avatar Morgan Stanley Emerging Markets Domestic Debt Fund, Inc. Finance, Insurance, And Real Estate
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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED Reports and financial statements 31 December 2018


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED REPORTS AND FINANCIAL STATEMENTS Year ended 31 December 2018 CONTENTS PAGE Directors’ report 1 Independent auditor’s report 3 Income statement 6 Statement of comprehensive income 7 Statement of changes in equity 8 Statement of financial position 9 Statement of cash flows 10 Notes to the financial statements 11 Unaudited supplementary financial information 69


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED DIRECTORS’ REPORT The Directors present the annual report and audited financial statements (which comprise the income statement, statement of comprehensive income, statement of changes in equity, statement of financial position, statement of cash flows and related notes 1 to 33) for Morgan Stanley Asia International Limited (the “Company” or “MSAIL”) for the year ended 31 December 2018. PRINCIPAL ACTIVITIES The Company is a private limited company incorporated in Hong Kong, with a head office in Hong Kong and a branch in Singapore (“Branch”). The Company is a restricted licence bank under the Banking Ordinance in Hong Kong and the Branch is licensed as a wholesale bank in Singapore. The Company is regulated by the Hong Kong Monetary Authority (“HKMA”) and the Branch is regulated by the Monetary Authority of Singapore (“MAS”). It is also a registered institution under the Hong Kong Securities and Futures Ordinance. The principal activities of the Company are to engage in the business of banking including deposit taking and lending. It also acts (a) as agent on behalf of its customers in connection with the provision of general investment, securities and futures dealing, as well as discretionary management and (b) as introducing broker to Morgan Stanley & Co. International plc for the provision of clearance, settlement and custody services in relation to the aforementioned transactions. The Company’s ultimate parent undertaking and controlling entity is Morgan Stanley which, together with the Company and Morgan Stanley’s other subsidiary undertakings, form the Morgan Stanley Group (the “Morgan Stanley Group”). RESULTS AND APPROPRIATIONS The results of the Company for the year ended 31 December 2018 are set out in the income statement on page 6. No interim dividends were paid to the sole shareholder during the year. The Directors do not recommend the payment of a final dividend and propose that the profits be retained. SHARE CAPITAL Details of the Company’s shares issued are set out in note 21 to the financial statements. There was no movement in the Company’s share capital during the year. DIRECTORS The following Directors held office throughout the year and up to the date of approval of this report (except where otherwise shown): Chui, Yik Chiu Vincent Clatworthy, David Peter Fung, Choi Cheung Gazzi, Robert (appointed on 3 September 2018) Kwan, Yin Ping Laroia, Gokul Ong, Whatt Soon Ronald Rajaram, Harish Wraight, David John 1


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED DIRECTORS’ REPORT (CONTINUED) DIRECTORS’ MATERIAL INTERESTS IN TRANSACTIONS, ARRANGEMENTS AND CONTRACTS THAT ARE SIGNIFICANT IN RELATION TO THE COMPANY’S BUSINESS No transactions, arrangements and contracts of significance to which the Company, its holding companies or any subsidiaries of its holding companies were a party and in which a Director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. DIRECTORS’ RIGHTS TO ACQUIRE SHARES AND DEBENTURES Morgan Stanley, the Company’s ultimate holding company, has several senior executive incentive compensation programs under which senior executives receive, as part of their total compensation, incentive awards of restricted stock units. All Directors of the Company except independent non- executive directors, are eligible to participate in such incentive compensation programs and receive awards of restricted stock units thereunder. Details of the deferred stock awards of the ultimate holding company, in which the Directors of the Company are entitled to participate, are set out in note 30 to the financial statements. Other than as disclosed above, at no time during the year was the Company, its holding companies or any subsidiaries of its holding companies a party to any arrangements to enable the Directors of the Company to acquire benefits by means of acquisition of shares in, or debentures of, the Company or any other body corporate. SUBSEQUENT EVENTS On 5 March 2019, the sale of all of the Company’s ordinary shares from Morgan Stanley Hong Kong Limited (“MSHKL”) to Morgan Stanley Hong Kong 1238 Limited (“MSHK1238”) was completed at a consideration of US$314,896,673. On 22 March 2019, 500,000,000 ordinary shares were issued by the Company to MSHK1238 for a cash consideration of US$500,000,000. PERMITTED INDEMNITY PROVISION The Articles of Association of the Company provide that a Director or former Director of the Company may be indemnified out of the Company’s assets against any liability incurred by the Director to a person other than the Company or an associated company of the Company in connection with any negligence, default, breach of duty or breach of trust in relation to the Company or associated company (as the case may be). AUDITOR A resolution will be submitted to the annual general meeting to re-appoint Messrs. Deloitte Touche Tohmatsu as auditor of the Company. On behalf of the Board CHUI, VINCENT YIK CHIU DIRECTOR 23 April 2019 2


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    INDEPENDENT AUDITOR’S REPORT TO THE SOLE MEMBER OF MORGAN STANLEY ASIA INTERNATIONAL LIMITED (incorporated in Hong Kong with limited liability) Opinion We have audited the financial statements of Morgan Stanley Asia International Limited (the "Company") set out on pages 6 to 68, which comprise the statement of financial position as at 31 December 2018, and the income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the financial statements give a true and fair view of the financial position of the Company as at 31 December 2018, and of its financial performance and its cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards ("HKFRSs") issued by the Hong Kong Institute of Certified Public Accountants (the "HKICPA") and have been properly prepared in compliance with the Hong Kong Companies Ordinance. Basis for Opinion We conducted our audit in accordance with Hong Kong Standards on Auditing ("HKSAs") issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the HKICPA's Code of Ethics for Professional Accountants (the "Code"), and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information The Directors are responsible for the other information. The other information comprises the information included in the annual report, but does not include the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 3


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    INDEPENDENT AUDITOR’S REPORT TO THE SOLE MEMBER OF MORGAN STANLEY ASIA INTERNATIONAL LIMITED (incorporated in Hong Kong with limited liability) Responsibilities of Directors and Those Charged with Governance for the Financial Statements The Directors are responsible for the preparation of the financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process. Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion solely to you in accordance with section 405 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with HKSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. 4


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    INDEPENDENT AUDITOR’S REPORT TO THE SOLE MEMBER OF MORGAN STANLEY ASIA INTERNATIONAL LIMITED (incorporated in Hong Kong with limited liability) Auditor's Responsibilities for the Audit of the Financial Statements – continued • Conclude on the appropriateness of the Directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong 23 April 2019 5


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED INCOME STATEMENT Year ended 31 December 2018 2018 2017 Note US$’000 US$’000 Interest income 75,752 26,488 Interest expense (23,517) (33,570) Net interest income/(expense) 9 52,235 (7,082) Fee and commission income 7 245,388 214,535 Net trading income/(expense) 10,152 (108,093) Net income from other financial assets held at fair value 5 - 136,283 Net gains on derecognition of financial assets measured at fair value through other comprehensive income (“FVOCI”) 6 373 - Other revenue 8 6,503 3,429 Total non-interest revenues 262,416 246,154 Net revenues 314,651 239,072 Non-interest expenses: Other expenses 10 (227,035) (209,711) PROFIT BEFORE INCOME TAX 87,616 29,361 Income tax 11 (13,343) (4,315) PROFIT FOR THE YEAR 74,273 25,046 All operations were continuing in the current year and prior year. The notes on pages 11 to 68 form an integral part of the financial statements. 6


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2018 2018 2017 Note US$’000 US$’000 PROFIT FOR THE YEAR 74,273 25,046 Items that may be reclassified subsequently to profit or loss: FVOCI reserve: 11 Net change in fair value 1,976 - Net amount reclassified to income statement (312) - Available-for-sale reserve: 11 Net change in fair value of available-for-sale financial assets - (572) Net amount reclassified to income statement - 297 OTHER COMPREHENSIVE INCOME AFTER INCOME TAX 1,664 (275) TOTAL COMPREHENSIVE INCOME FOR THE YEAR ATTRIBUTABLE TO OWNER OF THE COMPANY 75,937 24,771 The notes on pages 11 to 68 form an integral part of the financial statements. 7


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2018 Available- Share FVOCI for-sale Retained Total capital reserve reserve earnings equity Note US$’000 US$’000 US$’000 US$’000 US$’000 Balance at 1 January 2017 170,000 - (421) 38,618 208,197 Profit for the year - - - 25,046 25,046 Other comprehensive income for the year: 11 Available-for-sale reserve: Net change in fair value - - (572) - (572) Net amount reclassified to income statement - - 297 - 297 Total comprehensive income for the year - - (275) 25,046 24,771 Balance at 31 December 2017 and 1 January 2018 170,000 - (696) 63,664 232,968 Impact of adoption of new accounting standards 4 - (696) 696 - - Profit for the year - - - 74,273 74,273 Other comprehensive income for the year: 11 FVOCI reserve:: Net change in fair value - 1,976 - - 1,976 Net amount reclassified to income statement - (312) - - (312) Total comprehensive income for the year - 1,664 - 74,273 75,937 Balance at 31 December 2018 170,000 968 - 137,937 308,905 The notes on pages 11 to 68 form an integral part of the financial statements. 8


