the related assets and liabilities to the Company on November 25th, 1999. Inspur Co., Ltd., Shandong Hualu Group Co., Ltd. and Shandong Group Corp. of Fisheries Enterprises each acquired 199,000 state-owned corporate shares, with CNY 1.00 at par, by cash investment of CNY 200,000.00 each on November 26th, 1999. Luyin Investment Group acquired 199,000 domestic corporate shares (国内法人股), with CNY 1.00 at par, by cash investment of CNY 200,000.00 on November 26th, 1999. The Company issued 140,000,000 domestically listed shares denominated in foreign currency (境内上市外资 股) (hereafter, B share(s)), with par value at CNY 1.00 each and issue price at HKD 1.58 each, on August 28th, 2000 upon the approval (ZhengJianFaXingZi[2000]No.116 (证监发行字[2000]116 号)) granted by the China Securities Regulatory Commission on August 22nd, 2000; and, the Company was listed on the Shenzhen Stock Exchange on September 12th, 2000. Immediately after the issuance of the B shares, the capital of the Company increased to CNY 400,000,000.00. The Agreement of Share Transfer (《股份转让协议》) signed by SDA Group and China National Aviation Holding Company (hereafter, China Aviation Group) on February 28th, 2004 authorised the transfer of 91,200,000 shares of the Company, equal to 22.8% shareholding, from SDA Group to China Aviation Group. Immediately after the share transfer, SDA Group’s shareholding in the Company was 42.00%. In November 2004, the Board of Directors of the Company, in accordance with the approval (GuoZiChanQuan[2004]No.956 (国资产权 [2004]956 号:《关于中国航空集团公司将受让山东航空股份有限公司国有股的合同实施转让有关 问题的批复》)) issued by the State-owned Assets Supervision and Administration Commission of the State Council, authorised China Aviation Group to transfer the state-owned corporate shares received from SDA Group 81 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 to Air China Co., Ltd. (hereafter, Air China). As so provided in GuoZiChanQuan[2004]No.956, the rights and obligation attributable to China Aviation Group as specified in the Agreement of Share Transfer shall be afforded by Air China. The change of share ownership was registered at the China Securities Depository and Clearing Corporation Limited Shenzhen Office by SDA Group and Air China on December 3rd, 2004; And, 91,200,000 shares of the Company then became held by Air China. Legal representative of the Company: SUN, Xiujiang Place of registration: Shandong Jinan Yaoqiang International Airport Address of headquarter: Shandong Airlines Centre, 5746 – East 2nd Ring Road, Jinan, Shandong The Company is permitted to undertake international and domestic passenger and cargo transportation, hotel and beverage related operation (limited to operation through branch); provision of aircraft maintenance, training of civil aviation pilots and air crew, insurance brokerage; inter-airline agenting, and principal operation related ground services; sales of airborne material and equipments, grocery, food, health food, art work, souvenir, etc.; retailing of tobacco products (limited to Qingdao Red-Crowned Crane Hotel); lease of airborne material and equipments; venue rental, private house rental, business services, hotel accommodation agents and ticket agents; conference services; transportation agency; air cargo storage; and aviation pilot provision (for other domestic airlines). (The operating activities listed herein does not involve operation related to commodity that are subject to State Administered Trading (国营贸易管理),but involve operation related to commodity that are subject to quotas , licence requirements, which are restricted to obtain permission before the operation)(the project that subjects to the approval in accordance with the law, can carry out business activities only after the approval of the relevant departments to carry out business activities). The financial statements of the Company has been approved by the board of directors on 28 Mar 2017. 2 subsidiaries of the Company are included in the consolidated financial statements in 2016, see Note 8 "The equity in other main entities". No change of scope of consolidation from last year. The Company operates in the industry of transportation. Note 2 Basis for preparation of the financial statements The financial statements of company have been prepared on basis of going concern in conformity with Chinese Accounting Standards for Business Enterprises and the Accounting Systems for Business Enterprises issued by the Ministry of Finance of People’s Republic of China (Ministry of Finance issued order No.33, the Ministry of Finance revised order No.76) on15 February 2006, and revised Accounting Standards (order 41 of the Ministry of Finance) and Compilation Rules for Information Disclosure by Companies Offering Securities to the Public No.15 – General Provisions on Financial Reports (2014 Revision) issued by the China Securities Regulatory Commission (CSRC). According to the relevant accounting regulations in Chinese Accounting Standards for Business Enterprises, the 82 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 company has adopted the accrual basis of accounting. Held-for-sale non-current assets are measured at the lower of its book value at its classification date and fair value minus expected disposal costs. Where assets are impaired, provisions for asset impairment are made in accordance with relevant requirements. Note 3 Statement of Compliance with Enterprise Accounting Standards The financial statements of the company are recognized and measured in accordance with the regulations in the Chinese Accounting Standards for Business Enterprises and they give a true and fair view of the financial position, business result and cash flow of the Company as of 31 December 2016. In addition, the financial statements of the company comply, in all material respects, with the revised disclosing requirements for financial statements and the Compilation Rules for Information Disclosure by Companies Offering Securities to the Public No.15—General Provisions on Financial Reports (2014 Revision) issued by China Securities Regulatory Commission (CSRC) in 2014. Note 4 Important Accounting Principles and Accounting Estimates The Company and subsidiaries are principally engaged in air transportation. The Company and subsidiaries in accordance with the actual production and management features, according to the relevant provisions of Accounting Standards, to make a number of specific accounting policies and accounting estimates for other transactions and events of revenue recognition, see Note 4.21 “Revenue” for the description. For description of significant accounting judgments and estimates made by management, see Note 4.28 “Significant accounting judgments and estimates”. 4.1 Accounting period The accounting period of the Company is classified as interim period and annual period. Interim period refers to the reporting period shorter than a complete annual period. The accounting period of the Company is the calendar year from January 1 to December 31. 4.2 Operating cycle Normal business cycle is realized by the Company in cash or cash equivalents from the purchase of assets for processing until. The company has a 12 -month operating cycle, and its assets and liabilities as liquidity criteria for the classification. 4.3 Monetary Unit Yuan (CNY) is the currency of the primary economic environment in which the Company and its domestic subsidiaries operate. Therefore, the Company and its domestic subsidiaries choose CNY as their functional currency. The Company adopts CNY to prepare its functional statements. 83 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 4.4 Business combination A business combination is a transaction or event that brings together two or more separate entities into one reporting entity. Business combinations are classified into business combinations involving enterprises under common control and business combinations not involving enterprises under common control. 4.4.1 Business combination involving entities under common control A business combination involving enterprises under common control is a business combination in which all of the combining enterprises are ultimately controlled by the same party or parties both before and after the combination, and that control is not transitory. For a business combination involving enterprises under common control, the party that, on the combination date, obtains control of another enterprise participating in the combination is the absorbing party, while that other enterprise participating in the combination is a party being absorbed. Combination date is the date on which the absorbing party effectively obtains control of the party being absorbed. The assets and liabilities obtained are measured at the carrying amounts as recorded by the enterprise being combined at the combination date. The difference between the carrying amount of the net assets obtained and the carrying amount of consideration paid for the combination (or the total face value of shares issued) is adjusted to the capital premium (or share premium) in the capital reserve. If the balance of the capital premium (or share premium) is insufficient, any excess is adjusted to retained earnings. The cost of a combination incurred by the absorbing party includes any costs directly attributable to the combination shall be recognized as an expense through profit or loss for the current period when incurred. 4.4.2 Business combination involving entities not under common control A business combination involving enterprises not under common control is a business combination in which all of the combining enterprises are not ultimately controlled by the same party or parties both before and after the business combination. For a business combination not involving enterprises under common control, the party that, on the acquisition date, obtains control of another enterprise participating in the combination is the acquirer, while that other enterprise participating in the combination is the acquiree. Acquisition date is the date on which the acquirer effectively obtains control of the acquiree. For a business combination not involving enterprise under common control, the combination cost including the sum of fair value, at the acquisition date, of the assets given, liabilities incurred or assumed, and equity securities issued by the acquirer. The intermediary expenses incurred by the acquirer in respect of auditing, legal services, valuation and consultancy services etc and other associated administrative expenses attributable to the business combination are recognized in profit or loss when they are incurred. The transaction cost arose from issuing of equity securities or liability securities shall be initially recognized as equity securities or liability securities. 84 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 The contingent consideration related to the combination shall be booked as combination cost at the fair value at the acquisition date. If, within the 12 months after acquisition, additional information can prove the existence of related information at acquisition date and the contingent consideration need to be adjusted, goodwill can be adjusted. Combination cost of the acquirer’s interest and identifiable net assets of the acquirer acquired through the business combination shall be measured by the fair value at the acquisition date. Where the cost of combination exceeds the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, the difference shall be recognized as goodwill. Where the cost of combination is less than the acquirer’s interest in the fair value of the acquiree’s identifiable net assets, the difference shall be accounted for according to the following requirements: (i) the acquirer shall reassess the measurement of the fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities and measurement of the cost of combination; (ii) if after that reassessment, the cost of combination is still less than the acquirer’s interest in the fair values of the acquiree’s identifiable net assets, the acquirer shall recognize the remaining difference immediately in profit or loss for the current period. Where the temporary difference obtained by the acquirer was not recognized due to inconformity with the conditions applied for recognition of deferred income tax, if, within the 12 months after acquisition, additional information can prove the existence of related information at acquisition date and the expected economic benefits on the acquisition date arose from deductible temporary difference by the acquiree can be achieved, relevant income tax assets can be recognized, and goodwill offset. If the goodwill is not sufficient, the difference shall be recognized as profit of the current period. Apart from above, the differences shall be taken into profit or loss of the current period if the recognition of deferred income tax assets is related to the combination. For a business combination not involving enterprise under common control, which achieved in stages that involves multiple exchange transactions, according to “The notice of the Ministry of Finance on the issuance of Accounting Standards Interpretation No. 5” (CaiKuai [2012] No. 19) and Article55 of “Accounting Standards for Business Enterprises No.33 - Consolidated Financial Statements” on the “package deal” criterion (see Note 4.5.2), to judge the multiple exchange transations whether they are the"package deal". If it belong to the “package deal” in reference to the preceding paragraphs of this section and the Notes described in 4.13 “long-term investment” accounting treatment, if it does not belong to the “package deal” to distinguish the individual financial statements and the consolidated financial statements related to the accounting treatment: In the individual financial statements, the total value of the book valueoftheacquiree's equity investment before the acquisition date and the cost of new investment at the acquisition date, as the initial cost of the investment, the acquiree's equity investment before the acquisition date involved in other comprehensive income, in the disposal of the investment will be in other comprehensive income associated with the use of infrastructure and the acquiree directly related to the disposal of assets or liabilities of the same accounting treatment (that is, 85 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 except in accordance with the equity method of accounting in the defined benefit plan acquiree is remeasured net changes in net assets or liabilities other than in the corresponding share of the lead, and the rest into the current investment income). In the combination financial statements, the equity interest in the acquiree previously held before the acquisition date re-assessed at the fair value at the acquisition date, with any difference between its fair value and its carrying amount is recorded as investment income.The previously-held equity interest in the acquiree involved in other comprehensive income and other comprehensive income associated with the purchase of the foundation should be used party directly related to the disposal of assets or liabilities of the same accounting treatment (that is, except in accordance with the equity method of accounting in the acquiree is remeasured defined benefit plans other than changes in net liabilities or net assets due to a corresponding share of the rest of the acquisition date into current investment income). 4.5 Preparation of the consolidated financial statements 4.5.1 The scope of consolidation The scope of consolidation for the consolidated financial statements is determined on the basis of control. Control is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its operating activities. The scope of consolidation includes the Company and all of the subsidiaries. Subsidiary is an enterprise or entity under the control of the Company. Once the change in the relevant facts and circumstances leading to the definition of the relevant elements involved in the control of the change, the company will be re-evaluated. 4.5.2 Preparation of the consolidated financial statements The subsidiary of the Company is included in the consolidated financial statements from the date when the control over the net assets and business decisions of the subsidiary is effectively obtained, and excluded from the date when the control ceases. For a subsidiary disposed of by the Company, the operating results and cash flows before the date of disposal (the date when control is lost) are included in the consolidated income statement and consolidated statement of cash flows, as appropriate. For a subsidiary disposed during the period, no adjustment is made to the opening balance of the consolidated financial statements. For a subsidiary acquired through a business combination not under common control, the operating results and cash flows from the acquisition (the date when the control is obtained) are included in the consolidated income statement and consolidated statement of cash flows, as appropriated; no adjustment is made to the opening balance and comparative figures in the consolidated financial statements. Where a subsidiary and a party being absorbed in a merger by absorption was acquired during the reporting period, through a business combination involving enterprises under common control, the financial statements of the subsidiary are included in the consolidated financial statements. The results of operations and cash flow are 86 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 included in the consolidated balance sheet and the consolidated income statement, respectively, based on their carrying amounts, from the date that common control was established, and the opening balances and the comparative figures of the consolidated financial statements are restated. When the accounting period or accounting policies of a subsidiary are different from those of the Company, the Company makes necessary adjustments to the financial statements of the subsidiary based on the Company’s own accounting period or accounting policies. Where a subsidiary was acquired during the reporting period through a business combination not under common control, the financial statements was reconciliated on the basis of the fair value of identifiable net assets at the date of acquisition. Intra-Group balances and transactions, and any unrealized profit or loss arising from intra-Group transactions, are eliminated in preparing the consolidated financial statements. Minority interest and the portion in the net profit or loss not attributable to the Company are presented separately in the consolidated balance sheet within shareholders’/ owners’ equity and net profit. Net profit or loss attributable to minority shareholders in the subsidiaries is presented separately as minority interest in the consolidated income statement below the net profit line item. When the amount of loss for the current period attributable to the minority shareholders of a subsidiary exceeds the minority shareholders’ portion of the opening balance of shareholders’/equity of the subsidiary, the excess is allocated against the minority interests. When the Company loses control of a subsidiary due to the disposal of a portion of an equity investment or other reasons, the remaining equity investment is re-measured at its fair value at the date when control is lost. The difference between 1) the total amount of consideration received from the transaction that resulted in the loss of control and the fair value of the remaining equity investment and 2) the carrying amounts of the interest in the former subsidiary’s net assets immediately before the loss of the control is recognized as investment income for the current period when control is lost. Other comprehensive income related to the former subsidiary's equity investment, using the foundation and the acquiree directly related to the disposal of the same assets or liabilities are accounted when the control is lost(ie, in addition to the former subsidiary is remeasured at the net defined benefit plan or changes in net assets and liabilities resulting from, the rest are transferred to the current investment income). The retained interest is subsequently measured according to the rules stipulated in the - “Chinese Accounting Standards for Business Enterprises No.2 - Long-term equity investment” or “Chinese Accounting Standards for Business Enterprises No.22 - Determination and measurement of financial instruments”. See Note 4.13 Long-term equity investments and Note 4.9 Financial instruments for details. The company through multiple transactions step deal with disposal of the subsidiary's equity investment until the loss of control, need to distinguish between equity until the disposal of a subsidiary's loss of control over whether the transaction is package deal. Terms of the transaction disposition of equity investment in a subsidiary, subject to the following conditions and the economic impact of one or more of cases, usually indicates that several 87 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 transactions should be accounted for as a package deal:①these transactions are considered simultaneously, or in the case of mutual influence made, ②these transactions as a whole in order to achieve a complete business results; ③the occurrence of a transaction depends on occurs at least one other transaction; ④a transaction look alone is not economical, but when considered together with other transaction is economical. If they does not belong to the package deal, each of them separately, as the case of a transaction in accordance with “without losing control over the disposal of a subsidiary part of a long-term equity investments“ (see Note 4.10.2, 4)) and “due to the disposal of certain equity investments or other reasons lost control of a subsidiary of the original” (see previous paragraph) principles applicable accounting treatment. Until the disposal of the equity investment loss of control of a subsidiary of the transactions belonging to the package deal, the transaction will be used as a disposal of a subsidiary and the loss of control of the transaction. However, before losing control of the price of each disposal entitled to share in the net assets of the subsidiary 's investment corresponding to the difference between the disposal, recognized in the consolidated financial statements as other comprehensive income, loss of control over the transferred together with the loss of control or loss in the period. 4.6 Joint arrangement A joint arrangement is an arrangement of which two or more partieshave joint control.A joint arrangement is either a joint operation or a joint venture, depending of the rights and obligation of the Company in the joint arrangement. A joint operation is a joint arrangement whereby the Company has rights to the assets, andobligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the Company has rights to the net assets of thearrangement. The Company accounts for joint ventures using the equity method, see Note 4.13.2.2 for details. The company, a joint operator, recognises in relation to its interest in a jointoperation:(a)its assets, including its share of any assets held jointly;(b)its liabilities, including its share of any liabilities incurred jointly;(c)its revenue from the sale of its share of the output arising from thejoint operation;(d)its share of the revenue from the sale of the output by the jointoperation; and (e)its expenses, including its share of any expenses incurred jointly. When the Company enters into a transaction with a joint operation in which it is ajoint operator, such as a sale or contribution of assets, the Company, prior to disposal of the assets to a third party by the joint operation,recognises gains and losses resulting from such a transaction onlyto the extent of the other parties's interests in the joint operation.When there is evidence of a reduction in the net realisablevalue of the assets to be sold or contributed to the joint operation, or of animpairment loss of those assets which is in line with provision stipulated by CAS 8, those losses arerecognised fully by the Company.When there is evidence of a reduction in the net realisablevalue of the assets to be purchased or of an impairment loss of those assets, the Company shall recognise its share of those losses. 