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED STATEMENT OF FINANCIAL POSITION As at 31 December 2018 2018 2017 Note US$’000 US$’000 ASSETS Cash and short-term deposits 22(a) 538,485 188,267 Trading financial assets 13 969 2,813 Loans and advances to customers 14 1,598,301 1,430,416 Investment securities 15 1,315,300 2,410,435 Trade and other receivables 16 6,172 18,781 Deferred tax assets 19 4,023 6,452 Prepayments 124 215 TOTAL ASSETS 3,463,374 4,057,379 LIABILITIES AND EQUITY Deposits 18 3,029,991 3,686,326 Trading financial liabilities 13 3,164 15,771 Trade and other payables 17 112,919 120,039 Current tax liabilities 7,662 1,667 Accruals 733 608 TOTAL LIABILITIES 3,154,469 3,824,411 EQUITY Share capital 21 170,000 170,000 FVOCI reserve 21 968 - Available-for-sale reserve 21 - (696) Retained earnings 137,937 63,664 Equity attributable to owner of the Company 308,905 232,968 TOTAL EQUITY 308,905 232,968 TOTAL LIABILITIES AND EQUITY 3,463,374 4,057,379 These financial statements were approved by the Board and authorised for issue on 23 April 2019: Signed on behalf of the Board Chui, Vincent Yik Chiu Wraight, David John Director Director The notes on pages 11 to 68 form an integral part of the financial statements. 9


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED STATEMENT OF CASH FLOWS Year ended 31 December 2018 2018 2017 Note US$’000 US$’000 NET CASH FLOWS USED IN OPERATING ACTIVITIES 22(b) (767,080) (904,191) INVESTING ACTIVITIES Purchase of investment securities (7,566,430) (9,753,551) Proceeds from maturity/sale of investment securities 8,678,869 10,576,343 Interest received from investment securities 4,859 2,250 NET CASH FLOWS FROM INVESTING ACTIVITIES 1,117,298 825,042 NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 350,218 (79,149) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 188,267 267,416 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 22(a) 538,485 188,267 The notes on pages 11 to 68 form an integral part of the financial statements. 10


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 1. CORPORATE INFORMATION The Company is a private limited company with a head office in Hong Kong and a branch in Singapore (“Branch”). The Company was incorporated and is domiciled in Hong Kong, at the following principal place of business: Level 31, International Commerce Centre, 1 Austin Road West, Kowloon, Hong Kong. The Company is a restricted licence bank under the Banking Ordinance in Hong Kong and the Branch is licensed as a wholesale bank in Singapore. The Company is regulated by the HKMA and the Branch is regulated by the MAS. It is also a registered institution under the Hong Kong Securities and Futures Ordinance. The principal activities of the Company are to engage in the business of banking including deposit taking and lending. It also acts (a) as agent on behalf of its customers in connection with the provision of general investment, securities and futures dealing, as well as discretionary management and (b) as introducing broker to Morgan Stanley & Co. International plc for the provision of clearance, settlement and custody services in relation to the aforementioned transactions. As at 31 December 2018 and 31 December 2017, the Company’s immediate parent undertaking was MSHKL, which was incorporated in Hong Kong. The Company’s ultimate parent undertaking and controlling entity is Morgan Stanley which, together with the Company and Morgan Stanley’s other subsidiary undertakings, form the Morgan Stanley Group. Morgan Stanley is incorporated in the State of Delaware, the United States of America. Copies of its financial statements can be obtained from http://www.morganstanley.com/investorrelations. 2. BASIS OF PREPARATION Statement of compliance The Company has prepared its annual financial statements in accordance with Hong Kong Financial Reporting Standards (“HKFRS”) and interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and the Hong Kong Companies Ordinance. New standards and interpretations adopted during the year The following standards, amendments to standards and interpretations relevant to the Company’s operations were adopted during the year. Except where otherwise stated, these standards, amendments to standards and interpretations did not have a material impact on the Company’s financial statements. An amendment to HKFRS 2 ‘Share-based Payment’ was issued by the HKICPA in August 2016, for application in accounting periods beginning on or after 1 January 2018. Early application is permitted. HKFRS 9 ‘Financial instruments’ (“HKFRS 9”) was issued by the HKICPA in November 2009, amended in December 2013, and revised and reissued by the HKICPA in September 2014. HKFRS 9 is applicable retrospectively, except where otherwise prescribed by transitional provisions of the standard, and is effective for accounting periods beginning on or after 1 January 2018. The Company has adopted the requirements of HKFRS 9 from 1 January 2018. 11


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 2. BASIS OF PREPARATION (CONTINUED) New standards and interpretations adopted during the year (continued) The main aspects of HKFRS 9 which impact the Company are its requirements relating to: • Classification and measurement of financial assets The classification and measurement of financial assets is determined based upon how these financial assets are managed (the Company’s business model) and their contractual cash flow characteristics. Measurement will be either at amortised cost, fair value through other comprehensive income (“FVOCI”) or fair value through profit or loss (“FVPL”). • Impairment of financial instruments The impairment requirements are based on expected credit losses (“ECLs”) and apply to financial assets measured at amortised cost and at FVOCI. The Company has completed a project to implement HKFRS 9. As part of this project, the Company performed an evaluation of its business models and a review of the contractual terms of financial assets measured at amortised cost and FVOCI under HKFRS 9 to ensure that they are compatible with such classifications. As a result of this evaluation, government debt securities held as available-for-sale have reclassified to FVOCI with a consequent transfer of the accumulated available-for-sale reserve to FVOCI reserve. There was no impact on the Company’s retained earnings at 1 January 2018. For lending products and other debt financial instruments, a model-based approach has been adopted, the key aspects of which are: • The impairment allowance is based on ECLs associated with the lifetime cash shortfalls that will result if a default occurs in the twelve months after the reporting date (“twelve month ECL”), unless there has been a significant increase in credit risk (“SICR”) since origination, in which case the ECL is based on all possible defaults over the total expected life of the instrument (“lifetime ECL”). • Identifying whether assets have experienced a SICR since origination. When determining whether credit risk has increased significantly since initial recognition, the Company considers both quantitative and qualitative information and analysis, based on the Company’s historical experience and expert credit risk assessment, including forward-looking information. • Estimating ECL, reflecting an unbiased and the probability-weighted impact of multiple future economic scenarios. ECLs are calculated using three main components: probability of default (“PD”), the expected loss given default (“LGD”) and an estimated exposure at default (“EAD”). These parameters are generally derived from internally developed statistical models, combined with historical, current and forward-looking customer and macro- economic data. For some portfolios of financial assets, ECLs have been estimated to be close to zero, reflecting the benefit of collateral or other credit mitigants. There was no impact to the retained earnings of the Company as at 1 January 2018 as a result of the implementation of the ECL impairment approach. Under the transitional provisions of the standard, the Company’s opening statement of financial position at the date of initial application (1 January 2018) has been restated, with no restatement of comparative periods. However, the Company has updated the presentation of its primary statements on transition to HKFRS 9 to provide more relevant information to the users of the financial statements. The comparative period has been re-presented to align to the new format in the annual financial statements. 12


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 2. BASIS OF PREPARATION (CONTINUED) New standards and interpretations adopted during the year (continued) Note 3 Summary of significant accounting policies provides the new accounting policies under HKFRS 9 applicable from 1 January 2018, alongside the accounting policies applicable to 31 December 2017 under HKAS 39 ‘Financial Instruments: Recognition and Measurement’. To reflect the differences between HKFRS 9 and HKAS 39, HKFRS 7 ‘Financial Instruments: Disclosures’ (“HKFRS 7”) was updated by the HKICPA and the Company adopted the updated HKFRS 7 for the year beginning 1 January 2018. The updated requirements include transition disclosures shown in note 4, in addition to qualitative and quantitative information about the ECL as set out in note 24. HKFRS 15 ‘Revenue from Contracts with Customers’ (“HKFRS 15”) was issued by the HKICPA in July 2014 for retrospective application in accounting periods beginning on or after 1 January 2018. In addition, amendments relating to clarifications to HKFRS 15 were issued by the HKICPA in June 2016 requiring application in accounting periods beginning on or after 1 January 2018. Refer to note 4 for further information. HK(IFRIC)-Int 22 ‘Foreign Currency Transactions and Advance Consideration’ was issued by the HKICPA in June 2017 for application in accounting periods beginning on or after 1 January 2018. There were no other standards, amendments to standards or interpretations relevant to the Company’s operations which were adopted during the year. New standards and interpretations not yet adopted At the date of authorisation of these financial statements, the following amendments to standards and interpretation relevant to the Company’s operations were issued by the HKICPA but not mandatory for accounting periods beginning 1 January 2018. Except where otherwise stated, the Company does not expect that the adoption of the following amendments to standards and interpretations will have a material impact on the Company’s financial statements. As part of the 2015-2017 Annual Improvements Cycle published in February 2018, the HKICPA made amendments to the following standard that is relevant to the Company’s operations: HKAS 12 ‘Income Taxes’, for application in accounting periods beginning on or after 1 January 2019. HK(IFRIC)-Int 23 ‘Uncertainty over Income Tax Treatments’ was issued by the HKICPA in July 2017 for application in accounting periods beginning on or after 1 January 2019. Amendments to HKAS 1 ‘Presentation of Financial Statements’ and HKAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ were issued by the HKICPA in January 2019 for application in accounting periods beginning on or after 1 January 2020. Basis of measurement The financial statements of the Company are prepared under the historical cost basis, except for certain financial instruments that have been measured at fair value as explained in the accounting policies below. Critical judgements in applying the Company’s accounting policies In applying the Company’s accounting policies, the judgements made by management other than those involving estimations noted below, that have the most significant effect on the amounts recognised in the financial statements are existences of impairment of financial assets. The Company believes that the judgements utilised in preparing the financial statements are reasonable, relevant and reliable. The Company believes that the estimates used in preparing the financial statements are reasonable, relevant and reliable. Actual results could differ from these estimates. 13