88 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 4.7 Cash equivalent Cash and cash equivalents of the Company include cash on hand, ready usable deposits and investments having short holding term (normally will be due within three months from the day of purchase), with strong liquidity and easy to be exchanged into certain amount of cash that can be measured reliably and have low risks of change. 4.8 Foreign exchange 4.8.1 Translation in foreign exchange transactions The foreign currency transactions are recorded, on initial recognition in the functional currency, by applying [the spot exchange rate on the date of the transaction / an exchange rate that approximates the actual spot exchange rate on the date of transaction]. The exchange of foreign currency and transactions related to the foreign exchange are translated at the spot exchange rate. 4.8.2 Translation of monetary foreign currency and non-monetary foreign currency At the balance sheet date, foreign currency monetary items are translated using the spot exchange rate at the balance sheet date. All the exchange differences thus resulted are taken to profit or loss, except for ①those relating to foreign currency borrowings specifically for construction and acquisition of qualifying assets, which are capitalized in accordance with the principle of capitalization of borrowing costs, ②hedging accounting, the exchange difference related to hedging instruments for the purpose of net oversea operating investment is recorded in the comprehensive income till the date of disposal and recognized in profit or loss of the period; exchange difference from changes of other account balance of foreign currency monetary items, ③available-for-trade is recorded into profit or loss except for amortized cost. Non-monetary foreign currency items measured at historical cost shall still be translated at the spot exchange rate prevailing on the transaction date, and the amount denominated in the functional currency is not changed. Non-monetary foreign currency items measured at fair value are translated at the spot exchange rate prevailing at the date when the fair values are determined. The exchange difference thus resulted are recognized in profit or loss for the current period or as capital reserve. 4.8.3 The translation of financial statement in foreign currency When the consolidated financial statements include foreign operation(s), if there is a foreign currency monetary item constituting a net investment in a foreign operation, exchange difference arising from changes in exchange rates are recognized as “exchange differences arising on translation of financial statements denominated in foreign currencies” in owner’s equity, and in profit or loss for the period upon disposal of the foreign operation. The Group translates the financial statements of its foreign operations into CNY by following rules. Assets and liabilities in the balance sheet are translated at the spot exchange rate prevailing at the balance sheet date; all equity items except for retained earnings are translated at the spot exchange rates at the dates on which such items occur; income and expenses in income statement are translated at the spot exchange rates at the date of 89 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 transaction; the opening retained earnings is the closing retained earnings of the last period after translation; the closing balance of retained earnings is calculates and presented in the basis of each translated income statements and profit distribution item; the difference arising between the assets and liabilities and shareholders’ equity shall be booked as translation difference of foreign currency statements, and shall be presented as a separate component of equity in the balance sheet. On a loss of control over Group’s oversea operation due to disposal, the Company transfers the accumulated or proportionate share of the accumulated exchange difference arising on translation of financial statements of this oversea operation attributable to the owners’ equity of the Company and presented under shareholders’ equity, to profit or loss in the period in which the disposal occurs. Foreign currency cash flows and cash flow of oversea subsidiaries are translated at the spot exchange rates on the date of cash flows.The effect of exchange rate changes on cash is separately presented as an adjustment item in the cash flow statement. The opening and actual amount of last year are presented in the financial statement after translation At the disposal of all of the company's ownership interest in a foreign operation, or due to the disposal of part of the equity investment or other reasons, the loss of control over a foreign operation, the project owner's equity in the balance sheet listed under the relevant overseas operations attributable to statements of the parent company 's shareholders' equity of foreign currency translation differences, all transferred to the disposal of the income statement. At the disposal of part of the equity investment or other causes lower hold percentage overseas business interests, but does not lose control over a foreign operation, and disposal of the foreign operation section related to foreign currency translation differences attributable to minority interests, is not transferred to the income statement. At the disposal of a foreign operation as part of the equity joint venture or joint ventures, foreign currency financial statements of the foreign operation and the associated translation difference in proportion to dispose of the foreign operation into the disposal of the income statement. 4.9 Financial instruments 4.9.1 Determination of financial assets and liabilities’ fair value Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. For a financial instrument which has an active market, the Company uses quoted price in the active market to establish its fair value. The quoted price in the active market refers to the price that can be regularly obtained from exchange market, agencies, industry associations, pricing authorities; it represents the fair market trading price in the actual transaction. For a financial instrument which does not have an active market, the Company establishes fair value by using a valuation technique. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, reference to the current fair value of another instrument that is substantially the 90 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 same, discounted cash flow analysis and option pricing models. The Company measures initially and subsequently the fair value of an interest rate swap at the value of a competitor’s interest rate swap quoted by a recognised financial institution as at the Company’s balance sheet date in accordance with the principle of consistency. 4.9.2 Classification, recognition and measurement of financial assets All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. On initial recognition, the Company’s financial assets are classified into one of the four categories, including financial assets at fair value though profit or loss, held-to maturity investments, loans and receivables and available-for-trade financial assets. A financial asset is recognized initially at fair value. In the case of financial assets at fair value through profit or loss, relevant transaction costs are immediately charged to the profit and loss of the current period; transaction costs relating to financial assets of other categories are included in the amount initially recognized. 1) Financial assets at fair value through profit or loss: Including financial assets held-for-trade and financial assets designated at fair value through profit or loss. Financial asset held-for-trade is the financial asset that meets one of the following conditions: A. the financial asset is acquired for the purpose of selling it in a short term; B. the financial asset is a part of a portfolio of identifiable financial instruments that are collectively managed, and there is objective evidence indicating that the enterprise recently manages this portfolio for the purpose of short-term profits; C. the financial asset is a derivative, except for a derivative that is designated and effective hedging instrument, or a financial guarantee contract, or a derivative that is linked to and must be settled by delivery of an unquoted equity instrument (without a quoted price from an active market) whose fair value cannot be reliably measured. For such kind of financial assets, fair values are adopted for subsequent measurement. Financial asset is designated on initial recognition as at fair value through profit or loss only when it meets one of the following conditions: A. the designation eliminates or significantly reduces the inconsistency in the measurement or recognition of relevant gains or losses that would otherwise arise from measuring the financial instruments on different bases. B. a Group of financial instruments is managed and its performance is evaluated on a fair value basis, and is reported to the enterprise’s key management personnels. Formal documentation regarding risk management or investment strategy has prepared. Financial assets at fair value through profit or loss are subsequently measured at the fair value. Any gains or losses arising from changes in the fair value and any dividends or interest income earned on the financial assets are recognized in the profit or loss. 91 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 2) Investment held-to maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity. Such kind of financial assets are subsequently measured at amortized cost using the effective interest method. Gains or losses arising from derecognition, impairment or amortization are recognized in profit or loss for the current period. Effective interest rate is the rate that exactly discounted estimated future cash flows through the expected life of the financial asset or financial liability or, where appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Company shall estimate future cash flow considering all contractual terms of the financial asset or financial liability without considering future credit losses, and also consider all fees paid or received between the parties to the contract giving rise to the financial asset and financial liability that are an integral part of the effective interest rate, transaction costs, and premiums or discounts, etc. 3) Loans and receivables Loans and receivables are non-derivative financial assets with fixed determinable payment that are not quoted in an active market. Financial assets classified as loans and receivables by the Company include note receivables, account receivables, interest receivable dividends receivable and other receivables. Loans and receivables are subsequently measured at amortized cost using the effective interest method. Gain or loss arising from derecognition, impairment or amortization is recognized in profit or loss. 4) Financial assets available-for-trade Financial assets available-for-trade include non-derivative financial assets that are designated on initial recognition as available for trade, and financial assets that are not classified as financial assets at fair value through profit or loss, loans and receivables or investment held-to-maturity. Financial assets available-for-trade are subsequently measured at fair value, and gains or losses arising from changes in the fair value are recognized as other comprehensive income and included in the capital reserve, except that impairment losses and exchange differences related to amortized cost of monetary financial assets denominated in foreign currencies are recognized in profit or loss, until the financial assets are derecognized, at which time the gains or losses are released and recognized in profit or loss. Interests obtained and dividends declared by the investee during the period in which the financial assets available-for-trade are held, are recognized in investment gains. 4.9.3 Impairment of financial assets The Group assesses at the balance sheet date the carrying amount of every financial asset except for the financial assets that measured by the fair value. If there is objective evidence indicating a financial asset may be impaired, a provision is provided for the impairment. 92 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 1) Impairment on held-to maturity investment, loans and receivables The financial assets measured by cost or amortized cost write down their carrying value by the estimated present value of future cash flow. The difference is recorded as impairment loss. If there is objective evidence to indicate the recovery of value of financial assets after impairment, and it is related with subsequent event after recognition of loss, the impairment loss recorded originally can be reversed. The carrying value of financial assets after impairment loss reversed shall not exceed the amortized cost of the financial assets without provisions of impairment loss on the reserving date. 2) Impairment loss on available-for-trade financial assets Where the fair value of the equity instrument investment drops significantly or not contemporarily according to the integrated relevant factors, an available-for-trade financial asset is impaired. When an available-for-trade financial asset is impaired, the cumulative loss arising from declining in fair value that had been recognized in capital reserve shall be removed and recognized in profit or loss. The amount of the cumulative loss that is removed shall be difference between the acquisition cost with deduction of recoverable amount less amortized cost, current fair value and any impairment loss on that financial asset previously recognized in profit or loss. If, after an impairment loss has been recognized, there is objective evidence that the value of the financial asset is recovered, and it is objectively related to an event occurring after the impairment loss was recognized, the initial impairment loss can be reversed and the reserved impairment loss on available-for-trade equity instrument is recorded in the profit or loss, the reserved impairment loss on available-for-trade debt instrument is recorded in the current profit or loss. The equity instrument where there is no quoted price in an active market, and whose fair value cannot be reliably measured, or impairment loss on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument shall not be reversed. 4.9.4 Recognition and measurement of financial assets transfer The Group derecognizes a financial asset when one of the following conditions is met: 1) the rights to receive cash flows from the asset have expired; 2) the enterprise has transferred its rights to receive cash flows from the asset to a third party under a pass-through arrangement; or 3) the enterprise has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred norretained substantially all the risks and rewards of the asset, but has transferred control of the asset. If the enterprise has neither retained all the risks and rewards from the financial asset nor control over the asset, the asset is recognized according to the extent it exists as financial asset, and correspondent liability is recognized. The extent of existence refers the level of risk by the financial asset changes the enterprise is facing. 93 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 For a transfer of a financial asset in its entirety that satisfies the derecognition criteria, (a). the carrying amount of the financial asset transferred; and (b) the sum of the consideration received from the transfer and any cumulative gain or loss that had been recognized in other comprehensive income, is recognized in profit or loss. If a part of the transferred financial asset qualifies for derecognition, the carrying amount of the transferred financial asset is allocated between the part that continues to be recognized and the part that is derecognized, based on the relative fair value of those parts. The difference between (a) the carrying amount allocated to the part derecognized; and (b) the sum of the consideration received for the part derecognized and any cumulative gain or loss allocated to the part derecognized which has been previously recognized in other comprehensive income, is recognized in profit or loss. 4.9.5 Classification and measurement of financial liabilities The Group’s financial liabilities are, on initial recognition, classified into financial liabilities at fair value through profit or loss and other financial liabilities. For financial liabilities at fair value through profit or loss, relevant transaction costs are immediately recognized in profit or loss for the current period, and transaction costs relating to other financial liabilities are included in the initial recognition amounts. 1) Financial liabilities measured by the fair value and the changes recorded in profit or loss The classification by which financial liabilities held-for-trade and financial liabilities designed at the initial recognition to be measured by the fair value follows the same criteria as the classification by which financial assets held-for-trade and financial assets designed at the initial recognition to be measured by the fair value and their changes are recorded in the current profit or loss. For the financial liabilities measured by the fair value and changes recorded in the profit or loss, fair values are adopted for subsequent measurement. All the gains or losses on the change of fair value and the expenses on dividends or interests related to these financial liabilities are recognized in profit or loss for the current period. 2) Other financial liabilities Derivative financial liabilities that linked with equity instruments, which do not have a quoted price in an active market and their fair value cannot be measured reliably, is subsequently measured by cost Other financial liabilities are subsequently measured at amortized cost using the effective interest method. Gains or losses arising from derecognition or amortization is recognized in profit or loss for the current period. 3) Financial guarantee contracts For financial guarantee contracts that are not designated as at fair value through profit or loss,they are, after initial recognition, subsequently measured at the higher of: (i) the amount determined according to the principles of Accounting Standards for Business Enterprises No. 13 - Contingencies, and (ii) the amount initially recognized less the accumulated amortization determined according to the principles of Accounting Standards for Business Enterprises No. 14 - Revenue. 94 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 4.9.6 Derecognition of financial liabilities The Group derecognizes a financial liability (or part of it) when the underlying present obligation (or part of it) is discharged or cancelled or has expired. An agreement between the Company (an existing borrower) and existing lender to replace original financial liability with a new financial liability with substantially different terms is accounted for as an extinguishment of the original financial liability and the recognition of a new liability. When the Company derecognizes a financial liability or a part of it, it recognizes the difference between the carrying amount of the financial liability (or part of the financial liability) derecognized the consideration paid (including any non-cash assets transferred or new financial liabilities assumed) in profit or loss. 4.9.7 Derivatives and embedded derivatives Derivative financial instruments include derivatives are initially measured at fair value at the date when the derivative contracts are entered into and are substantially re-measured at fair value. The resulting gain and loss is recognized in profit or loss. An embedded derivative is separated from the hybrid instrument, where the hybrid instrument is not designated as a financial asset or financial liability at fair value though profit or loss, and the treated as a standalone derivative if (a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; and (b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. If the Company is unable to measure the embedded derivative separately either at acquisition or at a subsequent balance sheet date, it designates the entire hybrid instrument as a financial asset or financial liability at fair value through profit or loss. 4.9.8 Offsetting financial assets and financial liabilities When the Company has a legal right that is currently enforceable to set off the recognized financial assets and financial liabilities, and intends either to settle on a net basis, or to realize the financial asset and settle the financial liability simultaneously, a financial asset and a financial liability shall be offset and the net amount is presented in the balance sheet. Except for the above circumstances, financial assets and financial liabilities shall be presented separately in the balance sheet and shall not be offset. 4.9.9 Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. The consideration received from issuing equity instruments, net of transaction costs, are added to shareholders’ equity. All types of distribution (excluding stock dividends) made by the Company to holders of equity instruments are deducted from shareholders’ equity. The Group does not recognize any changes in the fair value of equity instruments. 4.10 Receivables The receivables by the Company include account receivables, and other receivables. 95 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 4.10.1 Criteria for recognition of bad debts: The Company carries out an inspection on the balance sheet date. Where there is any objective evidence proving that the receivables have been impaired, an impairment provision shall be made: 1) A serious financial difficulty occurs to the issuer or debtor; 2) The debtor breaches any of the contractual stipulations, for example, fails to pay or delays the payment of interests or the principal, etc.; 3) The debtor will probably become bankrupt or carry out other financial reorganizations; 4) Other objective evidences showing the impairment of the receivables. 4.10.2 Method for bad debts provision 1) Provisions of bad debts in account receivables that is individually significant. Individual receivables equal to or higher than 5% of total receivables are classified as receivables of individual significance. For an account receivable that is individually significant, the asset is individually assessed for impairment, the impairment loss is recognized at the difference between the present value of future cash flow less the carrying amount, and provision is made accordingly. 