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 2. BASIS OF PREPARATION (CONTINUED) Key sources of estimation uncertainty The preparation of the Company’s financial statements requires management to make judgements involving estimations and other assumptions regarding the valuation of certain financial instruments that affect the financial statements and related disclosures. For further details on the assumptions and estimation uncertainties in determining the fair value of certain assets and liabilities, see notes 3(d) and 27. The going concern assumption The notes to the financial statements include the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; and its exposures to credit risk and liquidity risk. Retaining sufficient liquidity and capital to withstand market pressures remains central to the Morgan Stanley Group’s and the Company’s strategy. Taking the above factors into consideration, the Directors believe it is reasonable to assume that the Company will have access to adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Functional currency Items included in the financial statements are measured and presented in US dollars, the currency of the primary economic environment in which the Company operates. All currency amounts in the financial statements are rounded to the nearest thousand US dollars. b. Foreign currencies All monetary assets and liabilities denominated in currencies other than US dollars are translated into US dollars at the rates ruling at the reporting date. Transactions and non-monetary assets and liabilities denominated in currencies other than US dollars are recorded at the rates prevailing at the dates of the transactions. From 1 January 2018, foreign exchange differences arising from translation differences of the amortised cost of financial assets measured at FVOCI are recognised in the income statement. All other gains and losses from movements in foreign exchange rates on financial assets measured at FVOCI are recorded in other comprehensive income. Until 31 December 2017, foreign exchange differences on available-for-sale financial assets were recorded in the ‘Available-for-sale reserve’ in equity, with the exception of translation differences on the amortised cost of monetary available-for- sale financial assets, which are recognised through the income statement. All other translation differences are taken through the income statement. Exchange differences recognised in the income statement are presented in ‘Other revenue’ or ‘Other expenses’, except where noted in 3(c) below. c. Financial instruments i) Financial instruments mandatorily at fair value through profit and loss Trading financial instruments Trading financial instruments include all derivatives contracts. Trading financial instruments are initially recorded on trade date at fair value (see note 3(d) below). All subsequent changes in fair value and foreign exchange differences are reflected in the income statement in ‘Net trading income/(expense)’. For all trading financial instruments, transaction costs are excluded from the initial fair value measurement of the financial instrument. These costs are recognised in the income statement in ‘Other expenses’. 14


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) c. Financial instruments (continued) ii) Financial assets measured at FVOCI Applicable from 1 January 2018 Financial assets measured at FVOCI include government debt securities. Financial assets measured at FVOCI are financial instruments which are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets and the contractual terms of which give rise on specified dates to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. Financial assets measured at FVOCI are recorded on trade date and are initially recognised and subsequently measured at fair value (see note 3(d) below). Transaction costs that are directly attributable to the acquisition of a financial asset measured at FVOCI are added to the fair value on initial recognition. Interest calculated using the effective interest rate (“EIR”) method (see note 3(c)(iv) below) is recognised in the income statement in ‘Interest income’. Foreign exchange differences on the amortised cost of the asset are recognised in the income statement in ‘Other revenue’ or ‘Other expenses’. Movement in ECL allowance is recognised in both the income statement in ‘Net impairment loss on financial instruments’ and in the statement of comprehensive income in the ‘FVOCI reserve’. All other gains and losses on financial assets measured at FVOCI are recognised in the ‘FVOCI reserve’ within equity. On derecognition of a financial asset measured at FVOCI, the cumulative gain or loss in the ‘FVOCI reserve’ is reclassified to the income statement and reported in ‘Net gains/(losses) on derecognition of financial assets measured at FVOCI’. iii) Available-for-sale financial assets Applicable until 31 December 2017 Financial assets classified as available-for-sale included government debt securities. Financial assets classified as available-for-sale were non-derivative financial assets that were either designated in this category, or not classified in any of the other categories applicable until 31 December 2017. Financial assets classified as available-for-sale were recorded on trade date and were initially recognised and subsequently measured at fair value (see note 3(d) below). Transaction costs that are directly attributable to the acquisition of an available-for-sale financial asset are added to the fair value on initial recognition. For debt instruments, interest calculated using the effective interest rate method (see note 3(c)(iv) below), impairment losses and reversals of impairment losses and foreign exchange differences on the amortised cost of the asset are recognised in the income statement in ‘Net income from other financial assets held at fair value’. All other gains and losses on debt instruments classified as available-for-sale are recognised in the ‘Available-for-sale reserve’ within equity. On disposal or impairment of an available-for-sale financial asset, the cumulative gain or loss in the ‘Available-for-sale reserve’ is reclassified to the income statement and reported in ‘Net income from other financial assets held at fair value’. 15


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) c. Financial instruments (continued) iv) Financial assets and financial liabilities at amortised cost Applicable from 1 January 2018 Financial assets are recognised at amortised cost when the Company’s business model objective is to collect the contractual cash flows of the assets and where these cash flows are SPPI on the principal amount outstanding until maturity. Such assets are recognised when the Company becomes a party to the contractual provisions of the instrument. The instruments are initially measured at fair value (see note 3(d) below) and subsequently measured at amortised cost less ECL allowance. Interest is recognised in the income statement in ‘Interest income’, using the EIR method as described below. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. Transaction costs that are directly attributable to the acquisition of the financial asset are added to the fair value on initial recognition. ECL and reversals thereof are recognised in the income statement in ‘Net impairment loss on financial instruments’. Financial assets at amortised cost include cash and short-term deposits, loans and advances to customers and trade and other receivables. Applicable until 31 December 2017 Financial assets classified as loans and receivables were recognised when the Company became a party to the contractual provisions of the instrument. They were initially measured at fair value (see note 3(d) below) and subsequently measured at amortised cost less allowance for impairment. Interest was recognised in the income statement in ‘Interest income’, using the EIR method as described below. Transaction costs that were directly attributable to the acquisition of the financial asset were added to the fair value on initial recognition. Impairment losses and reversals of impairment losses on financial assets classified as loans and receivables were recognised in the income statement in ‘Other expense’. Financial assets classified as loans and receivables included cash and short-term deposits, loans and advances to customers and trade and other receivables. Applicable until 31 December 2017 and from 1 January 2018 Financial liabilities are classified as being subsequently measured at amortised cost, except where they are held for trading or are designated as measured at FVPL. They are recognised when the Company becomes a party to the contractual provisions of the instrument and are initially measured at fair value (see note 3(d) below) and subsequently measured at amortised cost. Interest is recognised in the income statement in ‘Interest expense’ using the EIR method as described below. Transaction costs that are directly attributable to the issue of a financial liability are deducted from the fair value on initial recognition. The EIR method is a method of calculating the amortised cost of a financial instrument (or a group of financial instruments) and of allocating the interest income or interest expense over the expected life of the financial instrument. The EIR is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial instrument (or, where appropriate, a shorter period) to the carrying amount of the financial instrument. The EIR is established on initial recognition of the financial instrument. The calculation of the EIR includes all fees and commissions paid or received, transaction costs, and discounts or premiums that are an integral part of the EIR. Financial liabilities classified at amortised cost include deposits and trade and other payables. 16


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value Fair value measurement Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date. Where the Company manages a group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, the Company measures the fair value of that group of financial instruments consistently with how market participants would price the net risk exposure at the measurement date. In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximises the use of relevant observable inputs and minimises the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability that were developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions that the Company believes other market participants would use in pricing the asset or liability, that are developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows, with Level 1 being the highest and Level 3 being the lowest level: • Level 1 - Quoted prices (unadjusted) in an active market for identical assets or liabilities Valuations based on quoted prices in active markets that the Morgan Stanley Group has the ability to access for identical assets or liabilities. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgement. 17