2) Provisions of bad debts in account receivables that individually insignificant items with similar credit risk characteristics that have significant risk: A.Evidence of credit risk characteristics Whether the financial asset is individually significant or not individually significant, it is included in a group of financial assets with similar credit risk characteristics and collectively assessed for impairment. Such credit risk reflects the repayment of all due amount under the contract, and is related to the estimation of future cash flow expected to be derived from the assets. Evidence of portfolios: Item Basis Receivables not individually assessed for impairment are categorised on the basis of credit risk. Provision for bad debts for each category of Categorisation by nature of receivables is recognised at the actual rate of loss for the previous receivables year of the same or similar category bearing similar credit risk characteristics after adjustment for the current year circumstances. B.Provision by credit risk characteristics During the Company impairment test, the amount of bad debts provisions is determined by the assessed result from the experience of historical loss and current economic status and the existing loss in the estimated account receivables according to the set of account receivables and credit risk characteristic. 96 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Provisions for difference portfolios: Item Provision Categorisation by nature of receivables Percentage of carrying amount a. Portfolio 1 by Aging analysis Percentage of carrying amount for Percentage of carrying amount for recognition of allowance for bad Category recognition of allowance for bad debt debt applicable to other applicable to accounts receivable receivables Categorisation by nature of receivables 5% 5% 3) Provisions of bad debts that is individually insignificant. For the account receivables not individually significant, the Company assesses the account receivables individually for impairment when are of following characteristics: if there is objective evidence indicating the impairment, the impairment loss is recognized at the difference between the present value of future cash flow less the carrying amount, and provision is made accordingly. For examples: receivables of individual insignificance bears differing credit risk characteristics to other receivables of individual insignificance account receivables with related parties; account receivables under litigations or arbitrations, or account receivables with obvious indication that debtor cannot fulfill the obligation of repayment. 4.10.3 The reversal of bad debts provision If there is objective evidence of recovery in value of account receivables, and the recovery can be related to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed and recognized in profit or loss. However, the reversal shall not result in a carrying amount that exceeds what the amortized cost would have been had the impairment loss not been recognized at the date the impairment is reversed. 4.11 Inventories 4.11.1 Classification of inventory The Company’s inventory mainly include air materials and low-value consumables.。 4.11.2 Valuation method of inventories upon delivery Inventories are initially carried at the actual cost. The actual cost of inventories transferred out is assigned by using first-in, first out (FIFO) method. 4.11.3 Basis for determining net realizable value of inventories and provision methods for decline in value of inventories Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion, the estimated costs necessary to make the sale and relevant taxes. Net realizable value is determined on the basis of clear evidence obtained, and takes into consideration the purpose of holding 97 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 inventories and effect of post balance sheet events. At the balance sheet date, inventories are measured at the lower of the cost and net realizable value. If the net realizable value is below the cost of inventories, a provision for decline in value of inventories is made. The provision for inventories decline in value is determined normally by the difference of the cost of individual item less its realizable value. For large quantity and low value items of inventories, provision for decline in value is made based on categories of inventories. For items of inventories relating to a product line that are produced and marketed in the same geographical area, have the same or similar end users or purposes, and cannot be practicably evaluated separately from other items in that product line provision for decline in value is determined on an aggregate basis. After the provision for decline in value of inventories is made, if the circumstances that previously caused inventories to be written down below cost no longer exist so that the net realizable value of inventories is higher than their cost, the original provision for decline in value is reversed and the reversal is included in profit or loss for the period. 4.11.4 The perpetual inventory system is maintained for stock system. 4.11.5 Amortization method for low cost and short-lived consumable items and packaging materials. Low cost and short-lived consumable items are amortized using immediate write-off method; packaging materials are amortized using immediate write-off method. 4.12 Held-for-sale assets A non-current asset is classified as held-for-sale if all of the following conditions are satisfied: a. the asset is immediately sellable at its current condition per usual sales term applicable to the type of assets to which it belongs; b. the Company's has completed official decision to dispose the asset; c. the Company has entered into irrevokable sales contract with the purchaser; and d. the sales will be completed within one year. Amortization or depreciation of the held-for-sale asset ceases at the time of classification. The asset is measured at the lower of its book value and its classification date fair value minus disposal costs upon classification. Held-for-sale non-current assets include individual assets and disposal groups. If a disposal group satisfy the conditions of the asset group defined by CAS 8 - Asset Impairment and includes goodwill arising from business combination allocated in accordance with CAS 8 or the disposal group is an operation with an asset group, the disposal group include goodwill arising from business combination. Individual non-current assets held for sale and assets of disposal groups held for sale are collectively presented on the (consolidated) statement of financial position as a line item of current assets. Liabilities of disposal groups held for sale are collectively presented on the (consolidated) statement of financial position as a line item of current liabilities. 98 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 A held-for-sale asset or held-for-sale disposal group is reclassified from held-for-sale when the conditions for classification of the asset (disposal group) as held-for-sale are no longer satisfied and is measured at the lower of its classification date book value minus cumulative depreciation, amortization and impairment as if it has not been reclassified as held-for-sale and it recoverable amount as of the date on which the conditions for classification of the asset (disposal group) as held-for-sale are no longer satisfied. 4.13 Long-term equity investments Long-term equity investments referred to in this section refer to the Company invested entity has control, joint control or significant influence over the long-term equity investments. The Company invested does not have control, joint control or significant influence over the long-term equity investments as financial assets available for sale or at fair value and the changes included financial assets through profit or loss, which refer to the accounting policies in Note 4. 9 “financial Instruments”. Joint control is the Company control over an arrangement in accordance with the relevant stipulations are common, related activities and the arrangement must be after sharing control participants agreed to the decision-making. Significant influence is the Company s financial and operating policies of the entity has the right to participate in decision-making, but can not control or with other parties joint control over those policies. 4.13.1 Determination of Investment cost The cost of a long-term equity investment acquired through business combination under common control is measured at the acquirer's share of the combination date book value of the acquiree's net equity in the ultimate controller's consolidated financial statements. The difference between the cost and book value of cash paid, non-monetary assets transferred and liabilities assumed is adjusted to capital reserves, and to retained earnings if capital reserves is insufficient. If the consideration is transferred by way of issuing equity instruments, the face value of the equity instruments issued is recognised in share capital and the difference between the cost of the face value of the equity instruments issued is adjusted to capital reserves, and to retained earnings if capital reserves is insufficient. The cost of a long-term equity investment acquired through business combination not under common control is the fair value of the assets transferred, liabilities incurred or assumed and equity instruments issued. All expenses incurred directly associated with the acquisition by the acquirer, including expenditure of audit, legal services, valuation and consultancy and other administrative expenses, are recognised in profit or loss for the period during which the acquisition occurs. Long-term equity investments acquired not through business combination are measured at cost on initial recognition. Depending on the way of acquisition, the cost of acquisition can be the total cash paid, the fair value of equity instrument issued, the contract price, the fair value or book value of the assets given away in the case of non-monetary asset exchange, or the fair value of the relevant long-term equity investments. The cost of acquisition of a long-term equity investment acquired not through business combination also includes all directly 99 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 associated expenses, applicable taxes and fees, and other necessary expenses. 4.13.2 Subsequent Measurement To be invested joint control ( except constitute common operator ) or long-term equity investments significant influence are accounted for using the equity method. In addition, the Company's financial statements using the cost method of accounting for long-term equity can exercise control over the investee. 1) Cost method of accounting for long-term equity investments Under the cost method, a long-term equity investment is measured at initial investment cost. Except for cash dividends or profits declared but not yet paid that are included in the price or consideration actually paid upon acquisition of the long-term equity investment, investment income is recognized in the period in accordance with the attributable share of cash dividends or profit distributions declared by the investee. 2) Equity method of accounting for long-term equity investments Where the initial investment cost of a long-term equity investment exceeds the investing enterprise’s interest in the fair values of the investee’s identifiable net assets at the time of acquisition, no adjustment shall be made to the initial investment cost. The carrying amount of an long-term equity investment measured using the equity method is adjusted by the Company's share of the investee's net profit and other comprehensive income, which is recognised as investment income and other comprehensive income respectively. The carrying amount of an long-term equity investment measured using the equity method is reduced by profit distribution or cash dividends announced by the investee. The carrying amount of an long-term equity investment measured using the equity method is also adjusted by the investee's equity movement other than net profit, other comprehensive income and profit distribution, which is adjusted to capital reserves. The net profit of the investee is adjusted by the fair value of the investee's identifiable assets as at acquistion. The financial statements and hence the net profit and other comprehensive income of an investee which does not adopt accounting policies or accounting period uniform with the Company is adjusted by the Company's accounting policies and accounting period. The Company's share of unrealised profit or loss arising from related party transactions between the Company and an associate or joint venture is deducted from investment income. Unrealised loss arising from related party transactions between the Company and an associate or joint venture which is associated with asset impairment is not adjusted. Where assets transferred to an associate or joint venture which form part of the Company's investment in the investee but which does not enable the Company obtain control over the investee, the cost of the additional investment acquired is measured at the fair value of assets transferred and the difference between the cost of the additional investment and the book value of the assets transferred is recognised in profit or loss. Where assets transferred to an associate or joint venture form an operation, the difference between the consideration received and the book value of the assets transferred in recognised in profit or loss. Where assets transferred from an associate or joint venture form an operation, the transaction is accounted for in accordance 100 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 with CAS 20 - Business Combination, any gain or loss is reocgnised in profit or loss. The Company's share of an investee's net loss is limited by the sum of the book value of the long-term equity investment and other net long-term investments in the investees. Where the Company has obligation to share additional net loss of the investee, the estimated share of loss recognised as accrued liabilities and investment loss. Where the Company has unrecognised share of loss of the investee when the investee generates net profit, the Company's unrecognised share of loss is reduced by the Company's share of net profit and when the Company's unrecognised share or loss is eliminated in full, the Company's share of net profit, if any, is recognised as investment income. For long-term equity investments in associates and joint ventures which had been held by the Company before its first time adoption of Accounting Standards for Business Enterprises as of Jan 1 2007, where the initial investment cost of a long-term equity investment exceeds the Company’s interest in the investee’s net assets at the time of acquisition, the excess is amortized and is recognized in profit or loss on a straight line basis over the original remaining life. 3) Acquisition of minority interest The difference between newly increased equity investment due to acquisition of minority interests and portion of net asset cumulatively calculated from the acquisition date is adjusted as capital reserve. If the capital reserve is not sufficient to absorb the difference, the excess are adjusted against returned earnings. 4) Disposal of long-term equity investment Where the parent company disposes long-term investment in a subsidiary without a change in control, the difference in the net asset between the amount of disposed long-term investment and the amount of the consideration paid or received is adjusted to the owner’s equity. If the disposal of long-term investment in a subsidiary involves loss of control over the subsidiary, the related accounting policies in Note 4.5.2 applies. For disposal of long-term equity investments in any situation other than the fore-mentioned situation, the difference between the book value of the investment disposed and the consideration received is recognised in profit or loss. Where a long-term equity investment is measured by the equity method both before and after part disposal of the investment, cumulative other comprehensive income relevant to the investment recognised prior to the acquistion is treated in the same manner that the investee disposes the relevant assets or liabilities proportionate to the disposal. The investee's equity movement other than net profit, other comprehensive income and profit distribution is reocgnised in profit or loss proportionate to the disposal. Where a long-term equity investment is measured at cost both before and after part disposal of the investment, cumulative other comprehensive income relevant to the investment recognised, as a result of accounting by equity method or recognition and measurement principles applicable to financial instruments, prior to the Company's acquisition of control over the investee is treated in the same manner that the investee disposes the relevant assets or liabilities and recognised in profit or loss proportionate to the disposal. The investee's equity 101 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 movement other than net profit, other comprehensive income and profit distribution, as a result of accounting by equity method, is reocgnised in profit or loss proportionate to the disposal. Where the Company's control over an investee is lost due to partial disposal of investment in the investee and the Company continues to have significant influence over the investee after the partial disposal, the investment in measured by the equity method in the Company's separate financial statements; where the Company's control over an investee is lost due to partial disposal of investment in the investee and the Company ceases to have significant influence over the investee after the partial disposal, the investment in measured in accordance with the recognition and measurement principles applicable to financial instruments in the Company's separate financial statements and the difference between the fair value and the book value of the remaining investment at the date of loss of control is recognised in profit or loss. Cumulative other comprehensive income relevant to the investment recognised, as a result of accounting by equity method or recognition and measurement principles applicable to financial instruments, prior to the Company's acquisition of control over the investee is treated in the same manner that the investee disposes the relevant assets or liabilities on the date of loss of control. The investee's equity movement other than net profit, other comprehensive income and profit distribution, as a result of accounting by equity method, is reocgnised in profit or loss when control is lost. Where the remaining investment is measured by equity method, the fore-mentioned other comprehensive income and other equity movement are recognised in profit or loss proportionate to the disposal; Where the remaining investment is measured in accordance with the recognition and measurement principles applicable to financial instruments, the fore-mentioned other comprehensive income and other equity movement are recognised in profit or loss in full. Where the Company's joint control or significant influence over an investee is lost due to partial disposal of investment in the investee, the remaining investment in the investee is measured in accordance with the recognition and measurement principles applicable to financial instruments, the difference between the fair value and the book value of the remaining investment at the date of loss of joint control or significant influence is recognised in profit or loss.Cumulative other comprehensive income relevant to the investment recognised, as a result of accounting by equity method, prior to the partial disposal is treated in the same manner that the investee disposes the relevant assets or liabilities on the date of loss of joint control or significant influence. The investee's equity movement other than net profit, other comprehensive income and profit distribution is reocgnised in profit or loss when joint control or significant influence is lost. Where the Company's control over an investee is lost through multiple disposals and the multiple disposals shall be viewed as one single transaction, the multiple disposals is accounted for one single transaction which result in the Company's loss of control over the investee. Each difference between the consideration received and the book value of the investment disposed is recognised in other comprehensive income and reclassified in full to profit or loss at the time when control over the investee is lost. 102 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 4.14 Fixed assets 4.14.1 The conditions of recognition Fixed assets refers to the tangible assets that are held for the sake of producing commodities, rendering labor service, renting or business management and their useful life is in excess of one fiscal year. 4.14.2 The method for depreciation Fixed assets are stated at cost and consider the impact of expected costs of abandoning the initial measurement. From the following month of state of intended use, depreciation method of the straight-line method is used for different categories of fixed assets to take depreciation. The recognition of the classification, useful life and estimated residual rate are as follows: Estimated residual Category Expected useful life Depreciation(%) value(%) Houses and building 27-33 5.00 2.88-3.52 Key components and power 15-20 5.00 4.75-6.33 supports of aircraft engine Replacement parts of engine 3-5 0.00 20-33.33 Equipments, electronic devices and 4-10 5.00 9.5-23.75 furniture High value rotables 15-18 0.00 5.56-6.67 Transportation vehicles 5-10 5.00 9.5-19.00 Expected net residual value of fixed assets is the balance of the Company currently obtained from the disposal of the asset less the estimated costs of disposal amount, assuming the asset is out of useful life and state the expected service life in the end. 4.14.3 Measurement and recognition of fixed assets Impairment and provisions of fixed assets are disclosed on Note 4.16. 4.14.4 Fixed Assets under finance leases A finance lease is a lease that transfers in substance all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred. Fixed assets that are held under finance leases shall be depreciated by applying the same policy as that for the fixed assets owned by the Company. If it can be reasonably determined that the ownership of the leased assets can be obtained at the end of the lease period, the leased assets are depreciated over their useful lives; otherwise, the leased assets are depreciated over the shorter of the lease terms and the useful lives of the leased assets. 4.14.5 Others A fixed asset is recognized only when the economic benefits associated with the asset will probably flow to the 103 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Company and the cost of the asset can be measured reliably. Subsequent expenditure incurred for a fixed asset that meet the recognition criteria shall be included in the cost of the fixed asset, and the carrying amount of the component of the fixed asset that is replaced shall be derecognized. Otherwise, such expenditure shall be recognized in profit or loss in the period in which they are incurred. The revenue from selling or transferring, or disposing a fixed asset is booked into profit and loss after deduction of carrying value and related tax. The Company conducts a review of useful life, expected net realizable value and depreciation methods of the fixed asset at least on an annual base. Any change is regarded as change in accounting estimates. 