  • Page 20

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) Fair value measurement (continued) • Level 2 - Valuation techniques using observable inputs Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. • Level 3 - Valuation techniques with significant unobservable inputs Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, the liquidity of markets and other characteristics particular to the product. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgement. Accordingly, the degree of judgement exercised by the Company in determining fair value is greatest for instruments categorised in Level 3 of the fair value hierarchy. The Company considers prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3 of the fair value hierarchy. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety. For assets and liabilities that are transferred between levels in the fair value hierarchy during the period, fair values are ascribed as if the assets or liabilities had been transferred as of beginning of the period. Valuation techniques Many cash instruments and OTC derivative contracts have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that a party is willing to pay for an asset. Ask prices represent the lowest price that a party is willing to accept for an asset. The Company carries positions at the point within the bid-ask range that meets its best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions. Fair value for many cash instruments and OTC derivative contracts is derived using pricing models. Pricing models take into account the contract terms, as well as multiple inputs including, where applicable, commodity prices, equity prices, interest rate yield curves, credit curves, correlation, creditworthiness of the counterparty, creditworthiness of the Company, option volatility and currency rates. Where appropriate, valuation adjustments are made to account for various factors such as liquidity risk (bid-ask adjustments), credit quality, model uncertainty and concentration risk. 18


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) Valuation techniques (continued) Adjustments for liquidity risk adjust model-derived mid-market levels of Level 2 and Level 3 financial instruments for the bid-mid or mid-ask spread required to properly reflect the exit price of a risk position. Bid-mid and mid-ask spreads are marked to levels observed in trade activity, broker quotes or other external third-party data. Where these spreads are unobservable for the particular position in question, spreads are derived from observable levels of similar positions. Valuation process Valuation Control (“VC”) within the Financial Control Group (“FCG”) is responsible for the Company’s fair value valuation policies, processes and procedures. VC is independent of the business units and reports to the Chief Financial Officer of the Morgan Stanley Group (“CFO”), who has final authority over the valuation of the Company’s financial instruments. VC implements valuation control processes designed to validate the fair value of the Company’s financial instruments measured at fair value including those derived from pricing models. Model Review. VC, in conjunction with the Model Risk Management Department (“MRM”), which reports to the Chief Risk Officer of the Morgan Stanley Group (“CRO”), independently reviews valuation models’ theoretical soundness, the appropriateness of the valuation methodology and calibration techniques developed by the business units using observable inputs. Where inputs are not observable, VC reviews the appropriateness of the proposed valuation methodology to determine that it is consistent with how a market participant would arrive at the unobservable input. The valuation methodologies utilised in the absence of observable inputs may include extrapolation techniques and the use of comparable observable inputs. As part of the review, VC develops a methodology to independently verify the fair value generated by the business unit’s valuation models. The Company generally subjects valuations and models to a review process initially and on a periodic basis thereafter. 19


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d. Fair value (continued) Valuation process (continued) Independent Price Verification. The business units are responsible for determining the fair value of financial instruments using approved valuation models and valuation methodologies. Generally on a monthly basis, VC independently validates the fair values of financial instruments determined using valuation models by determining the appropriateness of the inputs used by the business units and by testing compliance with the documented valuation methodologies approved in the model review process described above. The results of this independent price verification and any adjustments made by VC to the fair value generated by the business units are presented to management of the Morgan Stanley Group’s three business segments (i.e. Institutional Securities, Wealth Management and Investment Management), the CFO and the CRO on a regular basis. VC uses recently executed transactions, other observable market data such as exchange data, broker/ dealer quotes, third-party pricing vendors and aggregation services for validating the fair values of financial instruments generated using valuation models. VC assesses the external sources and their valuation methodologies to determine if the external providers meet the minimum standards expected of a third-party pricing source. Pricing data provided by approved external sources are evaluated using a number of approaches; for example, by corroborating the external sources’ prices to executed trades, by analysing the methodology and assumptions used by the external source to generate a price and/ or by evaluating how active the third-party pricing source (or originating sources used by the third-party pricing source) is in the market. Based on this analysis, VC generates a ranking of the observable market data designed to ensure that the highest-ranked market data source is used to validate the business unit’s fair value of financial instruments. VC reviews the models and valuation methodology used to price new material Level 2 and Level 3 transactions and both FCG and MRM must approve the fair value of the trade that is initially recognised. Level 3 Transactions. VC reviews the business unit’s valuation techniques to assess whether these are consistent with market participant assumptions. Gains and losses on inception In the normal course of business, the fair value of a financial instrument on initial recognition is the transaction price (i.e. the fair value of the consideration given or received). In certain circumstances, however, the fair value will be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Company recognises a gain or loss on inception of the transaction. When the use of unobservable market data has a significant impact on determining fair value at the inception of the transaction, the entire initial gain or loss indicated by the valuation technique as at the transaction date is not recognised immediately in the income statement and is recognised instead when the market data becomes observable or on maturity or disposal of the instrument. e. Derecognition of financial assets and liabilities Applicable until 31 December 2017 and from 1 January 2018 The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risk and rewards of ownership of the asset. If the asset has been transferred, and the Company neither transfers nor retains substantially all of the risks and rewards of the asset, then the Company determines whether it has retained control of the asset. 20


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) e. Derecognition of financial assets and liabilities (continued) Applicable until 31 December 2017 and from 1 January 2018 (continued) If the Company has retained control of the asset, it shall continue to recognise the financial asset to the extent of its continuing involvement in the financial asset. If the Company has not retained control of the asset, it derecognises the asset and separately recognises any rights or obligation created or retained in the transfer. Upon derecognition of a financial asset, the difference between the previous carrying amount and the sum of any consideration received, together with the transfer of any cumulative gain/loss previously recognised in equity, are recognised in the income statement within ‘Net gains/(losses) on derecognition of financial assets measured at FVOCI’. The Company derecognises financial liabilities when the Company’s obligations are discharged or cancelled or when they expire. f. Impairment of financial instruments Applicable from 1 January 2018 The Company recognises loss allowances for ECL for the following financial instruments that are not measured at FVPL: • financial assets measured at amortised cost; • financial assets measured at FVOCI; Measurement of ECL For financial assets, ECLs are the present value of cash shortfalls (i.e. the difference between contractual and expected cash flows) over the expected life of the financial instrument, discounted at the asset’s EIR. Where a financial asset is credit-impaired at the reporting date, the ECL is measured as the difference between the asset’s gross carrying amount and the present value of future cash flows, discounted at the original EIR. The Company applies a three stage approach to measuring ECLs based on the change in credit risk since initial recognition: • Stage 1: if the credit risk of the financial instrument at the reporting date has not increased significantly since initial recognition then the loss allowance is calculated as the lifetime cash shortfalls that will result if a default occurs in the next 12 months, weighted by the probability of that default occurring. • Stage 2: if there has been a SICR since initial recognition, the loss allowance is calculated as the ECL over the remaining life of the financial instrument. If it is subsequently determined that there has no longer been a SICR since initial recognition, then the loss allowance reverts to reflecting 12 month expected losses. 21


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f. Impairment of financial instruments (continued) Applicable from 1 January 2018 (continued) Measurement of ECL (continued) • Stage 3: if there has been a SICR since initial recognition and the financial instrument is deemed credit-impaired (see below for definition of credit-impaired), the loss allowance is calculated as the ECL over the remaining life of the financial instrument. If it is subsequently determined that there has no longer been a SICR since initial recognition, then the loss allowance reverts to reflecting 12 month expected losses. The Company’s accounting policy is to not use the ‘low’ credit risk practical expedient. As a result, the Company monitors all financial instruments which do not have a significant financing component that are subject to impairment for SICR, with the exception of loans and advances to customers and the corresponding interest receivable, for which a lifetime ECL is always calculated. In general, ECLs are measured so that they reflect: a) A probability-weighted range of possible outcomes b) The time value of money; and c) Relevant information relating to past, current and future economic conditions. When measuring ECLs, the Company considers multiple scenarios, except where practical expedients are used to determine ECLs. Practical expedients are used where they are consistent with the principles described above. The Company measures ECL on an individual asset basis and has no purchased or originated credit- impaired financial assets. More information on measurement of ECLs is provided in note 24. Presentation of ECL ECL is recognised in the income statement within ‘Net impairment loss on financial instruments’. ECLs on financial assets measured at amortised cost are presented as an ECL allowance. The allowance reduces the net carrying amount on the face of the statement of financial position. Where the financial asset is measured at FVOCI, the loss allowance is recognised as an accumulated impairment amount in other comprehensive income and does not reduce the carrying amount of the financial asset on the statement of financial position. 22


  • Page 25

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f. Impairment of financial instruments (continued) Applicable from 1 January 2018 (continued) Credit-impaired financial instruments In assessing the impairment of financial instruments under the ECL model, the Company defines credit-impaired financial instruments in accordance with Credit Risk Management Department’s policies and procedures. A financial instrument is credit-impaired when, based on current information and events, it is probable that the Company will be unable to collect all scheduled payments of principal or interest when due according to the contractual terms of the agreement. Definition of Default In assessing the impairment of financial instruments under the ECL model, the Company defines default in accordance with Credit Risk Management Department’s policies and procedures. This considers whether the borrower is unlikely to pay its credit obligations to the Company in full and takes into account qualitative indicators, such as breaches of covenants. The definition of default also includes a presumption that a financial asset which is more than 90 days past due (“DPD”) has defaulted. Write-offs Loans and government debt securities are written off (either partially or in full) when they are deemed uncollectible which generally occurs when all commercially reasonable means of recovering the balance have been exhausted. Such determination is based on an indication that the borrower can no longer pay the obligation, or that the proceeds from collateral will not be sufficient to pay the balance. Partial write-offs are made when a portion of the balance is uncollectable. However, financial assets that are written off could still be subject to enforcement activities for recoveries of amounts due. If the amount to be written off is greater than the accumulated loss allowance, the difference is reflected directly in the income statement within ‘Net impairment loss on financial instruments’ and is not recognised in the loss allowance account. Any subsequent recoveries are credited to ‘Net impairment loss on financial instruments’ within the income statement. Applicable until 31 December 2017 At each reporting date, an assessment was made as to whether there was any objective evidence of impairment in the value of a financial asset classified as either available-for-sale or loans and receivables. Impairment losses were recognised if an event had occurred which would have an adverse impact on the expected future cash flows of an asset and the expected impact could be reliably estimated. Impairment losses on available-for-sale financial assets were measured as the difference between cost (net of any principal repayment and amortisation) and the current fair value (see note 3(d) above). Where there was evidence that the available-for-sale financial asset was impaired, the cumulative loss that had been previously recognised in other comprehensive income was reclassified from the ‘Available-for-sale reserve’ and recognised in the income statement. Impairment losses on loans and receivables were measured as the difference between the carrying amount of the loans and receivables and the present value of estimated cash flows discounted at the asset’s original EIR. Such impairment losses were recognised in the income statement within ‘Other expense’ and were recognised against the carrying amount of the impaired asset on the statement of financial position. Interest on the impaired asset continues to be accrued on the reduced carrying amount based on the original EIR of the asset. For all financial assets, if in a subsequent year, the amount of the estimated impairment loss decreased because of an event occurring after the impairment was recognised, the previously recognised impairment loss was reversed as described for the relevant categories of financial asset in note 3(c)(ii), (iii) and (iv). Any reversal was limited to the extent that the value of the asset would not exceed the original amortised cost of the asset had no impairment occurred. 23


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) g. Revenue recognition Revenues are recognised when the promised services are delivered to the Company’s customers, in an amount that is based on the consideration the Company expects to receive in exchange for those services when such amounts are not probable of significant reversal. Fee and commission income Fee and commission income results from transaction-based arrangements in which the client is charged a fee for the execution of transactions. Such revenues primarily arise from the Company providing services in connection with the provision of general investment, securities and futures dealing, as well as discretionary management to its customers and as introducing broker to Morgan Stanley & Co. International plc for the provision of clearance, settlement and custody services in relation to the aforementioned transactions. Fee and commission income is recognised on trade date when the performance obligation is satisfied. h. Cash and cash equivalents Cash and cash equivalents comprise cash and demand deposits with banks along with highly liquid investments, with original maturities of three months or less, that are readily convertible to known amounts of cash and subject to insignificant risk of change in value. i. Income tax The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is calculated based on taxable profit for the year. Taxable profit may differ from profit/(loss) before income tax as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. Current tax is charged or credited in the income statement, except when it relates to items charged or credited directly to other comprehensive income or equity, in which case the current tax is also recorded within other comprehensive income or equity respectively. 24


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) i. Income tax (continued) Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and limited to the extent that it is probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to other comprehensive income or equity, in which case the deferred tax is reflected within other comprehensive income or equity, respectively. Current tax assets are offset against current tax liabilities when there is a legally enforceable right to set off current tax assets against current tax liabilities and the Company intends to settle its current tax assets and current tax liabilities on a net basis or to realise the asset and settle the liability simultaneously. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and current tax liabilities on a net basis. j. Employee compensation plans i) Equity-settled share-based compensation plans Morgan Stanley issues awards in the form of restricted stock units (“RSUs”) to employees of the Morgan Stanley Group for services rendered to the Company. Awards are classified as equity-settled and the cost of the equity-based transactions with employees is measured based on the fair value of the equity instruments at grant date. The fair value of RSUs is based on the market price of Morgan Stanley shares. Awards are amortised over the service period. An estimation of awards that will be forfeited prior to vesting due to the failure to satisfy service conditions or non-market based performance conditions is considered in calculating the total compensation cost to be amortised over the requisite service period. Compensation expense for awards with performance conditions is recognised based on the probable outcome of the performance condition at each reporting date. Compensation expense for awards with market-based conditions is recognised irrespective of the probability of the market condition being achieved and is not reversed if the market condition is not met. Generally awards contain clawback and cancellation provisions which permit the Company to cancel all or a portion of the award under specified circumstances. Compensation expense for those awards is adjusted to fair value based upon changes in the share price of Morgan Stanley’s common stock until conversion, exercise or expiration. For year end equity-based awards anticipated to be granted to retirement-eligible employees under award terms that do not contain a future service requirement, the Company accrues the estimated cost over the course of the calendar year preceding the grant date, which reflects the period over which compensation is earned. 25


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) j. Employee compensation plans (continued) i) Equity-settled share-based compensation plans (continued) The Company pays Morgan Stanley in consideration of the procurement of the transfer of shares to employees via a chargeback agreement under which it is committed to pay to Morgan Stanley the grant date fair value as well as subsequent movements in the fair value of those awards at the time of delivery to the employees. Share-based compensation expense is recorded within ‘Staff costs’ and ‘Directors’ remuneration’ in ‘Other expenses’ in the income statement. ii) Deferred cash-based compensation plans Morgan Stanley also maintains deferred compensation plans on behalf of the Company for the benefit of certain current and former employees that provide a return to the participating employees based upon the performance of various referenced investments. Liabilities for these awards, which are included within ‘Trade and other payables’ in the statement of financial position, are measured based on the notional value of the award granted, adjusted for changes in the fair value of the referenced investments fair value and recognised over time in accordance with the awards’ vesting conditions. For unvested awards, the expense is recognised over the service period. For vested awards with only notional earnings on the referenced investments, the expense is fully recognised in the current period. For year end awards anticipated to be granted to retirement-eligible employees under award terms that do not contain a future service requirement, the Company accrued the estimated cost over the course of the calendar year preceding the grant date, which reflects the period over which the compensation is earned. The related expense is recorded within ‘Staff costs’ and ‘Directors’ remuneration’ in ‘Other expense’ in the income statement. k. Post-employment benefits The Company operates defined contribution post-employment plans. Additionally, the Branch of the Company participates in a defined contribution plan, the Singapore Central Provident Fund. Contributions due in relation to the Company’s defined contribution post-employment plan are recognised in ‘Other expense’ in the income statement when payable. Details of the plans are given in note 31 to these financial statements. l. Offsetting of financial assets and financial liabilities Where there is a currently legally enforceable right to set off the recognised amounts and an intention to either settle on a net basis or to realise the asset and the liability simultaneously, financial assets and financial liabilities are offset and the net amount is presented on the statement of financial position. In the absence of such conditions, financial assets and financial liabilities are presented on a gross basis. 26


  • Page 29

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 4. TRANSITION TO HKFRS 9 AND HKFRS 15 As discussed at note 2, the Company adopted two new standards from 1 January 2018, HKFRS 9 and HKFRS 15, which have no impact to retained earnings at the date of adoption. HKFRS 9 The disclosures below set out the impact of adopting HKFRS 9 on the statement of financial position, including the effect of replacing HKAS 39’s incurred credit loss models with the ECL framework under HKFRS 9. The following table shows the original measurement categories in accordance with HKAS 39 and the new measurement categories under HKFRS 9 for the Company’s financial assets and financial liabilities as at 1 January 2018 in accordance with the Company’s updated accounting policies on the classification and impairment of financial instruments under HKFRS 9 as set out in note 3. Original Original New carrying classification classification amount New carrying under under under amount under Note HKAS 39 HKFRS 9 HKAS 39 HKFRS 9 Financial assets US$’000 US$’000 Cash and short- Loans and Financial assets at 188,267 188,267 term deposits receivables amortised cost Trading financial FVPL FVPL (trading) 2,813 2,813 assets Loans and a Loans and Financial assets at 1,430,416 1,430,416 advances to receivables amortised cost customers Investment b Available-for- Financial assets 2,410,435 2,410,435 securities sale measured at FVOCI Trade and other Loans and Financial assets at 18,781 18,781 receivables receivables amortised cost Total financial 4,050,712 4,050,712 assets 27