4.15 Construction in progress Construction in progress is measured at its actual cost. The actual costs include various construction expenditures during the construction period, borrowing costs capitalized before it is ready for intended use and other relevant costs. Construction in progress is transferred to a fixed asset when it is ready for intended use. Testing method for provision impairment of construction in progress and accrued method for provision impairment please refer to Note 4.19. 4.16 Borrowing costs Borrowing costs include interest, amortization of discounts or premiums related to borrowings, ancillary costs incurred in connection with the arrangement of borrowings, and exchange differences arising from foreign currency borrowings. The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized. The amounts of other borrowing costs incurred are recognized as an expense in the period in which they are incurred. Qualifying assets are asset (fixed assets, investment property and inventories, etc.) that necessarily take a substantial period of time for acquisition, construction or production to get ready for their intended use or sale. Where funds are borrowed for a specific-purpose, the amount of interest to be capitalized is the actual interest expense incurred on that borrowing for the period less any bank interest earned from depositing the borrowed funds before being used on the asset or any investment income on the temporary investment of those funds. Where funds are borrowed for a general-purpose, the amount of interest to be capitalized on such borrowings is determined by applying a weighted average interest rate to the weighted average of the excess amounts of accumulated expenditure on the asset over and above the amounts of specific-purpose borrowings During the capitalization period, exchange differences related to a specific-purpose borrowing denominating in foreign currency are all capitalized. Exchange differences in connection with general-purpose borrowings are recognized in profit or loss in the period in which they are incurred. Assets qualified for capitalization are the fixed assets, investment properties or inventories which need a long time of construction or production activities before ready for intended used or sale. 104 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Capitalization of borrowing costs is suspended during periods in which the acquisition, construction or production of a qualifying asset is interrupted by activities other than those necessary to prepare the asset for its intended use or sale, when the interruption is for a continuous period of more than 3 months. Borrowing costs incurred during these periods recognized as an expense for the current period until the acquisition, construction or production is resumed. 4.17 Intangible assets 4.17.1 Intangible asset The term “intangible asset” refers to the identifiable non-monetary assets without physical shape, possessed or controlled by enterprises. The intangible assets are initially measured by its cost. Expenses related to intangible assets, if the economic benefits related to intangible assets are likely to flow into the enterprise and the cost of intangible assets can be measured reliably, shall be recorded as cost of intangible assets. The expenses other than this shall be booked in the profit or loss when they occur. Land use rights that are purchased by the Company are accounted for as intangible assets. Buildings, such as plants that are developed and constructed by the Company, and relevant land use rights and buildings, are accounted for as intangible assets and fixed assets, respectively. Payments for the land and buildings purchased are allocated between the land use rights and the buildings; if they cannot be reasonably allocated, all of the land use rights and buildings are accounted for as fixed assets. When an intangible asset with a definite useful life is available for use, its original cost less net residual value and any accumulate impairment losses is amortized over its estimated useful life using the straight-line method . An intangible asset with an indefinite useful life is not amortized. For an intangible asset with a definite useful life, the Company reviews the useful life and amortization method at the end of the period, and makes adjustment when necessary.. An additional review is also carried out for useful life of the intangible assets with indefinite useful life. If there is evidence showing the foreseeable limit period of economic benefits generated to the enterprise by the intangible assets, then estimate its useful life and amortize according to the policy of intangible assets with definite useful life. 4.17.2 the expenditure of research and development The expenditures for its internal research and development projects of the Company shall be classified into research expenditures and developmentexpenditures. The research expenditures shall be recorded into the profits and losses of the current period when they are incurred. Development expenditures in internal research and development projects shall be recognized as intangible assets where they satisfy all of the following conditions: 105 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 ①Technical feasibility of completing the intangible asset so that it will be available for use or sale; ②Intention to complete the intangible asset and use or sell it; ③How the intangible asset will generate economic benefits, including the ability to demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; ④Availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; ⑤Ability to measure reliably the expenditure that is attributable to the intangible asset during its development. The expenses which can not be distinguished between research and development stage, shall be recorded into the profit or loss for the current period. 4.17.3 Impairment testing methods and recognition of impairment provision of intangible assets Impairment and provisions of intangible assets are disclosed on Note 4.19. 4.18 Deferred charges Deferred charges represent expenses incurred that should be borne and amortized over the current and subsequent period (together of more than one year). Deferred charges are amortized by using straight line method. Such as expenses for pilots’ initial trainings, those expenses are amortized at 10 years according to their benefit period respectively. 4.19 Impairment of long-term assets Non-financial assets with non-current nature include fixed assets, construction in progress, intangible assets with definite useful lives, investment properties measured by cost methods and long-term equity investment on subsidiaries, jointly operations. The Company assesses whether there are any indicators of impairment for all non-financial assets at the balance sheet date, and impairment test is carried out and recoverable value is estimated if such an indicator exits. Goodwill and intangible assets with indefinite useful lives, as well as intangible assets not ready for use, are tested for impairment annually regardless of indicators of impairment. Impairment of loss is calculated and provisions taken by the difference if the recoverable value of the assets is lower than the book value. The recoverable value is the higher of estimated present value of the future expected cash flows from the asset and net fair value of the asset less disposed cost. The fair value of asset is determined by the sales agreement price within an arm’s length transaction. In case there is no sales agreement, but there is active market of assets, the fair value can be determined by the selling price. If there is neither sales agreement nor active market, the fair value of the asset can be estimated based on the best information obtained. Disposal expenses include expenses related to the legislation, taxes, transportations and the direct expense for the asset to be ready for sale. When calculating the present value of expected future cash flows from an asset or asset Group, the management shall estimate the expected future cash flows from the asset or asset Group and choose a suitable discount rate in order to calculate the present value of those cash flows. 106 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Provision for asset impairment is calculated and determined on the individual basis. If the recoverable of individual asset is hard to estimate, the recoverable amount can be determined by the asset Group where subject asset belongs. Asset Group is the smallest set of assets that can have cash flow in independently. The Company determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the present value of the future expected cash flows from the asset Groups or sets of asset Groups to which the goodwill is allocated. Estimating the present value requires the Company to make an estimate of the expected future cash flows from the asset Groups or sets of asset Groups and also choose a suitable discount rate in order to calculate the present value of those cash flows. Once the loss from above asset impairment is recognized, the recoverable part cannot be reserved in the subsequent periods. 4.20 Employee Benefits The employee benefits of the company include short-term employee benefits, post-employment benefits, termination benefits and other long-term employee benefits: Short-term employee benefits includes wages, bonuses, allowances and subsidies, welfare, health insurance , maternity insurance, work injury insurance, housing funds, labor union funds, employee education funds, non-monetary benefits and etc. Short-term employee benefits are recognised as liabilities and profit or loss account or the costs associated with the asset during the accounting period when employees actually provide services,. The non -monetary benefits are measured at fair value. Post-employment benefits include defined contribution plans and defined benefit plans. Defined contribution plan which includes the basic pension, unemployment insurance and annuities shall be recognised as cost of related assets or profit or loss. Projected unit credit cost method (“PUC”) was used by independent actuaries engaged by the Company to determine the present value of the defined benefit obligations with unbiased and consistent actuarial assumptions regarding population variables and financial variables. Defined benefit obligation was presented with the present value and the related current service cost was accounted into current profit or loss. When the Company terminates the labor relationship with employees prior to the employment contracts, or encourages employees to accept voluntary redundancy compensation proposals in this company, a provision shall be recognised for the compensation arising from the termination of employment relationship with employees at the time when the Company can not unilaterally withdraw layoff proposal termination benefits provided due to termination of employment, or the company ensures the costs related to the payment for termination benefits related to the restructuring, which one is early to confirm employee benefits liabilities, and recorded as profit or loss. However, if termination benefits can not be fully paid aftert welve months of the reporting date,, the liability shall be processed in accordance with other long-term employee benefits. Retirement plan adopts the same principles as the termination benefits . The salaries and insurance to be paid from the date when employees stop providing services to the date of normal retirementshall be recognised in profit or loss (termination benefits) when satisfying the requirements of a provision.. 107 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Other long-term employee benefits provided by the company to employees that is in line with defined contribution plans shall adopt the accounting treatment in accordance with defined contribution plans, otherwise the accounting treatment of defined benefit plans.. 4.21 Revenue 4.21.1 Revenue from rendering of service ① The Company recognise revenue from rendering of air service for carriage of passengers when the service is rendered or when an unused ticket expires. The sale of a ticket does not constitute revenue. An unused ticket expires on the annual anniversary of its sale. Tickets sold but of which the service is not yet rendered are recognised in current liabilities as Advances from customers. If service is rendered through code sharing, revenue arising from the service provision is apportioned amongst parties to the code sharing agreement. The revenue arising from code sharing is also recognised when the service is rendered. ② The Company company recognise air cargo revenue from rendering of air service for carriage of cargo when the service is rendered ③ Revenue arising from other air service rendering is recognised when the service rendering is completed. 4.21.2 Royalty Revenue According to the contract or agreement, the revenue is recognized on an accrual basis. 4.21.3 Interest Income The amount of interest revenue should be measured and confirmed in accordance with the length of time for which the enterprise's cash is used by others and the actual interest rate. 4.22 Government Grants Government grants are transfer of monetary assets and non-monetary assets from the government to the Company at no consideration, excluding the capital invested by the government as equity owner. Government grant can be classified as grant related to the assets and grants related to the income. Government grants obtained by the Company which are relevant to construction or acquisition of long-term assets are classified as asset-related government grants; all other government grants are classified as revenue-related government grants. For government grants without speficied beneficiary, the Company performs classification in accordance with the following criteria. 4.22.1 Where a grant is obtained for a specified project, the grant is spitted into asset-related and revenue related portions proportionate to the project's investment to expense ratio; the classification is reviewed on each balance sheet date and revised if necessary. 4.22.2 Where a grant is obtained for general purpose, the grant as a whole is classified as a revenue-related government grant. If a government grant is in the form of a transfer of a monetary asset, it is measured at the amount received or receivable. If a government grant is in the form of a non-monetary asset, it is measured at fair value. If the fair 108 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 value cannot be reliably determined, it is measured at a nominal amount. A government grant measured at a nominal amount is recognized immediately in profit or loss for the period. A government grant related to an asset is recognized as deferred income, and evenly amortized to profit or loss over the useful life of the related asset. For a government grant related to income, if the grant is a compensation for related expenses or losses to be incurred in subsequent period, the grant is recognized as deferred income, and recognized in profit or loss over the periods in which the related costs are recognized. If the grant is a compensation for related expenses or losses already incurred, the grant is recognized immediately in profit or loss for the period. For repayment of a government grant already recognized, if there is a related deferred income, the repayment is offset against the carrying amount of the deferred income, and any excess is recognized in profit or loss for the period. If there is no related deferred income, the repayment is recognized immediately in profit or loss for the period. 4.23 Deferred tax assets and deferred tax liabilities 4.23.1 Income tax for the current period At the balance sheet date, deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, according to the requirements of tax laws. The measurement of deferred tax assets and deferred tax liabilities reflects the tax consequences that would follow from the manner in which the Company expects at the balance sheet date, to recover the assets or settle the liabilities. At the balance sheet date, current income tax liabilities or assets for the current and prior periods, are measured at the amount expected to be paid (or recovered) according to the requirements of tax laws. The calculation for income tax expenses in the current period is based on the taxable income according to the related tax laws after adjustment to the accounting profit of the reporting period. 4.23.2 Deferred income tax assets and liabilities For temporary differences between the carrying amount of certain assets or liabilities and their tax base, or between the nil carrying amount of those items that are not recognized as assets or liabilities and their tax base that can be determined according to tax laws, deferred tax assets and liabilities are recognized using the balance sheet liability method. For temporary differences associated with the initial recognition of goodwill and the initial recognition of an asset or liability arising from a transaction (not a business combination) that affects neither the accounting profit nor taxable profits (or deductible losses) at the time of transaction, no deferred tax asset or liability is recognized. For taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, no deferred income tax liability related is recognized except where the Company is able to control the timing of reversal of the temporary difference and it is probable that the temporary difference will not reverse 109 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 in the foreseeable future. All deferred income tax liabilities arising from taxable temporary differences except the ones mentioned above are recognized. For temporary deductible differences associated with the initial recognition of an asset or liability arising from a transaction (not a business combination) that affects neither the accounting profit nor taxable profits (or deductible losses) at the time of transaction, no deferred tax asset is recognized. For taxable temporary deductible differences associated with investments in subsidiaries and associates, and interests in joint ventures, no deferred income tax asset related is recognized if it is impossible to reversal the temporary difference in the foreseeable future, or it is not probable to obtain taxable income which can be used for the deduction of the temporary difference in the future. Except mentioned above, the Company recognizes other deferred income tax assets that can deduct temporary differences to the extent that it is probable that taxable profits will be available against which the deductible temporary differences can be utilized. For the deductible losses and tax credit that can be carried forward, deferred tax assets for deductible temporary differences are recognized to the extent that it is probable that taxable profits will be available against which the deductible temporary differences can be utilized. At the balance sheet date, deferred tax assets and liabilities are measured at the tax rates according to tax laws, that are expected to apply in the period in which the asset is realized or the liability is settled. At the balance sheet date, the Company reviews the carrying amount of deferred tax assets. If it is no longer probable that sufficient taxable profit will be available in future periods to allow the benefits of the deferred tax assets to be used, the Company reduces the carrying amount of deferred tax assets. The amount of such reduction is reversed when it becomes probable that sufficient taxable profit will be available 4.23.3 Income tax expenses Income tax expenses consist of current income tax and deferred income tax. The expenses from income tax and deferred income tax, as well as the revenue, shall be recorded into profit or loss in current accounting period, except expense for income tax of the current period and deferred income tax that booked into other income or equity and adjusted carrying value of deferred income tax goodwill arose from business combination. 4.23.4 Income tax offset When we have the legal right, and have intended to, to make settlement with net amount, or through the asset acquisition and liability fulfillment simultaneously, the Company shall present the net value from the offset between current income tax asset and current income tax liability in the financial statement. When the Company has the legal right to make a settlement with the current income tax asset and current income tax liability, and the deferred income tax asset and deferred income tax liability are related to the same 110 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 taxable subject under the same tax payer, or related to different taxable subject, but the intension of net value settlement in regard of the current income tax asset and current income tax liability, the Company shall present net value after the offset of deferred income tax asset and deferred income tax liability. 4.24 Leases A finance lease is a lease that transfers in substance all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred. An operating lease is a lease other than a finance lease. 4.24.1 The Company as Lessee under operating Lease Lease payments under an operating lease are recognized by a lessee on a straight-line basis over the lease term, and either included in the cost of the related asset or charged to profit or loss for the current period. The contingent rents shall be recorded in the profit or loss of the period in which they actually arise. 4.24.2 The Company as Leasor under operating Lease Lease income from operating leases shall be recognized by the leasor in profit or loss on a straight-line basis over the lease term. Initial direct cost of significance in amount shall be capitalized when incurred. If another basis is more systematic and rational, that basis may be used. Contingent rents are credited to profit or loss in the period in which they actually arise. 4.24.3 The Company as Lessee under financing Lease For an asset that is held under a finance lease, at the lease commencement, the leased asset is recorded at the lower of its fair value at the lease commencement and the present value of the minimum lease payments, and the minimum lease payment is recorded as the carrying amount of the long-term payables; the difference between the recorded amount of the leased asset and the recorded amount of the payable is accounted for as unrecognized finance charge, Initial direct costs incurred by the lessee during the process of negotiating and securing the lease agreement shall be added to the amount recognized for the leased asset. The net amount of minimum lease payment deducted by the unrecognized finance shall be separated into long-term liabilities and long-term liability within one year for presentation. Unrecognized finance charge shall be computed by the effective interest method during the lease term. Contingent rent shall be booked into profit or loss when actually incurred. 4.24.4 In the case of the leasor of a financing lease For an asset that is leased out under a finance lease, the aggregate of the minimum lease receipts at the inception of the lease and the initial direct costs is recorded as a finance lease receivable, and unguaranteed residual value is recorded at the same time; the difference between the aggregate of the minimum lease receipt, initial direct costs, and unguaranteed residual value, and the aggregate of their present values, is recognized as unearned finance income, which is amortized using the effective interest rate method over each period during the lease term. Finance lease receivable less unearned finance income shall be separated into long-term liabilities and long-term 111 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 liability within one year for presentation. Unearned finance income shall be computed by the effective interest method during the lease term. Contingent rent shall be credited into profit or loss in which actually incurred. 4.25 Regular repair and substantial repair Regular repair expenditure of own aircrafts and aircrafts acquired under a financial lease is accounted for through profit or loss for the period in which it is incurred. Substantial repair expenditure eligible for capitalisation is capitalised when incurred and recognised as replacement cost of non-current assets and depreciated over a reasonable length of time. Substantial repair expenditure of aircrafts under an operating lease incurred before the lease expiry date is amortised on the basis of air hours over the lease period. 4.26 Changes in major accounting policies and accounting estimates 4.26.1 change of accounting policies There is no significant change of accounting policies for the company during the reporting period. 4.26.2 change of accounting estimates There is no significant change of accountingestimates for the company during the reporting period. 4.27 Correction of prior period errors There is no significant change of previous accounting errors for the Company during the reporting period. 4.28 Significant account judgment and estimates The Company is required to make judgments, estimates and assumptions about the carrying amounts of items in the financial statements that cannot be measured accurately, due to the internal uncertainties of operation activities. These judgments, estimates and assumptions are based on historical experiences of the Company’s management as well as other factors that are considered to be relevant. These judgments, estimates and assumptions may affect value of the financial statements in revenue, expenses, assets and liabilities and the disclosure of contingency at the balance sheet date. However, the result derived from those uncertainties in estimates may lead significant adjustments to the carrying amounts of the assets or liabilities affected in the future. The Company has reviewed the judgments, estimates and assumptions regularly on the basis of going concern. Where the changes in accounting estimates only affect the period when changes occurred, and they are recognized within the same period. Where the changes in accounting estimates affect both current period and future period, the changes are recognized within the period of change and future period. At balance sheet date, the followings are the significant areas where the Company needs to make judgment, estimates and assumptions over the value of items in the financial statements: 4.28.1 Classification of lease The Company classifies leases as operating lease and financing lease according to the rule stipulated in the Accounting Standard for Business Enterprises No. 21--Leasing-. The management shall make analysis and 112 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 judgment on whether the risks and rewards related to the title of leased assets has been transferred to the leaser, or whether the Company has substantially held the risks and rewards related to the ownership of leased assets. 4.28.2 Allowance for bad debt According to the relevant accounting policies of the Company in receivables, allowance method is used for bad debt’s calculation. The impairment of receivables is calculated based on the assessment of recoverable of receivables. Assurance of receivable impairment needs judgments and estimations from the management. The difference between actual results and original estimates shall have impact on the carrying amount of receivables and receivable bad debt provisions or the reverse during the change of estimation. 4.28.3 Impairment of inventories The Company measures inventories by the lower of cost and realizable net value according to the accounting policies in regard of inventories and provisions for decline in value of inventories is made if the cost is higher than their net realizable value, and obsolete and slow-movement inventories. Inventories decline in value to net realizable value is the estimated selling price in the ordinary course of business. Net realizable value is determined on the basis of clear evidence obtained, and takes into consideration the purposes of holding inventories and effect of post balance sheet events. The difference between the actual result and the original estimates shall have impact on reverse of the carrying amount of the inventories and their decline in value or provisions during the period of change. 4.28.4 The fair value of financial instruments For a financial instrument which has no active market, the Company establishes fair value by using various valuation methods, including of discounted cash flow analysis model. The Company needs to estimate future cash flow, credit risk, volatility and relationship during the valuation and choose appropriate discount rate. Such assumptions have uncertainties and their changes shall have impact on the fair value of financial instruments. 4.28.5 Impairment of non-financial, non-current assets The Company assesses whether there are any indicators of impairment for all non-current assets other than financial assets at the balance sheet date. For an intangible asset that has indefinite useful life, impairment test is made in addition to the annual impairment test if there is any indication of impairment. For non-current assets other than financial assets, impairment test is made when there is any indication that its account balance cannot be recovered. Impairment exists when the recoverable amount of an asset is the higher of its fair value less cost of disposal and present value of the future cash flows expected to be derived from the asset. Net value between the difference of fair value and disposal cost is determined by reference of the price of similar product in a sale agreement in an arm’s length transaction or an observable market price less the additional cost directly attributable to the disposal of the asset. When estimating the present value of future cash flow, significant judgments are made over the asset’s 113 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 production, selling price and relevant operating expenses, and discount rate used to calculate present value. All available materials that are considered to be relevant shall be used in the estimation of recoverable value. These materials include estimations of production, selling price and operating expenses based on reasonable and supportable assumptions. The Company makes an impairment test for goodwill at least at each year end. This requires an estimation of present value of future cash flow of the assets or assets group where goodwill has been allocated. The Company shall makes estimation on the future cash flow derived from assets or assets group and determine an appropriate discount rate for the present value of future cash flow when the estimation of present value of future cash flow is made. 4.28.6 Depreciation and amortization Investment property, fixed assets and intangible assets are depreciated and amortized using the straight-line method over their useful lives after taking into account residual value. The useful lives are regularly reviewed to determine the depreciation and amortization costs charged in each reporting period. The useful lives are determined based on historical experience of similar assets and the estimated technical changes. If there is an indication that there has been a change in the factor used to determine the depreciation or amortization, the rate of depreciation or amortization is revised. 4.28.7 Deferred tax assets The Company shall recognize all unused tax losses as deferred tax assets to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized. This requires the management of the Company make a lot of judgments over the estimation of time period, value and tax planning strategies when future taxable profit incurs so that the value of deferred tax assets can be determined. 4.28.8 Income tax There are some transactions where ultimate tax treatments and calculations have uncertainties in the Company’s everyday operation. Whether it is possible for some items to make expenditure before tax needs approval from competent tax authorities. If there is any difference between finalized determination value and their initial estimations value, the difference shall have the impact on the income tax and deferred income tax of the current period during the final determination. 4.28.9 Aircraft operating lease and engine overhaul expenses Aircraft operating lease and engine overhaul expenses are accrued and charged to profit or loss in accordance with the expected maintenance cycle, based on flight hours, flight cycles overhaul period and the amount of the cost of repairs which may occur. These estimates are largely based on past historical data about the same or similar types of aircraft and engines repairance. The withholding amount and overhaul costs may be affected by different judgments and estimates and affect current profit or loss. 114 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 4.28.10 Defined benefit plan The defined benefit plan implemented and maintained by the Company includes post-employment benefits plan. The provided welfare costs under the above defined benefit plan was calculated by expected cumulative unit credit method according to various actuarial assumptions, and were recognized during the employee service providing period. Actuarial Assumptions include but not limited to discount rate, mortality rate, and etc.. The discount rate is on the basis of management's review of national debt, and mortality rate depends on the mortality rate adopted by the China life insurance industry. Supplemental information of defined benefit plan see Note 6.28. Note 5 Taxation 5.1 Major taxes and tax rate Tax Tax rate (%) Enterprise income tax Business tax is calculated according to the taxable income(note1) The VAT is calculated as the difference between output tax (11% of the taxable revenue) and deductible input tax for the period, and the tax rates Value added tax are 6%, 11% or 17%(note 2). The output tax is calculated using the sales of goods and taxable services income (including transportation and ground services revenue). Business tax Business tax is calculated at 3%-5% of taxable turnover(note 3). Property tax is calculated by the nature of house property and is collected Property tax by ad valorem or specific duties according to the tax rules . Urban maintenance and Urban maintenance and construction tax is calculated at 7% of business tax construction tax and VAT. Education surcharge Education surcharge is calculated at 3% of business tax and VAT. Local education Surcharge Local education Surcharge is calculated at 2% of business tax and VAT. Civil aviation development fund shall be calculated using the collection standard of the relevant category of flight routes, maximum departure Civil aviation development weight and flight distance adopted by the civil aviation industry. According Fund to “Interim measures for the administration of the administration of civil aviation development fund” 《民航发展基金征收使用管理暂行办 法》. Note 1: According to the provision of National Development and Reform Commission ([2014]15), the branch membership of our company in Western China can get a reduced rate of 15% to pay corporate income tax, when 115 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 its international and domestic air passenger and cargo transport projects are in line with the " Catalogue of Encouraged Industries in Western Region”(《西部地区鼓励类产业目录》). All companies in mainland China are subject to a corporate income tax rate of 25%. Note 2: Prior to 1 August 2013, revenue arising from air transportation was taxable for business tax at the rate of 3%. As from 1 August 2013, revenue arising from air transportation become VAT taxable per the Notice of Pilot Conversion of Sales-tax-to-VAT for the Transportation Sector and Certain Contemporary Service Sectors by the Ministry of Finance and State Administration of Taxation (Caishui[2013]37).(《财政部、国家税务总局关于 在全国开展交通运输业和部分现代服务业营业税改征增值税试点税收政策的通知》(财税 [2013]37 号)). Note 3: From January to April 2016, the taxable income tax of business tax which is calculated according to the tax law shall be taxed at 3%-5%. According to relevant provisions of "the notice on the full implementation of pilot for replacing the business tax by VAT " (caishui[2016]36)(《关于全面推开营业税改征增值税试点的通知》 (财税[2016]36 号)), issued by the Ministry of Finance and the State Administration of Taxation, vat is levied replacing the business tax since May 1, 2016. 5.2 Tax incentives 5.2.1. Zero VAT rate applies to entities and individuals within the Chinese territory that provide international transportation services, research and development services and designing services provided to foreign entities, roundtrip transportation services between Hongkong, Marcau,and Taiwan, as well as transportion services provided in Hongkong, Marcau, and Taiwan per the Notice of Pilot Conversion of Sales-tax-to-VAT for the Transportation Sector and Certain Contemporary Service Sectors by the Ministry of Finance and State Administration of Taxation (Caishui[2013]No.37)(财税[2013]37号《财政部、国家税务总局关于在全国开 展交通运输业和部分现代服务业营业税改征增值税试点税收政策的通知》).. 5.2.2. Per the Notice of Continuous Implementation of Transitional Business Tax Exemption Policy for Cross-boarder Lease Contracts of Equipment and Machinery(CaiShui[2011]No.48) (财税[2011]48号《关于跨 境设备租赁合同继续实行过渡性营业税免税政策的通知》 jointly issued by the Ministry of Finance and the State Adnimistration of Taxation on June 30, 2011 and approved by the State Council, the transitional operating tax exemption applicable to revenue received by overseas leasor(s) to lease contracts (applicable to both financing lease and operating lease) of machinery and equipment import leasing involving domestic leasee(s) and overseas leasor(s) entered into prior to and remaining in force as at December 31, 2008 continues to apply from January 1, 2010 to the expiry date of the relevant contract. The Ministry of Finance and the State Adnimistration of Taxation, "the notice on the full implementation of pilot for replacing the business tax by VAT " (caishui[2016]36)(《关于全面推开营业税改征增值税试点的通知》(财税[2016]36 号)). “(Appendix 116 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 3)The provision of Transitional Policy of pilot for replacing the business tax by VAT”.(附件3《营业税改征增 值税试点过渡政策的规定》)6. The VAT preferential policies will be implemented during the pilot, expect the projects which have established deadlines and the fifth provision. If the pilot taxpayers have enjoyed the tax preferential policy of business tax before the day replacing business tax with VAT, during the remaining preferential tax policy term, they should enjoy the relevant vat preferential according to this provision. Note 6 Notes to significant elements of the consolidated financial statements Unless otherwise stated, the meaning of "B/f", "C/f", "Current year", "Prior year" in the following notes (incl. Notes to elements of the separate financial statements) is "1st January 2016", "31st December 2016", "the year ended 31st December 2016", and "the year ended 31st December 2015" respectively. 6.1 Monetary funds Item C/f B/f Cash at hand: 182,606.18 178,959.16 Bank deposit: 791,073,080.47 1,415,220,671.44 Other monetary funds: Total 791,255,686.65 1,415,399,630.60 Including: the total amount of deposit abroad 1,604,517.22 2,232,804.96 6.2 Accounts receivables 6.2.1 Disclosure by category C/f Category Carrying amount Allowance for bad debt Book value Amount % Amount % Accounts receivable of individual significance and 228,116,251.34 67.45 228,116,251.34 subject to individual impairment assessment Accounts receivable subject to impairment assessment 92,078,562.91 27.23 4,603,928.14 5.00 87,474,634.77 by credit risk characteristics of a portfolio Accounts receivable of individual insignificance but 18,006,401.64 5.32 10,823,117.90 60.11 7,183,283.74 subject to individual impairment assessment Total 338,201,215.89 100.00 15,427,046.04 4.70 322,774,169.85 (Continued) C/f Category Carrying amount Allowance for bad debt Book value Amount % Amount % Accounts receivable of individual significance and 156,501,058.00 59.44 156,501,058.00 117 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 C/f Category Carrying amount Allowance for bad debt Book value Amount % Amount % subject to individual impairment assessment Accounts receivable subject to impairment assessment by credit risk characteristics of a portfolio 94,755,329.85 35.99 4,737,766.49 5.00 90,017,563.36 Accounts receivable of individual insignificance but subject to individual impairment assessment 12,030,208.57 4.57 2,765,908.05 22.99 9,264,300.52 Total 263,286,596.42 100.00 7,503,674.54 2.85 255,782,921.88 ① Accounts receivable of individual significance and subject to individual impairment assessment C/f Rate of Debtor Allowance Carrying amount allowance Reason for allowance for bad debt (%) No indication of impairment Air China 111,220,493.07 upon individual assessment No indication of impairment BSP-CHINA 59,213,818.83 upon individual assessment No indication of impairment Accounting Center of China Aviation 57,681,939.44 upon individual assessment Total 228,116,251.34 ② Accounts receivable subject to impairment assessment by portfolio C/f Portfolio Carrying amount Allowance for bad debt Rate of allowance(%) Portfolio by nature 92,078,562.91 4,603,928.14 5.00 Total 92,078,562.91 4,603,928.14 5.00 ③ Accounts receivable of individual insignificance but subject to individual impairment assessment C/f Debtor Allowance for Rate of Carrying amount Reason for allowance bad debt allowance (%) impairment upon Debtor #1 8,057,209.85 8,057,209.85 100.00 individual assessment BSP-TAIWAN 2,937,548.86 No indication of 118 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 C/f Debtor Allowance for Rate of Carrying amount Reason for allowance bad debt allowance (%) impairment upon individual assessment No indication of UATP 2,275,133.99 impairment upon individual assessment impairment upon Kun Peng Airlines Co., Ltd. 1,849,400.00 1,849,400.00 100.00 individual assessment Non recoverable upon BSP-JAPAN 1,517,337.02 individual assessment impairment upon CR Airways 916,508.05 916,508.05 100.00 individual assessment No indication of BSP-CAMBODIA 172,325.12 impairment upon individual assessment No indication of ARC 158,157.05 impairment upon individual assessment No indication of BSP-THAILAND 92,031.53 impairment upon individual assessment No indication of BSP-GERMANY 30,750.17 impairment upon individual assessment Total 18,006,401.64 10,823,117.90 60.11 6.2.2 Recognisation, recovery or reversal of allowance for bad debt The amount of allowance for bad debts recognised during the year is CNY7,923,371.50. 6.2.3 Top five accounts receivables by debtors The total amount of top five accounts receivables summarised by debtors as at the end of current year is CNY 270,497,027.26, accounting for 79.98% of the total accounts receivable as at the end of current year, the total corresponding allowance for bad debts is CNY2,119,038.79. 119 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 6.3 Prepayments 6.3.1 Disclosure by age C/f B/f Age Amount % Amount % Within 1 year 248,363,327.89 99.69 154,068,748.52 99.46 1 to 2 years 50,862.40 0.02 337,815.97 0.22 2 to 3 years 231,761.96 0.09 Over 3 years 490,292.70 0.20 491,212.70 0.32 Total 249,136,244.95 100.00 154,897,777.19 100.00 6.3.2 Details of top five prepayments The total amount of top five prepayments as at the end of current year is CNY 100,773,613.19, accounting for 40.45% of the total advance to suppliers. 6.4 Dividends receivable 6.4.1 Disclosure by item Item C/f B/f Sichuan Airlines 4,381,900.00 Total 4,381,900.00 6.5 Other receivables 6.5.1 Disclosure by category C/f Category Carrying amount Allowance for bad debt Book value Amount % Amount % Other receivables of individual significance and subject to 353,220,633.95 76.34 108,431,670.15 30.70 244,788,963.80 individual impairment assessment Other receivables subject to subject to impairment 65,822,034.03 14.22 3,291,101.71 5.00 62,530,932.32 assessment by credit risk characteristics of a portfolio Other receivables of individual insignificance but subject to 43,680,428.66 9.44 43,680,428.66 individual impairment assessment Total 462,723,096.64 100.00 111,722,771.86 24.14 351,000,324.78 120 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 (Continued) B/f Category Carrying amount Allowance for bad debt Book value Amount % Amount % Other receivables of individual significance and subject to 267,542,239.69 68.46 106,461,110.62 39.79 161,081,129.07 individual impairment assessment Other receivables subject to subject to impairment 77,465,334.20 19.82 3,873,266.72 5.00 73,592,067.48 assessment by credit risk characteristics of a portfolio Other receivables of individual insignificance but subject to 45,815,835.47 11.72 45,815,835.47 individual impairment assessment Total 390,823,409.36 100.00 110,334,377.34 28.23 280,489,032.02 ① Other receivables of individual significance and subject to individual impairment assessment C/f Rate of Debtor Allowance for Carrying amount allowance Reason for allowance bad debt (%) No indication of Debtor #1 impairment upon 114,069,866.40 individual assessment Shandong Rainbow Commercial Jet impairment upon Co., Ltd. 101,551,717.65 101,551,717.65 100.00 individual assessment impairment assessment Debtor #2 79,570,006.50 3,978,500.33 5.00 by portfolio impairment assessment Debtor #3 58,029,043.40 2,901,452.17 5.00 by portfolio Total 353,220,633.95 108,431,670.15 30.70 121 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 ② Other receivables subject to impairment assessment by portfolio C/f Portfolio Carrying amount Allowance for bad debt Rate of allowance(%) Portfolio by nature 65,822,034.03 3,291,101.71 5.00 Total 65,822,034.03 3,291,101.71 5.00 ③ Other receivables of individual insignificance but subject to individual impairment assessment C/f Debtor Allowance for Rate of Carrying amount Reason for allowance bad debt allowance (%) No indication of Debtor #1 19,423,600.00 impairment upon individual assessment No indication of Air China 6,250,133.00 impairment upon individual assessment No indication of Debtor #2 4,758,782.00 impairment upon individual assessment No indication of Debtor #3 3,900,000.00 impairment upon individual assessment No indication of Debtor #4 1,553,182.17 impairment upon individual assessment No indication of Debtor #5 1,414,505.19 impairment upon individual assessment No indication of Debtor #6 1,387,400.00 impairment upon individual assessment No indication of Debtor #7 1,354,680.00 impairment upon 122 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 C/f Debtor Allowance for Rate of Carrying amount Reason for allowance bad debt allowance (%) individual assessment No indication of Shandong Air New Media Co., Ltd. 1,027,044.28 impairment upon individual assessment No indication of Debtor #8 554,707.92 impairment upon individual assessment No indication of Debtor #9 553,166.41 impairment upon individual assessment No indication of Shenzhen Airlines Co., Ltd. 468,173.37 impairment upon individual assessment No indication of Debtor #10 416,030.94 impairment upon individual assessment No indication of Debtor #11 405,052.90 impairment upon individual assessment Taikoo (Shandong) Aircraft No indication of Engineering Company 198,526.00 impairment upon Limited individual assessment No indication of Shandong XiangYu Air 15,444.48 impairment upon Technology Co., Ltd. individual assessment Total 43,680,428.66 6.5.2 Recognisation, recovery or reversal of allowance for bad debt The amount of allowance for bad debts recovered or reversed during the current year is CNY 1,388,394.52. 