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 4. TRANSITION TO HKFRS 9 AND HKFRS 15 (CONTINUED) HKFRS 9 (continued) Original Original New carrying classification classification amount New carrying under under under amount under HKAS 39 HKFRS 9 HKAS 39 HKFRS 9 Financial liabilities US$’000 US$’000 Deposits Financial Financial 3,686,326 3,686,326 liabilities at liabilities at amortised cost amortised cost Trading financial FVPL FVPL (trading) 15,771 15,771 liabilities Trade and other Financial Financial 120,039 120,039 payables liabilities at liabilities at amortised cost amortised cost Total financial 3,822,136 3,822,136 liabilities The Company’s accounting policies on the classification of financial instruments under HKFRS 9 are set out in note 3. The application of these policies resulted in the reclassifications set out in the table above and explained below. a. Loans and advances to customers are classified as financial assets at amortised cost where they are in a held to collect business model and their contractual terms are SPPI. b. The government debt securities are classified as FVOCI as these debt instruments are managed within a business model of collecting contractual cash flows and selling financial assets. 28


  • Page 31

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 4. TRANSITION TO HKFRS 9 AND HKFRS 15 (CONTINUED) HKFRS 9 (continued) The following table reconciles the carrying amounts under HKAS 39 to the carrying amounts under HKFRS 9 on transition to HKFRS 9 on 1 January 2018 by showing where there has been a presentation reclassification. HKAS 39 HKFRS 9 carrying amount carrying amount 31 December 2017 Reclassification 1 January 2018 US$’000 US$’000 US$’000 Financial assets Amortised cost Cash and short-term deposits 188,267 - 188,267 Loans and advances to customers 1,430,416 - 1,430,416 Trade and other receivables 18,781 - 18,781 Total amortised cost 1,637,464 - 1,637,464 Available-for-sale Investment securities: Opening balance 2,410,435 - 2,410,435 To FVOCI - (2,410,435) (2,410,435) Total available-for-sale 2,410,435 (2,410,435) - FVOCI Investment securities: Opening balance - - - From available-for-sale - 2,410,435 2,410,435 Total FVOCI - 2,410,435 2,410,435 FVPL (trading) Trading financial assets 2,813 - 2,813 Total FVPL (trading) 2,813 - 2,813 29


  • Page 32

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 4. TRANSITION TO HKFRS 9 AND HKFRS 15 (CONTINUED) HKFRS 9 (continued) HKAS 39 HKFRS 9 carrying amount carrying amount 31 December 2017 Reclassification 1 January 2018 US$’000 US$’000 US$’000 Financial liabilities Amortised cost Deposits 3,686,326 - 3,686,326 Trade and other payables 120,039 - 120,039 Total amortised cost 3,806,365 - 3,806,365 FVPL (trading) Trading financial liabilities 15,771 - 15,771 Total FVPL (trading) 15,771 - 15,771 The following table analyses the impact, net of tax, of transition to HKFRS 9 on reserves. There is no impact on other components of equity. Available- for-sale reserve FVOCI reserve Impact of adopting HKFRS 9 US$’000 US$’000 Closing balance under HKAS 39 (31 December 2017) (696) - Reclassification of investment securities from available-for-sale to 696 (696) FVOCI Opening balance under HKFRS 9 (1 January 2018) - (696) HKFRS 9: ECLs The Company had no impairment provisions under HKAS 39 at 31 December 2017 and has no ECL impairment allowance as at 1 January 2018 (see note 2 New standards and interpretations adopted during the year). 30


  • Page 33

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 4. TRANSITION TO HKFRS 9 AND HKFRS 15 (CONTINUED) HKFRS 15 At 1 January 2018, the Company adopted HKFRS 15, in accordance with the transition provisions therein. The Company has applied the provisions of HKFRS 15 retrospectively only to contracts that were not completed as at 1 January 2018, the date of initial application. The Company has not retrospectively restated contracts for modifications before the beginning of the earliest period presented and prior periods have not been restated, which have no impact to retained earnings. As a result of adopting HKFRS 15, the accounting for certain transactions has changed, resulting in certain transactions now being presented on a gross basis. This adoption had the following impact: Year ended 31 December 2018 US$’000 Increase in other revenue 6,420 Increase in other expenses 6,420 5. NET INCOME FROM OTHER FINANCIAL ASSETS HELD AT FAIR VALUE 2018 2017 US$’000 US$’000 Available-for-sale financial assets Interest income - 25,696 Foreign exchange revaluation - 110,925 Net fair value losses reclassified from the available-for-sale reserve on disposal of assets - (338) - 136,283 6. NET GAINS ON DERECOGNITION OF FINANCIAL ASSETS AT FVOCI The table below summarises the carrying amount of the derecognised financial assets measured at FVOCI and the gain on derecognition. 2018 Carrying amount of Gains financial assets arising from sold derecognition US$’000 US$’000 Investment securities 1,021,581 373 31


  • Page 34

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 7. FEE AND COMMISSION INCOME 2018 2017 US$’000 US$’000 Sales commissions and fees 245,378 214,520 Other fees 10 15 245,388 214,535 Of which, revenue from contracts with customers 16,980 N/A Revenue from contracts with customers ‘Revenue from contracts with customers’ was introduced by HKFRS 15, for which comparative periods have not been restated. The equivalent figure for 2017 of US$3,983,000 is presented within ‘Fee and commission income’. Performance obligations The following table presents revenues in the current year. The Company had no unsatisfied performance obligations from contracts with customers with original expected durations exceeding 1 year as at 31 December 2018. Current contract revenues 2018 US$’000 Commission income 16,970 Other revenue from contracts with customers 10 Total revenue from contracts with customers 16,980 32


  • Page 35

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 8. OTHER REVENUE 2018 2017 US$’000 US$’000 Net foreign exchange gains - 1,408 Management charges to other Morgan Stanley Group undertakings 6,420 1,889 Others 83 132 6,503 3,429 9. INTEREST INCOME AND INTEREST EXPENSE No other gains or losses have been recognised in respect of financial assets measured at amortised cost other than as disclosed as ‘Interest income’ and foreign exchange differences disclosed in ‘Other expenses’ (note 10). No other gains or losses have been recognised in respect of financial liabilities measured at amortised cost other than as disclosed as ‘Interest expense’, and foreign exchange differences disclosed in ‘Other expenses’ (note 10). The table below presents interest income and expense by accounting classification. Interest income and expense is calculated using the effective interest method for financial assets and financial liabilities measured at amortised cost and financial assets measured at FVOCI. 2018 2017 US$’000 US$’000 Financial assets measured at amortised cost 40,652 - Financial assets measured at FVOCI 35,100 - Loans and receivables - 26,488 Total interest income 75,752 26,488 Financial liabilities measured at amortised cost (23,517) (33,570) Total interest expense (23,517) (33,570) Net interest income/(expense) 52,235 (7,082) 33


  • Page 36

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 10. OTHER EXPENSES 2018 2017 US$’000 US$’000 Staff costs 133,239 128,067 Directors’ remuneration Fees 134 82 Contribution to defined contribution plan 70 71 Others 6,804 10,211 Net foreign exchange losses 5,467 - Auditors’ remuneration: Fees payable to the Company’s auditor for the audit of the Company’s annual financial statements 569 579 Fees payable to the Company’s auditor for other services to the Company 2 2 Non-audit professional services 7,435 10,049 Management charges from other Morgan Stanley Group undertakings relating to staff costs 539 128 Management charges from other Morgan Stanley Group undertakings relating to other services 68,960 57,010 Others 3,816 3,512 227,035 209,711 Included within ‘Staff costs’, ‘Directors’ remuneration’ and ‘Management charges from other Morgan Stanley Group undertakings’ are amounts totalling US$15,521,000 (2017: US$13,197,000) in relation to equity-settled share-based compensation plans granted to employees of the Company. These costs reflect the amortisation of equity-based awards in relation to current and previous years’ awards and are therefore not directly aligned with other staff costs in the current year. Similarly, included within ‘Staff costs’, ‘Directors’ remuneration’ and ‘Management charges from other Morgan Stanley Group undertakings’ are amounts totalling US$14,996,000 (2017: US$14,008,000) in relation to the amortisation of current and previous years’ awards of deferred cash-based compensation, granted to employees of the Company. Further information regarding employee compensation plans is provided in note 30. For the years ended 31 December 2018 and 31 December 2017, the Company has not paid any (a) payments or benefits in respect of the termination of the service of directors whether in the capacity of directors or in any other capacity while being a director of the Company, and (b) consideration provided to or receivable by any third party for making available the services of a person as a director or in any other capacity while being a director of the Company. During the year, the Company has not granted any loans, quasi-loans nor entered into any other dealings in favor of (a) the Directors, (b) entities controlled by the Directors; or (c) entities connected with the Directors (2017: Nil). 34


  • Page 37

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 11. INCOME TAX 2018 2017 US$’000 US$’000 Current tax Current year Hong Kong 9,210 4,638 Other jurisdiction 1,959 742 11,169 5,380 Adjustments in respect of prior years Hong Kong 44 (43) Other jurisdiction 21 (50) 65 (93) 11,234 5,287 Deferred tax Origination and reversal of temporary differences 2,101 (951) Adjustments in respect of prior years 8 (21) 2,109 (972) Income tax 13,343 4,315 Reconciliation of effective tax rate The current year income tax expense is lower (2017: lower) than that resulting from applying the standard rate of profits tax in Hong Kong for the year of 16.5% (2017:16.5%). The main differences are explained below: 2018 2017 US$’000 US$’000 Profit before income tax 87,616 29,361 Income tax using the standard rate of profits tax in Hong Kong of 16.5% 14,457 4,845 Impact on tax of: Expenses not deductible for tax purposes 1,583 1,834 Recognition of previously unrecognised tax losses - (44) Tax exempt income (2,010) (1,823) Concessionary tax rate (794) (450) Effect of tax rates in foreign jurisdiction 85 47 Tax under/(over) provided in prior years 73 (70) Withholding tax expensed 10 6 Other (61) (30) Total income tax in the income statement 13,343 4,315 35


  • Page 38

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 11. INCOME TAX (CONTINUED) In addition to the amount charged to the income statement, the aggregate amount of current and deferred tax relating to each component of other comprehensive income was as follows: 2018 2017 Tax Tax Before (expense)/ Net of Before benefit/ Net of tax benefit tax tax (expense) tax US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 FVOCI reserve: Net change in fair value 2,332 (356) 1,976 - - - Net amount reclassified to income statement (373) 61 (312) - - - Available-for-sale reserve: Net change in fair value - - - (655) 83 (572) Net amount reclassified to income statement - - - 338 (41) 297 Other comprehensive income 1,959 (295) 1,664 (317) 42 (275) 12. FINANCIAL ASSETS AND FINANCIAL LIABILITIES BY MEASUREMENT CATEGORY The following table analyses financial assets and financial liabilities as at 31 December 2018 presented in the statement of financial position by HKFRS 9 classifications. 2018 Amortised FVPL FVOCI cost Total US$’000 US$’000 US$’000 US$’000 Cash and short-term deposits - - 538,485 538,485 Trading financial assets 969 - - 969 Loans and advances to customers - - 1,598,301 1,598,301 Investment securities - 1,315,300 - 1,315,300 Trade and other receivables - - 6,172 6,172 Total financial assets 969 1,315,300 2,142,958 3,459,227 Trading financial liabilities 3,164 - - 3,164 Deposits - - 3,029,991 3,029,991 Trade and other payables - - 112,919 112,919 Total financial liabilities 3,164 - 3,142,910 3,146,074 36


  • Page 39

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 12. FINANCIAL ASSETS AND FINANCIAL LIABILITIES BY MEASUREMENT CATEGORY (CONTINUED) The following table analyses financial assets and financial liabilities as at 31 December 2017 presented in the statement of financial position by HKAS 39 classifications. 2017 Financial liabilities FVPL at (held for Available Loans and amortised trading) -for-sale receivables cost Total US$’000 US$’000 US$’000 US$’000 US$’000 Cash and short-term - - 188,267 - 188,267 deposits Trading financial assets 2,813 - - - 2,813 Loans and advances to - - 1,430,416 - 1,430,416 customers Investment securities - 2,410,435 - - 2,410,435 Trade and other - - 18,781 - 18,781 receivables 2,813 2,410,435 1,637,464 - 4,050,712 Total financial assets Trading financial 15,771 - - - 15,771 liabilities Deposits - - - 3,686,326 3,686,326 Trade and other - - - 120,039 120,039 payables Total financial 15,771 - - 3,806,365 3,822,136 liabilities 37


  • Page 40

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 13. TRADING FINANCIAL ASSETS AND LIABILITIES Trading assets and trading liabilities are summarised as follows: 2018 2017 Notional Fair value Notional Fair value amount Assets Liabilities amount Assets Liabilities US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Derivatives: Foreign exchange contracts 696,576 969 3,164 2,179,821 2,522 15,771 Interest rate contracts - - - 1,050,000 291 - 696,576 969 3,164 3,229,821 2,813 15,771 The derivatives are entered with other Morgan Stanley Group undertakings (see note 32). 14. LOANS AND ADVANCES TO CUSTOMERS 2018 2017 US$’000 US$’000 Loans and advances to customers at amortised cost 1,598,301 1,430,416 There was no ECL impairment loss on loans and advances to customers as at 31 December 2018 (2017: Nil). Refer to note 24 for further information. See note 3(f), for an explanation of ECL under HKFRS 9 and impairment under HKAS 39. 15. INVESTMENT SECURITIES 2018 2017 US$’000 US$’000 Investment securities (FVOCI) Government debt securities: Singapore government treasury bills 270,923 - US treasury bills and securities 1,044,377 - Available-for-sale financial assets Government debt securities: Singapore government treasury bills - 1,287,352 US treasury bills and securities - 1,123,083 Total 1,315,300 2,410,435 38


  • Page 41

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 16. TRADE AND OTHER RECEIVABLES 2018 2017 US$’000 US$’000 Trade and other receivables Trade receivables 1,735 15,314 Other receivables Amounts due from other Morgan Stanley Group undertakings 39 633 Interest receivable 4,362 2,743 Other amounts receivable 36 91 6,172 18,781 17. TRADE AND OTHER PAYABLES 2018 2017 US$’000 US$’000 Trade and other payables Trade payables 17,047 254 Other payables Amounts due to other Morgan Stanley Group undertakings 12,039 13,520 Staff compensation and benefits accruals 74,577 81,502 Funds-in-transit - 20,000 Interest payable 5,589 1,160 Other amounts payable 3,667 3,603 112,919 120,039 18. DEPOSITS 2018 2017 US$’000 US$’000 Deposits of banks Current account balances 1,202 1,734 Deposits of non-bank customers Current account balances 2,484,966 2,644,840 Term deposits 543,823 254,478 Deposits of other Morgan Stanley Group undertakings - 785,274 3,029,991 3,686,326 19. DEFERRED TAX ASSETS Deferred taxes are calculated on all temporary differences under the liability method. The movement in the deferred tax account is as follows: Deferred tax asset 2018 2017 US$’000 US$’000 At 1 January 6,452 5,406 Amount recognised in the income statement (2,109) 972 Amount recognised in other comprehensive income: Financial assets measured at FVOCI (295) - Available-for-sale financial assets - 42 Foreign exchange revaluation (25) 32 At 31 December 4,023 5, 6,452 39


  • Page 42

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 19. DEFERRED TAX ASSETS (CONTINUED) The deferred tax included in the statement of financial position and changes recorded in ‘Income tax’/‘Other comprehensive income’ are as follows: 2018 2017 Deferred Other Deferred Other Tax Income Comprehensive tax Income Comprehensive Asset statement Income asset statement Income US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Deferred compensation 2,779 (2,109) - 6,355 1,585 - Financial assets measured at FVOCI 1,244 - (295) - - - Available-for-sale financial assets - - - 97 - 42 Tax losses utilised - - - - (613) - 4,023 (2,109) (295) 6,452 972 42 The deferred tax assets recognised are based on management assessment that it is probable that the Company will have taxable profits against which the temporary differences can be utilised. 20. COMMITMENTS AND CONTINGENCIES At 31 December 2018, there were no commitments and contingencies (2017: Nil). 21. EQUITY Ordinary share capital Ordinary Ordinary shares shares Number US$’000 Issued and fully paid At 1 January 2017, 31 December 2017 and 31 December 2018 170,000,000 170,000 The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company. All shares rank equally with regard to the Company’s residual assets. Reserves FVOCI reserve The ‘FVOCI reserve’ of US$968,000 (2017: US$nil) includes the cumulative net change in the fair value of FVOCI financial assets held at the reporting date. The tax effect of these movements is also included in the ‘FVOCI reserve’. Available-for-sale reserve The ‘Available-for-sale reserve’ of US$nil (2017: US$696,000) includes the cumulative net change in the fair value of available-for-sale financial assets held at the reporting date. The tax effect of these movements is also included in the ‘Available-for-sale reserve’. 40


  • Page 43

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 22. ADDITIONAL CASH FLOW INFORMATION a. Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances, which have less than three months maturity from the date of acquisition: 2018 2017 US$’000 US$’000 Cash with central bank 7,985 14,212 Cash at banks 526,978 162,968 Placements with banks 3,522 11,087 538,485 188,267 b. Reconciliation of cash flows from operating activities 2018 2017 US$’000 US$’000 Profit for the year 74,273 25,046 Adjustments for: Net gains on derecognition of financial assets measured at FVOCI (373) - Net income from other financial assets held at fair value - (136,283) Interest income (75,752) (26,488) Interest expense 23,517 33,570 Income tax 13,343 4,315 Operating cash flows before changes in operating assets and liabilities 35,008 (99,840) Changes in operating assets Increase in loans and advances to customers (167,885) (172,625) Decrease/(increase) in trade and other receivables 14,229 (8,681) Decrease in trading financial assets 1,844 32,234 Decrease/(increase) in prepayments 91 (107) (151,721) (149,179) Changes in operating liabilities Decrease in deposits (651,434) (639,299) Decrease in trade and other payables (11,550) (6,362) (Decrease)/increase in trading financial liabilities (12,607) 14,477 Increase in accruals 125 31 (675,466) (631,153) Interest received 39,032 21,876 Interest paid (23,988) (45,553) Net income tax paid (5,205) (350) Effect of foreign exchange movements 15,260 8 Net cash flows used in operating activities (767,080) (904,191) 41