6.5.3 Disclosure by nature Category C/f B/f Deposits 151,888,719.29 107,918,479.76 Others 310,834,377.35 282,904,929.60 123 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Total 462,723,096.64 390,823,409.36 6.5.4 Top five other receivables Allowance for Debtor Nature C/f Aging % bad debt Debtor #1 Deposits 114,069,866.40 Within 1 year 24.65 Shandong Rainbow Commercial Jet Others Over 4 years 21.95 Co., Ltd. 101,551,717.65 101,551,717.65 Debtor #2 Others 79,570,006.50 Within 2 years 17.20 3,978,500.33 Debtor #3 Others 58,029,043.40 Within 3 years 12.54 2,901,452.17 Debtor #4 Deposits 19,423,600.00 Within 5 years 4.19 Total 372,644,233.95 80.53 108,431,670.15 6.6 Inventories C/f Type Impairment Gross carrying amount Net carrying amount allowance Consumable air quipements 115,711,019.94 115,711,019.94 Low-value consumables 3,930,799.75 3,930,799.75 Materials 1,323,423.87 1,323,423.87 Total 120,965,243.56 120,965,243.56 (Continued) B/f Type Impairment Gross carrying amount Net carrying amount allowance Consumable air quipements 108,152,915.54 108,152,915.54 Low-value consumables 3,141,642.16 3,141,642.16 Materials 1,012,883.29 1,012,883.29 Total 112,307,440.99 112,307,440.99 6.7 Other current assets Type C/f B/f VAT deductible 59,685,735.09 39,291,476.46 Income tax overpaid 7,134,030.07 Total 59,685,735.09 46,425,506.53 124 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 6.8 Financial assets available for sale 6.8.1 General information C/f B/f Category Net carrying Net carrying Carrying amount Impairment Carrying amount Impairment amount amount Available for sale equity instruments Including: measured by fair value 190,210,082.34 190,210,082.34 139,460,673.92 139,460,673.92 measured by cost 81,662,100.00 81,662,100.00 81,662,100.00 81,662,100.00 Total 271,872,182.34 271,872,182.34 221,122,773.92 221,122,773.92 6.8.2 Financial assets available for sale measured by fair value at the end of current year Available for sale equity Category Total instruments Cost of equity instruments 6,690,000.00 6,690,000.00 Fair value 190,210,082.34 190,210,082.34 Accumulated changes in the fair value recognised into other comprehensive income 183,520,082.34 183,520,082.34 Impairment amount 6.8.3 Financial assets available for sale measured by cost at the end of current year Carrying amounts as at 31/12/2015 Impairment Shareholdin Cash Increa Decrea Increa Decrea g in Dividend Investee se in se in B/ se in se in C/ B/f C/f for current current current f current current f investee(%) year year year year year Sichuan 35,000,000. 35,000,000. 15,736,285. Airlines 00 00 10.00 82 Jinan International 46,662,100. 46,662,100. Airport 00 00 2.53 734,928.08 81,662,100. 81,662,100. 16,471,213. Total 00 00 90 125 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 6.9 Long-term equity investments Currency year movement (+, -) Investment gains and losses Other comprehensive Other Category B/f Allowance b/f Additional Investment recognised under income changes investment reduction the equity adjustment in equity method Associates Shandong Rainbow 22,500,000.00 22,500,000.00 Commercial Jet Co., Ltd. Total 22,500,000.00 22,500,000.00 (Continued) Currency year movement (+, -) Category Declared cash Allowance C/f Allowance c/f Others dividends or profits recognised Investment in associates Shandong Rainbow Commercial Jet Co., Ltd. 22,500,000.00 22,500,000.00 Total 22,500,000.00 22,500,000.00 6.10 Fixed assets 6.10.1 General information Houses and Aircrafts and High-value Transportation Items Others Total buildings engines rotables vehicles 1. Cost: 1.1 Balance as at 31/12/2015 358,411,470.20 10,041,861,037.02 667,498,748.25 68,916,652.12 176,777,010.04 11,313,464,917.63 1.2 Increased in current year 3,534,450.00 644,459,535.83 57,969,008.25 2,214,684.25 18,967,723.04 727,145,401.37 (1) Purchase 3,534,450.00 339,573,652.18 57,969,008.25 2,214,684.25 18,967,723.04 422,259,517.72 (2) Transferred from 304,885,883.65 304,885,883.65 construction in-progress (3) Transferred from merger and acquisitions (4) Others 126 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Houses and Aircrafts and High-value Transportation Items Others Total buildings engines rotables vehicles 1.3 Decreased in 2,675,743.34 195,929,218.41 7,141,379.72 2,198,919.76 4,773,039.95 212,718,301.18 current year (1) Disposal or scrap 2,675,743.34 195,929,218.41 7,141,379.72 2,198,919.76 4,773,039.95 212,718,301.18 (2) Others 1.4 Balance as at 31/12/2016 359,270,176.86 10,490,391,354.44 718,326,376.78 68,932,416.61 190,971,693.13 11,827,892,017.82 2. Accumulated Depreciation 2.1 Balance as at 31/12/2015 71,319,328.50 3,698,527,093.34 249,163,286.61 35,214,239.86 89,410,704.17 4,143,634,652.48 2.2 Increased in current year 11,665,366.90 714,111,509.49 37,700,090.76 5,075,199.53 16,407,738.11 784,959,904.79 (1) Accrual 11,665,366.90 714,111,509.49 37,700,090.76 5,075,199.53 16,407,738.11 784,959,904.79 2.3 Decreased in current year 1,088,989.54 195,929,218.41 3,988,355.74 1,940,287.64 3,813,713.43 206,760,564.76 (1) Disposal or scrap 1,088,989.54 195,929,218.41 3,988,355.74 1,940,287.64 3,813,713.43 206,760,564.76 (2) Others 2.4. Balance as at 31/12/2016 81,895,705.86 4,216,709,384.42 282,875,021.63 38,349,151.75 102,004,728.85 4,721,833,992.51 3. Impairment allowance 3.1 Balance as at 31/12/2015 13,572,095.22 13,572,095.22 3.2 Increased in current year (1) Accrual 3.3 Decreased in current year 747,221.70 747,221.70 (1) Disposal or scrap 747,221.70 747,221.70 (2) Others 3.4 Balance as at 31/12/2016 12,824,873.52 12,824,873.52 4. Carrying amount 4.1 Carrying amount as at 31/12/2016 277,374,471.00 6,273,681,970.02 422,626,481.63 30,583,264.86 88,966,964.28 7,093,233,151.79 4.2 Carrying amount as at 31/12/2015 287,092,141.70 6,343,333,943.68 404,763,366.42 33,702,412.26 87,366,305.87 7,156,258,169.93 6.10.2 Fixed assets acquired under financial leases Accumulated Impairment Category Cost Carrying amount Depreciation allowance Aircrafts and engines 2,192,909,859.90 1,047,651,447.97 1,145,258,411.93 Total 2,192,909,859.90 1,047,651,447.97 1,145,258,411.93 127 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 6.10.3 Fixed assets pending ownership registration Item Carrying amount Reason for pending Operational support building of Yantai Penglai 59,925,312.42 Ownership registration in process International Airport Land rented from Jinan Air Control, not Jinan cargo arrival and departure warehouses 12,854,531.53 eligible for ownership registration Impairment allowance of fixed assets is CNY 12,824,873.52 as at 31/12/2016, with no additional amount of allowance for fixed assets impairment recognised during the year. 6.11 Construction in progress 6.11.1 General information C/f B/f Items Impairment Impairment Carrying amount Net carrying amount Carrying amount Net carrying amount allowance allowance Factory building 137,792,677.66 137,792,677.66 126,277,951.14 126,277,951.14 project Prepayment 2,110,159,957.73 2,110,159,957.73 1,933,285,252.31 1,933,285,252.31 for aircrafts Construction of 2,547,826.96 2,547,826.96 2,747,369.44 2,747,369.44 information system Total 2,250,500,462.35 2,250,500,462.35 2,062,310,572.89 2,062,310,572.89 6.11.2 Significant projects Transferred to Current year Project Budget B/f fixed assets in Other decrease C/f increase current year Administrative office of Xiamen 195,000,000.00 121,804,542.80 14,802,453.69 136,606,996.49 branch Aircraft asset introduction 15,004,922,602.00 1,933,285,252.31 1,641,362,621.46 304,885,883.65 1,159,602,032.39 2,110,159,957.73 project Total 15,199,922,602.00 2,055,089,795.11 1,656,165,075.15 304,885,883.65 1,159,602,032.39 2,246,766,954.22 128 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 (Continued) Weight Including: of cost Stage of Including:Transferr Including:Transferr Capitalisation Cumulative interests to date completio ed into leaseback ed into fixed assets rate applicable Source of Items interests capitalized in n assets during the during the current to the current finance capitalised during the budgete current year year year current year d cost Administrativ Not e office of current 70.05% complete Xiamen assets d branch Loans from Aircraft asset Finance Not 2.895%-3.8246 introduction 14.06% Institution applicable % project s and 77,345,661.2 54,466,022.0 current 9 50,732,661.23 7,960,619.85 1 assets 77,345,661.2 54,466,022.0 Total 9 50,732,661.23 7,960,619.85 1 Note: The cumulative amount of interests capitalized as at 31/12/2015 is 81,572,920.36, the amount of current year is 54,466,022.01, including 7,960,619.85 transferred into fixed assets and 50,732,661.23 transferred into leaseback assets during the current year, the cumulative amount of interests capitalized as at 31/12/2016 is 77,345,661.29. 6.11.3 Recognization of impairment allowance for construction in progress No sign of construction in progress impairment occurred as at 31/12/2016, no impairment provision shall be recognised. 6.12 Intangible assets 6.12.1 General information Items Land rights Software Total 1. Cost: 1.1 Balance as at 31/12/2015 108,347,341.13 24,196,624.41 132,543,965.54 1.2 Increased in current year 4,661,372.11 4,661,372.11 (1) Purchase 129 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Items Land rights Software Total (2) Diversion of construction 4,661,372.11 4,661,372.11 (3) Increased from business combination 1.3 Decreased in current year (1) Disposal 1.4 Balance as at 31/12/2016 108,347,341.13 28,857,996.52 137,205,337.65 2. Accumulated amortization 2.1 Balance as at 31/12/2015 11,181,225.30 5,957,130.68 17,138,355.98 2.2 Increased in current year 2,403,584.27 3,459,644.20 5,863,228.47 (1) Accrual 2,403,584.27 3,459,644.20 5,863,228.47 2.3 Decreased in current year (1) Disposal 2.4 Balance as at 31/12/2016 13,584,809.57 9,416,774.88 23,001,584.45 3. Impairment allowance 3.1 Balance as at 31/12/2015 3.2 Increased in current year (1) Accrual 3.3 Decreased in current year (1) Disposal 3.4 Balance as at 31/12/2016 4. Carrying amount 4.1 Carrying amount as at 31/12/2016 94,762,531.56 19,441,221.64 114,203,753.20 4.2 Carrying amount as at 31/12/2015 97,166,115.83 18,239,493.73 115,405,609.56 6.12.2 Land rights with pending ownership registration No case of land rights with pending ownership registration was identified as of 31/12/2016. 6.13 Goodwill 6.13.1 General information Current year Current year increase decrease Investee B/f From C/f business Disposal combination Qingdao Feisheng 10,220,816.22 10,220,816.22 130 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Total 10,220,816.22 10,220,816.22 6.13.2 Impairment allowance Current year Current year Investee B/f increase decrease C/f Accrual Disposal Qingdao Feisheng 10,220,816.22 10,220,816.22 Total 10,220,816.22 10,220,816.22 6.14 Deferred charges Current year Current year Item B/f Other decrease C/f increase amortization Pilot training 423,768,628.75 111,110,220.91 75,488,264.78 459,390,584.88 Decoration expenditure 18,887,498.03 139,263.05 6,299,555.54 12,727,205.54 Modification costs for aircraft leasing 3,852,021.58 407,151.92 3,444,869.66 Total 446,508,148.36 111,249,483.96 82,194,972.24 475,562,660.08 6.15 Deferred tax assets and deferred tax liabilities 6.15.1 Deferred tax assets C/f B/f Deductible Item Deductible temporary Deferred tax assets temporary Deferred tax assets difference difference Allowance for bad debt 127,149,817.90 31,787,454.48 117,838,051.88 29,459,512.97 Impairment allowance for fixed assets 12,824,873.52 3,206,218.38 13,572,095.22 3,393,023.81 Fair value movement of financial liabilities held for trading 1,155,815.80 288,953.95 3,370,447.62 842,611.91 Provisions 2,398,351,341.80 599,587,835.45 1,644,962,585.43 411,240,646.36 Employment benefits payable 13,339,322.51 3,334,830.63 19,736,492.42 4,934,123.11 Deferred income 14,319,523.98 3,579,881.00 15,795,524.10 3,948,881.03 Total 2,567,140,695.51 641,785,173.89 1,815,275,196.67 453,818,799.19 131 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 6.15.2 Deferred tax liabilities C/f B/f Item Deductible temporary Deferred tax Deductible temporary Deferred tax difference liabilities difference liabilities Changes in fair value of financial assets available 183,520,082.34 45,880,020.58 132,770,673.92 33,192,668.48 for sale Total 183,520,082.34 45,880,020.58 132,770,673.92 33,192,668.48 6.16 Other non-current assets Item C/f B/f Unrealized gains and losses of operating lease 23,794,314.90 from aircraft leaseback Total 23,794,314.90 6.17 Financial liabilities measured by fair value with changes in fair value recognised in profit or loss Item Fair value c/f Fair value b/f Interest rate swaps 1,155,815.80 3,370,447.62 Total 1,155,815.80 3,370,447.62 The immature interest rate swaps held by the Company had a principal amount of USD 59,735,862.80 as at 31/12/2016; bankers confirmed that the reporting date fair value of these interest rate swaps is CNY-1,155,815.80. 6.18 Notes payable Type C/f B/f Commercial acceptance 25,299,479.50 Total 25,299,479.50 6.19 Accounts payable 6.19.1 General information Item C/f B/f Aircraft maintenance costs 463,956,451.17 169,842,647.39 Fuel cost 197,231,462.72 157,915,325.68 Landing fee 333,773,372.93 312,636,408.52 Aircraft service cost 345,104,581.50 185,358,946.55 Flight catering 82,266,721.74 74,222,899.49 Computer booking fee 35,600,521.61 87,277,689.83 132 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Item C/f B/f Lease rental 7,978,905.87 6,906,064.64 Others 222,182,843.55 134,469,713.45 Total 1,688,094,861.09 1,128,629,695.55 6.19.2 No significant account payable due for more than 1 year as at the reporting date. 6.20 Advance from customers Item C/f B/f Ticket clearing 671,930,813.96 418,599,325.09 Advanced payment for tickets 4,811,444.78 5,221,967.36 Others 22,577,294.31 8,395,116.92 Total 699,319,553.05 432,216,409.37 6.21 Employee benefits payable 6.21.1 Disclosure by classification Current year Current year Item B/f C/f increase decrease 1. Short-term employee benefits 455,788,600.48 2,158,626,862.64 2,160,040,433.93 454,375,029.19 2. Post-employment benefits 182,644,165.36 182,644,165.36 3. Termination benefits 133,447.36 133,447.36 4. Other long-term employee benefits within one year Total 455,788,600.48 2,341,404,475.36 2,342,818,046.65 454,375,029.19 6.21.2 Disclosure by classification of short-term employee benefits Current year Current year Item B/f C/f increase decrease 1. Wages, salaries and subsidies 411,749,614.06 1,917,868,017.65 1,916,389,359.03 413,228,272.68 2. Employee welfare 36,512,500.09 36,512,500.09 3. Social insurance: 70,358,802.56 70,358,802.56 Including: Medical insurance 55,762,590.55 55,762,590.55 Employment injury 4,425,771.41 4,425,771.41 insurance Maternity insurance 6,149,689.13 6,149,689.13 Disabled security 4,020,751.47 4,020,751.47 payments 133 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Current year Current year Item B/f C/f increase decrease 4.Housing provident fund 22,494.00 62,962,328.56 62,837,388.56 147,434.00 5.Labour union fee and employee 19,736,492.42 43,265,213.78 49,662,383.69 13,339,322.51 education fee 6. Short-term paid absences 24,280,000.00 27,660,000.00 24,280,000.00 27,660,000.00 7. Short-term profit-sharing plan Total 455,788,600.48 2,158,626,862.64 2,160,040,433.93 454,375,029.19 6.21.3 Disclosure by defined contribution plan Item B/f Current year increase Current year decrease C/f 1. Basic pension 115,425,415.85 115,425,415.85 2.Unemployment insurance 6,444,183.43 6,444,183.43 3. Annuity payment 60,774,566.08 60,774,566.08 Total 182,644,165.36 182,644,165.36 The company participated in basic pension and unemployment insurance in accordance with the regulations. Based on the insurance program, a percentage of total wages of employees were paid to the account separately. Except for the fee paid, enterprise annuity was deposited to annuity management institution by a percentage of monthly payment base, which was determined by seniority pay and post salary. 6.22 Taxes and fees payable Tax (Fee) C/f B/f VAT 775,322.54 184,449.99 Business tax 1,315,631.25 Urban construction and maintenance tax 171,124.16 661,316.27 Education surcharge 123,863.13 473,042.24 Enterprise income tax 4,877,426.27 545,653.46 Property tax 170,078.07 170,078.07 Land tax 221,139.00 224,139.00 Personal income tax 22,838,989.34 8,767,613.18 stamp duty 2,553,371.69 1,805,107.26 Civil aviation development fund 106,835,140.08 90,906,945.13 Others 95,350.88 93,895.34 Total 138,661,805.16 105,147,871.19 134 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 6.23 Interests payable Item C/f B/f Interest on long-term borrowings with repayment by installments 2,430,456.90 3,638,536.32 Total 2,430,456.90 3,638,536.32 6.24 Other payables 6.24.1 Disclosure by nature Item C/f B/f Payable for construction projects 30,515,708.94 36,254,846.11 Payable for down payments 91,264,426.66 77,019,458.72 Payables associated with aircraft purchase 3,949,505.02 9,475,078.50 Taxes deducted at source 80,231,680.37 50,487,172.46 Others 195,893,115.22 182,393,206.98 Total 401,854,436.21 355,629,762.77 6.24.2 Significant other payables due for more than 1 year Creditor Amount Reason for pending settlement Air China 20,000,000.00 Margin deposit to be settled upon expiry of immature wet lease Total 20,000,000.00 6.25 Non-current liabilities due within one year Category C/f B/f Long-term borrowings due within one year (Note 6.26) 836,269,451.50 1,342,283,640.89 Bonds payable due within one year Long-term payables due within one year (Note 6.27) 144,580,142.52 138,796,767.49 Long-term employee benefits payable due within one year (Note 6.28) 6,794,418.00 5,930,912.28 Total 987,644,012.02 1,487,011,320.66 6.26 Long-term borrowings Category C/f B/f Mortgage loan Secured loans 2,027,940,287.04 2,589,468,383.99 Guaranteed loans Credit loans 607,930,932.00 1,640,517,129.60 Less: Long-term borrowings due within one year (Note 6.25) 836,269,451.50 1,342,283,640.89 Total 1,799,601,767.54 2,887,701,872.70 135 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Note: ① Class and amount of mortgage assets see Note 6.49 assets with imposed restriction on ownership. ② Interest rates as at 31/12/2016 of the above-mentioned long-term borrowings range from 1.9741%-5.0200%. 6.27 Long-term payables Category C/f B/f Financial lease rental payables 921,300,803.04 1,024,970,371.19 Maintenance payables for aircrafts and engines held under operating lease 2,217,672,688.43 1,644,962,585.43 Less: Financial lease rental payables due within one year (Note 6.25) 144,580,142.52 138,796,767.49 Less: Maintenance payables for aircrafts and engines held under operating lease due within one 460,191,258.69 164,895,012.20 year (Note 1) Total 2,534,202,090.26 2,366,241,176.93 Note : Maintenance payables for aircrafts and engines held under operating lease due within one year had been included in accounts payable. 6.28 Long-term employee benefits payable 6.28.1 General information Item C/f B/f Post-employment benefits-net defined benefit liability 100,925,069.51 90,145,000.00 Less: long-term staff remuneration payable due within one year (Note 6.25) 6,794,418.00 5,930,912.28 Total 94,130,651.51 84,214,087.72 6.28.2 Movements ① Defined benefit obligation Item C/f B/f (1) Net Defined Benefit Asset/(Liability) at End of Prior Period 90,145,000.00 75,838,000.00 (2) Defined benefit costs recognised 17,918,069.51 14,938,000.00 into current profit or loss 1. Current Service Cost 2. Past Service Cost 15,302,069.51 12,194,000.00 3. Settlement (Gain)/Loss 4. Net Interest/(Income) on Net Defined Benefit Liability/(Asset) 2,616,000.00 2,744,000.00 (3) Defined benefit costs recognised 263,000.00 -5,281,000.00 into other comprehensive income 1. Actuarial gains/(losses) 263,000.00 -5,281,000.00 136 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Item C/f B/f (4) Other movements 6,875,000.00 5,912,000.00 1. Settlement payment 2. Benefits Paid Directly by Employer 6,875,000.00 5,912,000.00 (5) Net defined benefit asset/(liability) at end of current year 100,925,069.51 90,145,000.00 ② Actuarial Assumptions Item 31st December, 2015 31st December, 2016 Discount Rate 3.00% 3.25% China Life Insurance Mortality Rate 2000-2003 Mortality Rate (Annuity) Cost of Living Adjustments for Retired Cadres and 0.00% Retirees Cost of Living Adjustments for Internal Retirees 0.00% Cost of Living Adjustments for Dependants 0.00% 6.29 Deferred income Current year Current year Item B/f C/f increase decrease Unrealized gains and losses of operating lease from aircraft 45,946,398.21 1,826,401.03 44,119,997.18 leaseback Designated subsidy for snow disaster 1,989,958.34 499,500.00 1,490,458.34 Designated subsidy for civil aviation 13,805,565.76 976,500.12 12,829,065.64 energy-saving program Total 15,795,524.10 45,946,398.21 3,302,401.15 58,439,521.16 Details of government grants: the amount included in Current year Other Item B/f non-operating income C/f increase changes for current year Designated subsidy for 1,989,958.34 499,500.00 1,490,458.34 snow disaster Designated subsidy for civil aviation 13,805,565.76 976,500.12 12,829,065.64 energy-saving program Total 15,795,524.10 1,476,000.12 14,319,523.98 137 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Note : The increasing amount of unrealized gains and losses of operating lease from aircraft leaseback in this year includes the amount of other non-current assets as at 31/12/2015, which is CNY 23,794,314.90. 6.30 Share capital B/f Currency year movement (+, -) C/f Coversion Category Share Bonus Amount % from Others Subtotal Amount % issue issue reserves 1. Shares with restriction on disposal 1.1 State-held shares 1.2 Shares held by 259,801,000.00 64.95 259,801,000.00 64.95 state-owned entities 1.3 Shares held by 199,000.00 0.05 199,000.00 0.05 other domestic investors Including: Held by 199,000.00 0.05 199,000.00 0.05 institutional investors Held by non-institutional investors 1.4 Shares held by foreign investors Including: Held by institutional investors Held by non-institutional investors Subtotal of shares with 260,000,000.00 65.00 260,000,000.00 65.00 restriction on disposal 2. Floating shares 2.1 Ordianry shares issued in CNY 2.2 Shares issued in domestic stock market in 140,000,000.00 35.00 140,000,000.00 35.00 foreign currency 2.3 Shares issued in foreign market in foreign currency 138 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 B/f Currency year movement (+, -) C/f Coversion Category Share Bonus Amount % from Others Subtotal Amount % issue issue reserves 2.4 Others Subtotal of floating shares 140,000,000.00 35.00 140,000,000.00 35.00 Total 400,000,000.00 100.00 400,000,000.00 100.00 6.31 Capital reserves Current year Current year Category B/f C/f increase decrease Share premium 67,618,282.54 67,618,282.54 Other capital reserves 7,792,081.16 7,792,081.16 Total 75,410,363.70 75,410,363.70 6.32 Other comprehensive income Total amount in current year Less: previously recognised in After tax After tax Amount for Item B/f other Less: Income attributable to attributable C/f the year comprehensive tax expense the parent to minority before tax income company shareholders transferred into profit or loss 1.Other comprehensive income will be reclassified into -6,023,000.00 263,000.00 263,000.00 -5,760,000.00 income or loss in the future Including: remeasurement of net assets or net liabilities of -6,023,000.00 263,000.00 263,000.00 -5,760,000.00 defined benefit plans 139 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Total amount in current year Less: previously recognised in After tax After tax Amount for Item B/f other Less: Income attributable to attributable C/f the year comprehensive tax expense the parent to minority before tax income company shareholders transferred into profit or loss 2.Other comprehensive income reclassifiable to 99,578,005.44 50,749,408.42 12,687,352.10 38,062,056.32 137,640,061.76 profit or loss in subsequent periods Gains and losses from changes in fair value of 99,578,005.44 50,749,408.42 12,687,352.10 38,062,056.32 137,640,061.76 financial assets available for sale Total of other comprehensive 93,555,005.44 51,012,408.42 12,687,352.10 38,325,056.32 131,880,061.76 income 6.33 Surplus reserves Current year Current year Category B/f C/f increase decrease Statutory surplus reserve 370,981,095.40 52,443,232.24 423,424,327.64 Total 370,981,095.40 52,443,232.24 423,424,327.64 Notes: according to the Company Law and the Articles of Association, 10% of net profit was transferred to statutory surplus reserve. The company may make allocations to the discretionary surplus reserve from the after-tax profits after making allocations to the statutory surplus reserve from the after-tax profits. Approved surplus reserves can be released 140 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 to recover losses or for conversion into share capital. 6.34 Retained earnings Items Current year Prior year Pre-adjustment balance brought forward 2,425,066,740.03 2,025,535,984.99 Total adjustment to retained earnings b/f (+, -) Retained earnings b/f after adjustment 2,425,066,740.03 2,025,535,984.99 Add: Net profit attributable to shareholders of the parent 532,834,567.17 532,260,993.04 Other transfer Less: Appropriation to statutory surplus reserve 52,443,232.24 52,730,238.00 Appropriation to discretionary surplus reserve General reserve Ordinary dividends declared 100,000,000.00 80,000,000.00 Bonus issue Balance carrying forward 2,805,458,074.96 2,425,066,740.03 6.35 Operating revenues and costs Current year Prior year Category Operating revenues Operating costs Operating revenues Operating costs Principal business 13,383,512,531.78 11,888,575,339.12 11,935,727,711.34 10,193,994,230.65 Other business 358,853,013.78 1,598,065.47 173,235,427.77 5,592,112.29 Total 13,742,365,545.56 11,890,173,404.59 12,108,963,139.11 10,199,586,342.94 6.36 Tax and surcharges Item Current year Prior year Business tax 4,633,662.56 9,216,831.59 Urban maintenance and construction tax 18,430,505.70 22,135,656.88 Education surcharge and others 22,953,032.48 18,869,986.75 Total 46,017,200.74 50,222,475.22 Notes: Applicable rates for business tax and surcharges see Note 5 Taxation. 6.37 Sales expenses Category Current year Prior year Agency fees 267,742,409.14 372,905,765.90 Employment benefits 178,332,207.47 158,090,438.04 Computer booking 100,918,601.79 86,702,081.37 Online payment 40,788,727.39 23,986,458.37 141 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Category Current year Prior year Sales expense of annual tickets 1,047,985.94 1,345,688.25 Lease rental 16,362,885.25 14,628,692.68 Advertisement fees 20,250,896.90 10,693,634.28 Administrative office expenses 3,862,339.59 4,060,310.97 Travel expenses 5,202,704.24 4,220,849.07 System and network 9,597,413.64 8,393,041.43 BSP data processing 3,499,362.04 1,881,198.97 Depreiciation 1,599,442.92 1,614,214.81 Others 25,756,200.22 25,176,521.98 Total 674,961,176.53 713,698,896.12 6.38 General and administrative expenses Category Current year Prior year Employment benefits 183,786,142.00 146,652,861.99 Lease rental 19,625,100.23 16,859,132.71 Business entertainment costs 4,937,359.74 5,894,332.28 Depreiciation 14,628,022.94 13,145,398.37 Taxes and fees 2,020,031.01 7,605,886.97 Administrative office expenses 4,709,058.67 3,950,502.67 Technology development costs 11,007,809.25 10,522,258.65 Amortisation of intangibles 5,863,228.47 5,143,696.48 Water, electricity charges 12,220,258.07 11,226,671.68 Outsourcing fee 21,970,938.61 11,418,859.77 Others 53,175,913.71 48,277,714.95 Total 331,923,831.69 280,697,316.52 Note: In accordance with "Vat accounting treatment provisions" (Accounting [2016]22), the tax from May to December this year is disclosed in Tax and surcharges. 6.39 Financial costs Category Current year Prior year Interest expenses 126,981,176.69 162,478,745.82 Less: Interest income 17,637,929.77 18,783,142.89 Exchange difference 147,625,889.91 174,944,031.89 Bank charges and others 4,907,449.32 1,182,985.23 Total 261,876,586.15 319,822,620.05 142 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 6.40 Loss on asset impairment Category Current year Prior year Allowance for bad debt 9,311,766.02 5,580,449.74 Total 9,311,766.02 5,580,449.74 6.41 Gain from changes in fair value Source Current year Prior year Interest rate swaps 2,214,631.82 -1,810,736.85 Total 2,214,631.82 -1,810,736.85 6.42 Investment income Category Current year Prior year Income from holding of financial assets available for sale 18,636,766.90 11,345,875.41 Income from long-term equity investment income of equity method -17,729,201.91 Income from disposal of long-term equity investment 45,119,181.79 Income from financial assets measured by fair value with changes in -1,277,063.78 -3,232,254.52 fair value recognised in profit or loss Total 17,359,703.12 35,503,600.77 6.43 Non-operating income Included in current Category Current year Prior year year non-recurring profit and loss Gain on non-current asset disposals 68,054.80 454,266.84 68,054.80 Including: Gain on fixed asset disposals 68,054.80 454,266.84 68,054.80 Government grants (See details of government 149,937,201.77 113,608,585.59 149,937,201.77 grants below) Others 18,711,370.32 25,696,951.85 18,711,370.32 Total 168,716,626.89 139,759,804.28 168,716,626.89 Details of government grants: related to the assets/ Government assitance Current year Prior year related to the income Airline subsidies 118,668,610.66 75,278,575.00 related to the income Energy-saving reward from ministry of 19,420,000.00 22,890,000.00 related to the income finance Designated subsidy for snow disaster 499,500.00 499,500.00 related to the assets 143 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 related to the assets/ Government assitance Current year Prior year related to the income Designated subsidy for civil aviation 976,500.12 976,500.12 related to the assets energy-saving program Others 10,372,590.99 13,964,010.47 related to the income Total 149,937,201.77 113,608,585.59 Note: Government grants are mainly referred to subsidy income received from government departments, which was used to support the development of aviation business. 6.44 Non-operating expenses Included in current Category Current year Prior year year non-recurring profit and loss Loss on non-current asset disposals 3,459,280.00 1,402,588.79 3,459,280.00 Including: Loss on fixed asset disposals 3,459,280.00 1,402,588.79 3,459,280.00 Others 1,539,179.07 396,443.11 1,539,179.07 Total 4,998,459.07 1,799,031.90 4,998,459.07 6.45 Income tax expenses 6.45.1 Income tax expenses Items Current year Prior year Current income tax expense 364,505,859.12 162,461,842.97 Deferred tax -187,966,374.70 16,285,838.81 Total 176,539,484.42 178,747,681.78 6.45.2 Reconciliation of account profit and income tax expenses Items Current year Profit before tax 709,374,051.59 Income tax computed in accordance with the applicable tax rate 177,343,512.90 Income tax computed in accordance with the applicable tax rate -1,714,919.19 Impact of non-taxable income -4,659,191.73 Impact of non-deductible costs, expenses and losses 5,570,082.44 Income tax expenses 176,539,484.42 6.46 Other comprehensive income Please see Note 6. 32 for detail. 144 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 6.47 Notes to the consolidated statement of cash flows 6.47.1 Other cash receipts relating to operating activities Category Current year Prior year Government grants 148,461,201.65 112,132,585.47 Interest income on bank deposit 17,637,929.77 18,783,142.89 Cash receiptes from non-operating income 18,711,370.32 24,220,951.73 Cash receiptes from operating balance 65,538,456.35 7,737,415.37 Total 250,348,958.09 162,874,095.46 6.47.2 Other cash payments relating to operating activities Category Current year Prior year Bank charges 45,696,176.71 25,169,443.60 Cash payments for non-operating expenses 1,539,179.07 396,443.11 Cash payments for operating balance 33,184,794.98 24,589,548.35 Cash payments for sales and general and administrative expenses 214,079,640.16 179,893,151.93 Total 294,499,790.92 230,048,586.99 6.47.3 Other cash payments relating to investing activities Category Current year Prior year Cash payments of settlement of interest rate swaps 1,277,063.78 2,693,748.52 Total 1,277,063.78 2,693,748.52 6.47.4 Other cash receipts relating to financing activities Category Current year Prior year Cash receipts for disposal of purchase rights on aircrafts (which became acquired under operating lease instead of purchase) 1,221,674,080.70 1,619,738,784.33 Total 1,221,674,080.70 1,619,738,784.33 6.47.5 Other cash payments relating to financing activities Category Current year Prior year Cash payments for aircraft financial lease rental 188,394,977.32 174,680,444.93 Total 188,394,977.32 174,680,444.93 6.48 Supplementary information to the consolidated statement of cash flows 6.48.1 Supplementary information to the statement of cash flows Items Current year Prior year ① Reconciliation of cash flows from operating activities to net profit: 145 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Items Current year Prior year Net profit 532,834,567.17 532,260,993.04 Add: Loss on asset impairment 9,311,766.02 5,580,449.74 Depreciation of fixed assets, oil and gas assets, biological assets held for production 784,959,904.79 681,095,870.34 Amortisation of intangible assets 5,863,228.47 5,143,696.48 Amortisation of Long-term deferred expenditure 82,194,972.24 72,256,495.12 Loss on non-current assets disposal (gain presented by "-" prefix) 3,391,225.20 948,321.95 Loss on scrap of fixed assets (gain presented by "-" prefix) Loss on fair value changes (gain presented by "-" prefix) -2,214,631.82 1,810,736.85 Financial costs (gain presented by "-" prefix) 273,896,782.70 338,327,086.22 Investment loss (gain presented by "-" prefix) -17,359,703.12 -35,503,600.77 Decrease of deferred tax assets (increase presented by "-" prefix) -187,966,374.70 16,285,838.81 Increase of deferred tax liabilities (increase presented by "-" prefix) Decrease of inventories (increase presented by "-" prefix) -8,657,802.57 -155,668.54 Decrease of operating receivables (increase presented by "-" prefix) -200,802,727.26 -56,231,115.12 Increase of operating payables (decrease presented by "-" prefix) 1,143,177,781.30 855,829,502.76 Others 8,427,000.00 6,809,236.13 Net cash flows generated from operating activities 2,427,055,988.42 2,424,457,843.01 ②Significant investing and financing activities involve no cash: Debt-to-capital conversion Convertible loan due within one year Fixed assets acquired under financial lease ③ Movement of cash and cash equivalents: Cash as at 31/12/2016 791,255,686.65 1,415,399,630.60 Less: Cash as at 31/12/2015 1,415,399,630.60 460,741,336.35 Add: Cash equivalents as at 31/12/2016 Less: Cash equivalents as at 31/12/2015 Net increase of cash and cash equivalents -624,143,943.95 954,658,294.25 6.48.2 Composition of cash and cash equivalents Items Current year Prior year ①Cash 791,255,686.65 1,415,399,630.60 Including: Cash at hand 182,606.18 178,959.16 146 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Items Current year Prior year Demand bank deposit 791,073,080.47 1,415,220,671.44 Demand other monetary funds Demand deposit in the Central Bank Deposit in peer firms Loan to peer firms ②Cash equivalents Including: Debt instrument matured within three months …… ④ Cash and cash equivalents as at 31/12/2016 791,255,686.65 1,415,399,630.60 Including: restricted cash and cash equivalents in parent company or subsidiary Note: Cash and cash equivalents excluding restricted cash and cash equivalents in parent company or subsidiary. 6.49 Assets with imposed restriction on ownership Category C/f Reason of restriction Assets pledged as security 4,111,592,599.72 Aircrafts and engines 4,111,592,599.72 Pledge as security for borrowings Other form of restriction: 1,145,258,411.93 Aircrafts and engines 1,145,258,411.93 Assets acquired under financial lease Total 5,256,851,011.65 6.50 Foreign currency monetary items Original amount as at Foreign exchange Translated amount as at Item 31/12/2016 rate 31/12/2016 Monetary funds Including: -USD 17,123,723.15 6.9370 118,787,267.49 -EUR -GBP -CAD 10.00 5.1406 51.41 -Hwan 31,288,733.00 0.0058 181,474.65 -TWD 6,545,734.00 0.2174 1,423,042.57 Prepayments Including: -USD 35,231,815.35 6.9370 244,403,103.08 Other receivables 147 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Original amount as at Foreign exchange Translated amount as at Item 31/12/2016 rate 31/12/2016 Including: -USD 21,813,197.98 6.9370 151,318,154.39 Accounts payable Including: -USD 1,936,402.58 6.9370 13,432,824.70 -EUR 16,014.36 7.3068 117,013.73 -JPY 4,620,819.00 0.0596 275,359.23 Other payables Including: -USD 11,365,157.04 6.9370 78,840,094.41 Non-current liabilities due within one year Including: -USD 123,872,414.52 6.9370 859,302,939.53 Long-term borrowings Including: -USD 220,268,382.23 6.9370 1,528,001,767.54 Long-term payables Including: -USD 65,250,782.93 6.9370 452,644,681.17 Note 7: Change of scope of consolidation No change of scope of consolidation from last year. Note 8: The equity in other main entities 8.1 The equity in subsidiaries 8.1.1 The construction of the group Place Holding proportion % Place of Nature Subsidiaries of Acquired method operation of business Directly Indirectly registration Shandong aviation Logistics Logistics Ltd Qingdao, Qingdao, and 100.00 acquired through investment (hereafter, Qingdao Shandong Shandong storage Logistics) 148 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Place Holding proportion % Place of Nature Subsidiaries of Acquired method operation of business Directly Indirectly registration Qingdao Feisheng International Aviation Acquired through business Training Technology Qingdao, Qingdao, Pilot combination not under 100.00 Development Co., Ltd Shandong Shandong training common (hereafter, Qingdao control Feisheng) 8.2 The equity in associates 8.2.1 Significant associates Holding proportion % The accounting Place Place of Nature treatment of Associates of operation of business Directly Indirectly investments in registration associates Shandong Rainbow Jinan, Jinan, Aero 45.00 Equity method Commercial Jet Co., Ltd. Shandong Shandong transportation 8.2.2 Key financial information of significant associate- Shandong Rainbow Commercial Jet Co., Ltd. Item Dec 31th, 2016/Year 2016 Dec 31th, 2015/Year 2015 Current assets 1,820,781.43 1,832,244.32 Non-current assets 25,856.24 27,224.00 Total assets 1,846,637.67 1,859,468.32 Current liabilities 167,765,813.33 167,765,813.33 Non-current liabilities Total liabilities 167,765,813.33 167,765,813.33 Minority interests Equity attributable to shareholders of the parent -165,919,175.66 -165,906,345.01 Pro rata share of the net assets calculated Adjusting events - Goodwill -Unrealized profits from internal transaction 149 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Item Dec 31th, 2016/Year 2016 Dec 31th, 2015/Year 2015 -Others Book value of equity investments in associates Fair value of publicly quoted equity investments in associates Operating income Net profit -12,830.65 -44,335.70 Net profit from discontinued operations Other comprehensive income Total comprehensive income Dividends received from associates during the year 8.2.3 Excess loss occurred by associates Cumulative Unrecognized losses of Cumulative Associates unrecognized losses current year (Share of unrecognized losses of prior year net profit of current year) of current year Shandong Rainbow Commercial Jet Co., -74,657,835.01 -5,773.79 -74,663,608.80 Ltd. Note 9 The risk associated with financial instruments The main financial instruments of the Company including equity investments, loans, accounts receivable, accounts payable etc., please see Note 6 for detail of related items. The risk associated with financial instruments, and risk management policies which the company use to reduce these risks are described below. The management of the Company manages and supervises the risks to ensure that the risks can be controlled within a limited range. Sensitivity analysis techniques are adopted by the Company to analyse the impact of reaonsable and possible changes of risk variables on the profit and loss or shareholders' equity for the current period. While risk variables seldomly change in isolation, and the correlation among variables will have a significant effect on the ultimate impact of the change of one risk variable. Therefore, the following content is based on the assumption that changes in each variable is independent. 9.1 The targets and policies of risks management The target of risks management is to obtain the proper balance between the risks and benefits, to reduce the 150 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 negative impact that caused by the risk of the Company to the lowest level, and to maximize the benefits of shareholders and other equity investors. Based on the targets of risk management, the basic strategy of the Company’s risk management is to identify and analyse the risks which are faced by the Company, establish suitable risk tolerance baseline and proceed the risk management, and supervise a variety of risks timely and reliably, and control the risk within a limited range. 9.1.1 Market Risk (1) Foreign exchange risk Foreign exchange risk refers to the risk of loss due to exchange rate fluctuations generally. The company bears the foreign exchange risk primarily concerned with USD, and uses USD for pricing or settlement in the field of main financing business, operating leases, financing leasing. On 31 December 2016, except the following assets or liabilities in Note 6.50 are recorded in foreign currency, the others are recorded in CNY. Foreign exchange risk of the assets and liabilities in foreign currencies may have an impact on the Company's performance of operation. (2) Interest rate risk - the risk of changes in cash flow The risk of changes in cash flows of a financial instrument due to interest rate is mainly concerned with the floating rate of bank borrowings (see Note 6.26,6.27). The company's policy is to maintain a floating interest rate on the borrowings. (3) Other price risk Financial assets available for sale and financial assets held-for-trade held by the company should be measured at fair value on the balance sheet date. For the reason that, the company bears the risk of changes in the stock market. 9.1.2. Credit Risk As at the statement date, the maximum risk that could cause the Company’s financial losses mainly comes from default of the other party of the contract, which includes: The carrying amount of financial assets recognised in the Consolidated statement of financial position; for financial instruments measured by fair value, the book value reflects its risk exposure but not the maximum risk exposure, which will vary with changes in the fair value in the future. In order to reduce credit risk, the Company set up a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that the necessary measures be taken to recover overdue debts. In addition, the Company reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure fully provision for bad debts recognised for the money that cannot be recovered. Therefore the Company's management believes the Company’s credit risk has been greatly reduced. The Company's circulating funds were deposited in banks with high credit ratings, so that the credit risk of circulating funds was low. 151 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 9.1.3 Liquidity risk When managing liquidity risk,the Company’s management believes maintaining adequate cash and cash equivalents, and monitoring that at same time, in order to meet the needs of operation of the Company, and to reduce the impact of fluctuations in cash flows.The management of the Company monitors the use of bank borrowings and ensure to abide by loan agreements. Note 10 Disclosure of the fair value 10.1 The fair value at the end of current year of assets and liabilities which are measured by fair value The fair value at the end of current year The third The first level The second level Item level measured by measured by fair Total measured fair value value by fair value 1. Continuous measurement by fair value 1.1 financial assets available for sale 190,210,082.34 190,210,082.34 (1) Equity instruments investment 190,210,082.34 190,210,082.34 Total amount of assets continuous 190,210,082.34 190,210,082.34 measurement by fair value 2. Financial liabilities measured at fair value with changes in fair value 1,155,815.80 1,155,815.80 recognised in profit or loss Interest rate swaps 1,155,815.80 1,155,815.80 Total amount of liabilities continuous measurement by fair 1,155,815.80 1,155,815.80 value 10.2 Determined on the basis of continuous and noncontinuous first level for fair value measurement of the market of project Financial assets available for sale of continuous measurement by fair value is the investment in TravelSky Technology Limited, whose fair value was determined based on the closing price for the stock market in Hong Kong Stock Exchange on balance sheet date. 10.3 Determined on the basis of continuous and noncontinuous second level for fair value measurement of the market of project Fair value measurement basis of interest rate swaps which was continuously measured by fair value is quotes 152 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 from counterparty banks on the fair value of interest rate swaps. Note 11 Related parties and related party transaction 11.1 Major investors Shareholding Voting right in Place of Nature of in the Investor Registered capital the Company registration operation Company (%) (%) Investment and management of SDA Group Jinan 580,000,000.00 42.00 42.00 aero transportation Aero Air China Beijing 13,084,751,004.00 22.80 22.80 transportation Note: SDA Group and Air China is the first and second largest shareholder of the Company respectively. Air China is the largest shareholder of SDA Group; Air China’s shareholding and voting right in SDA Group is 49.406% and 49.406% respectively. 11.2 Subsidiaries See Note 8.1 for subsidiaries. 11.3 Associates See Note 8.2 for associates. 11.4 Other related parties Other related party Relationship to the Company Taikoo (Shandong) Aircraft Engineering Company Limited Controlled by major investors Shandong XiangYu Air Technology Co., Ltd. Controlled by major investors Shandong Rainbow Commercial Jet Co., Ltd. Controlled by major investors Shandong Air New Media Co., Ltd. Controlled by major investors Air China Import & Export Co., Ltd. Controlled by major investors Zhejiang Aviation Service Co., Ltd. Controlled by major investors Air China Shanghai Aviation Service Co., Ltd. Controlled by major investors Beijing Golden Phoenix Human Resources Service Co., Ltd. Controlled by major investors CATIC Industrial Co., Ltd. Controlled by major investors Air Macau Controlled by major investors Air China Offshore Holding Company Controlled by major investors 153 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Other related party Relationship to the Company Air China Hongkong Development Limited Controlled by major investors Beijing Airlines Co., Ltd. Controlled by major investors China International Aviation Shantou Industrial Development Controlled by major investors Corporation Chengdu Fukai Aircraft Engineering Services Limited Controlled by major investors Beijing Aircraft Maintenance and Engineering Corporation Controlled by major investors Air China Cargo Co., Ltd. Controlled by major investors China Aviation Group Finance Co., Ltd. Controlled by major investors Shenzhen Airlines Co., Ltd. Controlled by major investors Dalian Airlines Co., Ltd. Controlled by major investors China International Airlines Inner Mongolia Co., Ltd. Controlled by major investors Kunming Airlines Ltd Controlled by major investors Sichuan international aero engine maintenance Co., Ltd. jointly operated by major investors SkyWorks Capital Asia Ltd. jointly operated by major investors ACT Cargo (USA), Inc. jointly operated by major investors Shanghai Pudong International Airport West Public Cargo Terminal jointly operated by major investors Co., Ltd. Ji'an Beijing Aviation Asset Management Co., Ltd. jointly operated by major investors Shanghai International Airport Ground Service Co., Ltd. jointly operated by major investors 11.5 Related party transactions 11.5.1 Purchase of goods and services Related party Transaction Current year Prior year Office lease rental and SDA Group 29,933,839.56 30,527,418.15 catering Taikoo (Shandong) Aircraft Aircraft maintenance 53,489,045.18 69,735,539.72 Engineering Company Limited Shandong XiangYu Air Repairment 62,803,828.70 59,312,132.56 Technology Co., Ltd. Air China Ground service 27,902,903.35 23,438,134.17 Air China Repairment 516,583.34 21,280,619.93 Purchase / lease of aircraft Air China 65,317.62 materials 154 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Related party Transaction Current year Prior year Air China Agency service 12,634,460.02 12,560,221.97 Air China Irregular flight expenditure 14,336,654.51 11,324,626.20 Air China Training service 1,143,000.00 Shenzhen Airlines Co., Ltd. Training service 411,698.12 Shenzhen Airlines Co., Ltd. Agency service 1,778,151.48 173,125.51 Purchase / lease of aircraft Shenzhen Airlines Co., Ltd. 23,980.28 materials Air China Cargo Co., Ltd. Ground service 3,051,710.01 2,902,157.36 Beijing Aircraft Maintenance and Repairment 46,912,099.74 19,609,357.04 Engineering Corporation Beijing Aircraft Maintenance and Purchase / lease of aircraft 82,930.04 Engineering Corporation materials Beijing Aircraft Maintenance and Ground service 28,354,445.95 17,385,910.85 Engineering Corporation Sichuan International Aero Engine Repairment 266,883,899.60 139,922,734.58 Maintenance Co., Ltd. Chengfu FuKai Aircraft Repairment 6,765,978.17 7,439,482.42 Engineering Co., Ltd. Shandong Air New Media Co., Aircraft offerings and 14,165,444.80 Ltd. advertising fees Beijing Golden Phoenix Human Ground service 1,802,736.00 Resources Service Co., Ltd. Shenzhen Airlines Co., Ltd. Catering 930,225.00 Air China Import & Export Co., Taxes of aircraft materials 9,700.60 Ltd. Total 572,443,933.95 417,166,158.58 11.5.2 Sales of goods and vendering of services Related party Transaction Current year Prior year Air China Ground service 2,967,241.10 367,140.31 Simulator maintenance / Air China House rental income 10,283,400.00 Sale /rent of aircraft Air China materials 19,373.16 155 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Related party Transaction Current year Prior year Air China Irregular flight expenditure 5,410.00 Air China Agency service 6,406,068.26 1,747,484.66 Air China Cargo Co., Ltd. Warehouse rent income 2,800.00 Beijing Aircraft Maintenance and Sale /rent of aircraft Engineering Corporation materials 222,101.94 Shenzhen Airlines Co., Ltd. Agency service 636,161.44 396,672.50 Shenzhen Airlines Co., Ltd. Ground service 302,000.00 159,160.00 Sale /rent of aircraft Shenzhen Airlines Co., Ltd. materials 392,823.37 Shenzhen Airlines Co., Ltd. Irregular flight expenditure 5,750.00 Dalian Airlines Co., Ltd. Ground service 56,969.93 Dalian Airlines Co., Ltd. Irregular flight expenditure 165,015.00 Flight support services Qingdao Airlines Co., Ltd. revenue 1,191,758.45 Taikoo (Shandong) Aircraft Sale of aircraft materials Engineering Company Limited 279,891.59 286,966.38 Shandong XiangYu Air Sale of aircraft materials Technology Co., Ltd. 105,257.45 6,830,489.31 Shandong Air New Media Co., Media resource fee Ltd. 17,193,467.69 Total 39,043,730.93 10,979,671.61 11.5.3 Lease between related parties The Company as leasee Leasor Leased asset Current year Prior year Qingdao Airlines Co. Aircrafts 9,200,000.00 Total 9,200,000.00 11.5.4 Related Party borrowing funds demolition Related Party Borrowing money Beginning date Due date Description borrowing: Balance as at China National Aviation Finance 296,000,000.00 2016-6-20 2026-6-20 31/12/2016 CNY Co., Ltd. 281,200,000.00 156 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 11.5.5 Remuneration to key management personel Item Current year Prior year Remuneration to key management personel CNY 11.1861 million CNY 7.8380 million 11.5.6 Other related party transactions Related party Transaction Current year Prior year Air China Wet lease 282,331,884.00 453,634,566.00 Air China Code sharing -111,859.52 3,275,195.22 Frequent flyer Air China 130,718,573.22 61,675,975.36 cooperation Air China Cargo Co., Ltd. Code sharing for cargo 712,369.96 863,741.04 Total 413,650,967.66 519,449,477.62 11.6 Related party balances 11.6.1 Receivables C/f B/f Related party Allowance for Allowance for Carrying amount Carrying amount bad debt bad debt Accounts receivable Air China 111,220,493.07 64,912,116.42 Air China Cargo Co., Ltd. 2,994,845.77 Taikoo (Shandong) Aircraft Engineering 186,120.00 Company Limited Total 111,220,493.07 68,093,082.19 Other receivables Air China 6,250,133.00 5,067,826.76 Shenzhen Airlines Co., Ltd. 468,173.37 740.00 Shandong Rainbow Commercial Jet 101,551,717.65 101,551,717.65 101,551,717.65 101,551,717.65 Co., Ltd. Shandong XiangYu Air Technology Co., 15,444.48 19,858.85 Ltd. Taikoo (Shandong) Aircraft Engineering 198,526.00 854,742.74 Company Limited Shandong Air New Media Co., Ltd. 1,027,044.28 Total 109,511,038.78 101,551,717.65 107,494,886.00 101,551,717.65 157 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 11.6.2 Payables Related party C/f B/f Accounts payable Shandong XiangYu Air Technology Co., Ltd. 2,451,618.94 Taikoo (Shandong) Aircraft Engineering Company Limited 1,279,779.59 6,848,765.73 Air China 190,287,022.82 99,480,295.38 Air China Cargo Co., Ltd. 260,935.50 259,754.60 Beijing Golden Phoenix Human Resources Service Co., Ltd. 161,838.00 Shenzhen Airlines Co., Ltd. 208,826.20 Aircraft Maintenance and Engineering Corporation (Ameco 10,860,743.99 7,760,074.07 Beijing) Sichuan International Aero Engine Maintenance Co., Ltd. 64,482,126.00 31,226,775.59 Chengfu FuKai Aircraft Engineering Co., Ltd. 1,414,020.82 Total 269,992,891.04 146,989,686.19 Other payables SDA Group 6,041,798.09 3,565,944.65 Air China 20,000,000.00 20,000,000.00 Shenzhen Airlines Co., Ltd. 1,850,144.00 Taikoo (Shandong) Aircraft Engineering Company Limited 245,400.00 245,400.00 Total 26,287,198.09 25,661,488.65 Note 12 Commitments 12.1 Signifcant commitments 12.1.1 Capital commitment Item C/f B/f Firm contracts not recognized in the financial statements - Commitment to acquire non-current assets 18,276,050,022.59 18,228,453,171.55 - large outsourcing contract - External investment commitments Total 18,276,050,022.59 18,228,453,171.55 158 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 12.1.2 Operating lease Information of irrevocable operating lease contracts as at the reporting date: Item C/f B/f Minimum lease rental for irrevocable operating lease contracts Within one year from the reporting date 2,290,232,032.00 1,868,704,859.20 Within two years from the reporting date 2,155,144,647.15 1,790,568,747.56 Within three years from the reporting date 2,125,539,777.15 1,667,161,566.37 Subsequent years 11,553,366,310.20 9,900,119,169.07 Total 18,124,282,766.50 15,226,554,342.19 Note: As of 31/12/2016, the balance of unexpired bond issued by this company is CNY 43,354,600.00, USD 89,738,600.00. 12.1.3 Other commitment No other significant commitments of the Company need to be disclosed as at 31/12/2016. Note 13 Post balance sheet date events 13.1 Post balance sheet date profit appropriation The Proposal for Profit Appropriation for the Year ended 31 December 2016 of distributing cash dividend of CNY 3.00 (gross) per 10 shares for the 400 million shares outstanding as at the reporting date, which in total amounts to CNY 120,000,000.00, was approved by the 2th Meeting of the 6th Term of Board of Directors of the Company held on 28 March 2017; the Proposal was pending the approval of the General Meeting of stockholders of the Company. Note 14 Other significant events 14.1 Pension Plan No significant change of the annuity program occurred for current year, see note 6.21, 6.28. Note 15 Notes to elements of the separate financial statements 15.1 Accounts receivable 15.1.1 Disclosure by category C/f Category Carrying amount Allowance for bad debt Book value Amount % Amount % Accounts receivable of individual significance and subject to individual 228,079,021.34 68.01 228,079,021.34 impairment assessment 159 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 C/f Category Carrying amount Allowance for bad debt Book value Amount % Amount % Accounts receivable subject to impairment assessment by credit risk 88,170,349.23 26.29 4,408,517.46 5.00 83,761,831.77 characteristics of a portfolio Accounts receivable of individual insignificance but subject to individual 19,100,611.14 5.70 8,057,209.85 42.18 11,043,401.29 impairment assessment Total 335,349,981.71 100.00 12,465,727.31 3.83 322,884,254.40 (Continued) B/f Category Carrying amount Allowance for bad debt Book value Amount % Amount % Accounts receivable of individual significance and subject to individual 155,464,398.00 60.75 155,464,398.00 impairment assessment Accounts receivable subject to impairment assessment by credit risk 86,102,003.17 33.65 4,305,100.16 5.00 81,796,903.01 characteristics of a portfolio Accounts receivable of individual insignificance but subject to individual 14,327,817.42 5.60 14,327,817.42 impairment assessment Total 255,894,218.59 100.00 4,305,100.16 1.68 251,589,118.43 ① Accounts receivable of individual significance and subject to individual impairment assessment C/f Rate of Debtor Allowance for Carrying amount allowance Reason for allowance bad debt (%) No indication of BSP-CHINA 111,183,263.07 impairment upon individual assessment No indication of Air China 59,213,818.83 impairment upon individual assessment 160 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 C/f Rate of Debtor Allowance for Carrying amount allowance Reason for allowance bad debt (%) No indication of Accounting Center of China Aviation 57,681,939.44 impairment upon individual assessment Total 228,079,021.34 ② Accounts receivable subject to impairment assessment by portfolio C/f Portfolio Carrying amount Allowance for bad debt Rate of allowance (%) Portfolio by nature 88,170,349.23 4,408,517.46 5.00 Total 88,170,349.23 4,408,517.46 5.00 ③ Accounts receivable of individual insignificance but subject to individual impairment assessment C/f Rate of Debtor Carrying Allowance for allowance Reason for allowance amount bad debt (%) Impairment upon individual Debtor #1 8,057,209.85 8,057,209.85 100.00 assessment No indication of impairment Shandong aviation Logistics Ltd 3,860,117.55 upon individual assessment No indication of impairment BSP-TAIWAN 2,937,548.86 upon individual assessment No indication of impairment UATP 2,275,133.99 upon individual assessment No indication of impairment BSP-JAPAN 1,517,337.02 upon individual assessment No indication of impairment BSP-CAMBODIA 172,325.12 upon individual assessment No indication of impairment ARC 158,157.05 upon individual assessment No indication of impairment BSP-THAILAND 92,031.53 upon individual assessment No indication of impairment BSP-THAILAND 30,750.17 upon individual assessment Total 19,100,611.14 8,057,209.85 42.18 161 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 15.1.2 Recognisation, recovery or reversal of allowance for bad debt The amount of allowance for bad debts recognised during the year is CNY8,160,627.15. 15.1.3 Top five accounts receivables by debtors The total amount of top five accounts receivables summarized by debtors as at the end of current year is CNY 270,459,797.26, accounting for 80.65% of the total accounts receivable as at the end of current year, the total corresponding allowance for bad debts is CNY2,119,038.79. 15.2 Other receivables 15.2.1 Disclosure by category C/f Category Carrying amount Allowance for bad debt Book value Amount % Amount % Other receivables of individual significance and subject to individual impairment assessment 398,743,770.11 78.79 108,431,670.15 27.19 290,312,099.96 Other receivables subject to subject to impairment assessment by credit risk characteristics of a portfolio 63,673,072.13 12.58 3,183,653.61 5.00 60,489,418.52 Other receivables of individual insignificance but subject to individual impairment assessment 43,680,428.66 8.63 43,680,428.66 Total 506,097,270.90 100.00 111,615,323.76 22.05 394,481,947.14 (Continued) B/f Category Carrying amount Allowance for bad debt Book value Amount % Amount % Other receivables of individual significance and subject to individual impairment assessment 311,471,122.15 71.76 106,461,110.62 34.18 205,010,011.53 Other receivables subject to subject to impairment assessment by credit risk characteristics of a portfolio 76,765,699.27 17.69 3,838,284.97 5.00 72,927,414.30 Other receivables of individual insignificance but subject to individual impairment assessment 45,815,835.47 10.55 45,815,835.47 Total 434,052,656.89 100.00 110,299,395.59 25.41 323,753,261.30 162 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 ① Other receivables of individual significance and subject to individual impairment assessment C/f Rate of Debtor Carrying Allowance for allowance Reason for allowance amount bad debt (%) No indication of Debtor #1 114,069,866.40 impairment upon individual assessment Shandong Rainbow Commercial Jet impairment upon 101,551,717.65 101,551,717.65 100.00 Co., Ltd. individual assessment impairment assessment Debtor #2 79,570,006.50 3,978,500.33 5.00 by portfolio impairment assessment Debtor #3 58,029,043.40 2,901,452.17 5.00 by portfolio No indication of Shandong Air Logistics Co., Ltd. 45,523,136.16 impairment upon individual assessment Total 398,743,770.11 108,431,670.15 27.19 ② Other receivables subject to impairment assessment by portfolio C/f Portfolio Carrying amount Allowance for bad debt Rate of allowance (%) Portfolio by nature 63,673,072.13 3,183,653.61 5.00 Total 63,673,072.13 3,183,653.61 5.00 ③ Other receivables of individual insignificance but subject to individual impairment assessment C/f Rate of Debtor Carrying Allowance for allowance Reason for allowance amount bad debt (%) No indication of Debtor #1 19,423,600.00 impairment upon individual assessment No indication of Air China 6,250,133.00 impairment upon individual assessment 163 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 C/f Rate of Debtor Carrying Allowance for allowance Reason for allowance amount bad debt (%) No indication of Debtor #2 4,758,782.00 impairment upon individual assessment No indication of Debtor #3 3,900,000.00 impairment upon individual assessment No indication of Debtor #4 1,553,182.17 impairment upon individual assessment No indication of Debtor #5 1,414,505.19 impairment upon individual assessment No indication of Debtor #6 1,387,400.00 impairment upon individual assessment No indication of Debtor #7 1,354,680.00 impairment upon individual assessment No indication of Shandong Air New Media Co., Ltd. 1,027,044.28 impairment upon individual assessment No indication of Debtor #8 554,707.92 impairment upon individual assessment No indication of Debtor #9 553,166.41 impairment upon individual assessment No indication of Shenzhen Airlines Co., Ltd. 468,173.37 impairment upon individual assessment 164 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 C/f Rate of Debtor Carrying Allowance for allowance Reason for allowance amount bad debt (%) No indication of Debtor #10 416,030.94 impairment upon individual assessment No indication of Debtor #11 405,052.90 impairment upon individual assessment No indication of Taikoo (Shandong) Aircraft Engineering 198,526.00 impairment upon Company Limited individual assessment No indication of Shandong XiangYu Air Technology Co., 15,444.48 impairment upon Ltd. individual assessment Total 43,680,428.66 15.2.2 Recognisation, recovery or reversal of allowance for bad debt The amount of allowance for bad debts recovered or reversed during the current year is CNY 1,315,928.17. 15.2.3 Disclosure by nature Category C/f B/f Deposits 149,790,973.93 107,675,329.76 Others 356,306,296.97 326,377,327.13 Total 506,097,270.90 434,052,656.89 15.2.4 Top five other receivables Allowance for Debtor Nature C/f Aging % bad debt Debtor #1 Deposits 114,069,866.40 Within 1 year 22.54 Shandong Rainbow Commercial Others 101,551,717.65 Over 4 years 20.07 101,551,717.65 Jet Co., Ltd. Debtor #2 Others 79,570,006.50 Within 2 years 15.72 3,978,500.33 Debtor #3 Others 58,029,043.40 Within 3 years 11.47 2,901,452.17 Shandong aviation Logistics Ltd Others 45,523,136.16 Over 5 years 8.99 Total 398,743,770.11 78.79 108,431,670.15 165 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 15.3 Long-term equity investments 15.3.1 Disclosure by category C/f B/f Item Impairment Net carrying Impairment Carrying amount Carrying amount Net carrying amount allowance amount allowance Investments in subsidiaries 106,000,685.43 106,000,685.43 106,000,685.43 106,000,685.43 Investments in associates 22,500,000.00 22,500,000.00 22,500,000.00 22,500,000.00 Total 128,500,685.43 22,500,000.00 106,000,685.43 128,500,685.43 22,500,000.00 106,000,685.43 15.3.2 Investments in subsidiaries Current Current year Allowance Year-end Investee B/f year C/f decrease recognized allowance increase Shandong aviation Logistics Ltd 48,323,205.97 48,323,205.97 Qingdao Feisheng International Aviation Training Technology Development Co., Ltd 57,677,479.46 57,677,479.46 Total 106,000,685.43 106,000,685.43 15.3.3 Investments in associates Currency year movement (+, -) Investment gains Impairment Investee B/f Additional Investment and losses Other comprehensive Other changes allowance investment reduction recognized under income adjustment in equity the equity method Associates Shandong Rainbow Commercial Jet Co., Ltd. 22,500,000.00 22,500,000.00 Total 22,500,000.00 22,500,000.00 166 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 (Continued) Currency year movement (+, -) Declared cash Year-end Investee C/f dividends or Allowance recognized Others allowance profits Associates Shandong Rainbow Commercial Jet Co., 22,500,000.00 22,500,000.00 Ltd. Total 22,500,000.00 22,500,000.00 15.4 Operating revenues and costs Current year Prior year Category Operating revenues Operating costs Operating revenues Operating costs Principal business 13,356,300,303.64 11,881,690,830.48 11,915,288,160.41 10,190,195,747.06 Other business 358,853,013.78 1,598,065.47 173,235,427.77 5,592,112.29 Total 13,715,153,317.42 11,883,288,895.95 12,088,523,588.18 10,195,787,859.35 15.5 Investment income Category Current year Prior year Income from long-term equity investments measured at cost 18,636,766.90 11,345,875.41 Income from long-term equity investment income of equity method -17,729,201.91 Income from disposal of long-term equity investment 45,119,181.79 Income from long-term equity investment income of equity method -1,277,063.78 -3,232,254.52 Total 17,359,703.12 35,503,600.77 Note 16 Supplementary information 16.1 Non-recurring profit and loss Category Current year Description Gains from disposals of non-current assets after expending impairment -3,391,225.20 provisions Exceeded-authority approved, non-official approved or accidental tax repayment and relief Government grants recognised through profit or loss for the current reporting period, excluding grants which are closely related to the Company’s operating 149,937,201.77 activities and of which the quota or approval is eligible for automatic renewal in 167 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Category Current year Description accordance with relevant regulations Financial resource usage fees charged on non-financial institution recognised through profit or loss for the current reporting period Gains arising from bargain purchase in business combination and investments in associates and joint ventures Non-monetary asset exchange Consigned investment and asset management Impairment provision resulting from force majeure, eg. natural desasters Reorganisation Reorganisation expenditure Unfair transactions Net profits or losses achieved by an acquired under-common-control entity during the period from the start of the period to the acquisition date Gains or losses arising from contingent events unconnected with the Company’s daily operating activities Fair value changes of tradable financial assets and tradable financial liabilities held and gains or losses arising from disposals of tradable financial assets, tradable 937,568.04 financial liabilities and available-for-sale financial assets, excluding hedging contracts relevant to the Company’s daily operating activities Reversal of impairment provision for accounts receivables eligible for individual impairment assessment Gains or losses arising from consigned borrowings Fair value changes of property investments subsequently measured at fair value One-off adjustment of profit or loss for the current reporting period in accordance with tax and accounting laws and regulations Consignment income arising from consigned operations Income and expenses other than items listed above 17,172,191.25 Other gains or losses satisfying the definition of extraordinary gains or losses Subtotal 164,655,735.86 Less: Impact of income tax 41,398,528.97 Less: Impact on non-controlling interest Total 123,257,206.89 168 Shandong Airlines Co., Ltd. Notes to the Financial Statements for the Year Ended 31 December 2016 Note: Positive amounts and negative amounts in non-recurring categories mean income and expense or loss respectively. The Company recognised non-recurring categories of activities in accodance with the Explanatory Announcement regarding Information Disclosure by Publicly Listed Company No. 1 - Non-recurring Profit and Loss (Zhengjianhui Gonggao [2008] No.43). 16.2 Rate of return on net assets and earnings per share Earnings per share (CNY/share) Profit catetory Weighted average rate of RONA Basic EPS Diluted EPS Net profit attributable to ordinary shareholders 14.88% 1.33 1.33 Recurring profit or loss attributable to ordinary shareholders 11.44% 1.02 1.02 169 山东航空股份有限公司 2016 年年度报告全文 Section XII. Documents available for Reference 1. Financial statements carrying the personal signatures and seals of Chairman of the Board, Chief Accountant and Person in Charge of Accounting Department; 2. Original of Auditors’ Report carrying the seals of Certified Public Accountants as well as personal signatures and seals of certified public accountants; 3. Originals of all documents and notices publicly disclosed on newspapers designated by CSRC in the report period in 2016; 4. The Company will offer above documents for reference timely provided that CSRC or Stock Exchange demands or shareholders requires according to the regulations and Articles of Association. 170