  • Page 44

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 23. EXPECTED MATURITY OF ASSETS AND LIABILITIES The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered, realised or settled. At 31 December 2018 Less than More or equal than to twelve twelve months months Total US$’000 US$’000 US$’000 ASSETS Cash and short-term deposits 538,485 - 538,485 Trading financial assets 969 - 969 Loans and advances to customers 1,598,301 - 1,598,301 Investment securities 720,304 594,996 1,315,300 Trade and other receivables 6,172 - 6,172 Deferred tax assets - 4,023 4,023 Prepayments 124 - 124 2,864,355 599,019 3,463,374 LIABILITIES Trading financial liabilities 3,164 - 3,164 Deposits 3,029,991 - 3,029,991 Trade and other payables 96,462 16,457 112,919 Current tax liabilities 7,662 - 7,662 Accruals 733 - 733 3,138,012 16,457 3,154,469 At 31 December 2017 Less than or equal More than to twelve twelve months months Total US$’000 US$’000 US$’000 ASSETS Cash and short-term deposits 188,267 - 188,267 Trading financial assets 2,813 - 2,813 Loans and advances to customers 1,430,416 - 1,430,416 Investment securities 2,410,435 - 2,410,435 Trade and other receivables 18,781 - 18,781 Deferred tax assets - 6,452 6,452 Prepayments 215 - 215 4,050,927 6,452 4,057,379 LIABILITIES Trading financial liabilities 15,771 - 15,771 Deposits 3,686,326 - 3,686,326 Trade and other payables 94,458 25,581 120,039 Current tax liabilities 1,667 - 1,667 Accruals 608 - 608 3,798,830 25,581 3,824,411 42


  • Page 45

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 24. FINANCIAL RISK MANAGEMENT Risk management procedures Risk is an inherent part of the Morgan Stanley Group’s and the Company’s business activities. The Company seeks to identify, assess, monitor, and manage each of the various types of risk involved in its business activities in accordance with defined policies and procedures. The Company has developed its own risk management policy framework, which is consistent with and leverages the risk management policies and procedures of the Morgan Stanley Group and which includes escalation to appropriate senior management personnel of the Company as well as oversight through the Company’s Board of Directors (the “Board”) and through a dedicated Risk Committee that reports to the Board. Significant risks faced by the Company resulting from its private wealth management and financing activities are set out below. Credit risk Credit risk refers to the risk of loss arising when a borrower, counterparty or issuer does not meet its financial obligations to the Company. The Company incurs credit risk primarily from margin loans to clients of the Wealth Management business segment, and to a lesser extent from Treasury activities related to deposit placement, investment portfolio and interest rate and foreign exchange hedges. Credit risk management Credit risk exposure is managed on a global basis and in consideration of each significant legal entity within the Morgan Stanley Group. The credit risk management policies and procedures establish the framework for identifying, measuring, monitoring and controlling credit risk whilst ensuring transparency of material credit risks, compliance with established limits and escalating risk concentrations to appropriate senior management and the Board of Directors. The Company incurs credit risk primarily in the Wealth Management business through margin loans to its clients. Margin loans are asset-based in nature secured by mostly cash and marketable securities held with the Company as collateral. The Company also incurs credit risk through a variety of treasury activities, including, but not limited to, the following: • entering into derivative contracts with other Morgan Stanley Group undertakings under which counterparties may have obligations to make payments to the Company; • posting margin and/or collateral to banks and other financial counterparties; • placing funds on deposit at other financial institutions; and • entering into securities transactions, whereby the value of these assets may fluctuate based on realised or expected defaults on the underlying obligations. Monitoring and Control In order to help protect the Company from losses, the Credit Risk Management Department establishes firm-wide practices to evaluate, monitor and control credit risk at the transaction, obligor and portfolio levels. The Credit Risk Management Department approves extensions of credit, evaluates the creditworthiness of the Company’s counterparties and borrowers on a regular basis, and helps ensure that credit exposure is actively monitored and managed. The evaluation of counterparties and borrowers includes an assessment of the probability that an obligor will default on its financial obligations and any subsequent losses that may occur when an obligor defaults. In addition, credit risk exposure is actively managed by credit professionals and committees within the Credit Risk Management Department and through various risk committees, whose membership includes individuals from the Credit Risk Management Department. 43


  • Page 46

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk management (continued) Monitoring and Control (continued) A Credit Limits Framework is utilised to manage credit risk levels across the Company. The Credit Limits Framework is calibrated within the Company’s risk appetite and includes stress loss, product, collateral concentration, correlated collateral, single-name, regulatory and connected lending limits. The Credit Risk Management Department helps ensure timely and transparent communication of material credit risks, compliance with established limits and escalation of risk concentrations to appropriate senior management. The Credit Risk Management Department also works closely with the Market Risk Department and applicable business units to monitor risk exposures and to perform stress tests to identify, analyse and control credit risk concentrations arising from the Company’s lending and treasury activities. The stress tests shock market factors (e.g. interest rates, security prices, credit spreads) and risk parameters (e.g. default probabilities), in order to assess the impact of stresses on exposures, profit and loss, and the Company’s capital position. Stress tests are conducted in accordance with established policies and procedures of Morgan Stanley Group and the Company and comply with methodologies outlined in the Basel regulatory framework. Credit Evaluation The evaluation of corporate and institutional counterparties and borrowers includes assigning obligor credit ratings, which reflect an assessment of an obligor’s PD and LGD. An obligor credit rating can be categorised into Investment grade, Non-investment grade and Default. Credit evaluations typically involve the assessment of financial statements, leverage, liquidity, capital strength, asset composition and quality, market capitalisation, access to capital markets, the adequacy of collateral, if applicable, and in the case of certain loans, cash flow projections and debt service requirements. The Credit Risk Management Department also evaluates strategy, market position, industry dynamics, management and other factors that could affect the obligor’s risk profile. Additionally, the Credit Risk Management Department evaluates the relative position of the Morgan Stanley Group’s exposure in the borrower’s capital structure and relative recovery prospects, as well as adequacy of collateral (if applicable) and other structural elements of the particular transaction. The Company’s Wealth Management business segment generates minimal credit exposure given the collateralised nature of the business, as such the credit evaluation focuses on the counterparties’ and borrowers’ background and collateral evaluation, to ensure the exposures are well-collateralised and credit risk is mitigated. In addition to assessing and monitoring its credit exposure and risk at the individual obligor level, the Company also reviews its credit exposure and risk to geographic regions. As at 31 December 2018 and 31 December 2017, credit exposure was concentrated in North American and Asian countries. In addition, the Company pays particular attention to smaller exposures in emerging markets given their unique risk profile. Sovereign ceiling ratings are derived using methodologies generally consistent with those employed by external rating agencies. The Company also reviews its credit exposure and risk to certain types of customers. At 31 December 2018 and 31 December 2017, the Company’s material credit exposure was to sovereigns, sovereign related entities, corporate entities, financial institutions and individuals. 44


  • Page 47

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk management (continued) Risk Mitigation The Credit Risk Management Department may seek to mitigate credit risk from its lending and treasury activities in multiple ways, including collateral provisions and hedges. In connection with the Company’s Wealth Management business, the Company relies on the use of collateral to manage credit risk. The amount and type of collateral required by the Company depends on an assessment of the credit risk of the obligor. Collateral held is managed in accordance with the Company’s guidelines and the relevant underlying agreements. Collateral is primarily publicly traded debt and equity securities, as well as a small amount of other collateral including unlisted securities, notes, mutual funds and insurance policies that fulfill the risk management requirement of being valuable and realisable at short notice. In connection with the Company’s derivatives activities with other Morgan Stanley Group undertakings, the Company generally enters into master netting agreements and collateral arrangements with counterparties. These agreements provide the Company with the ability to demand collateral, as well as to liquidate collateral and offset receivables and payables covered under the same master agreement in the event of a counterparty default. In connection with securities purchased under agreements to resell transactions, the Company manages credit exposure arising from such transactions by, in appropriate circumstances, entering into Global Master Repurchase Agreements with counterparties that provide the Company, in the event of a counterparty default, with the right to net a counterparty’s rights and obligations under such agreement and liquidate and set off collateral held by the Company against the net amount owed by the counterparty. Under these securities purchased under agreements to resell transactions, the Company receives collateral, including US government securities. The Company also monitors the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and, as necessary, requests additional collateral to ensure such transactions are adequately collateralised. As at 31 December 2018 and 31 December 2017, there were no outstanding securities purchased under agreements to resell transactions. Exposure to credit risk The maximum exposure to credit risk (“gross credit exposure”) of the Company as at 31 December 2018 and 31 December 2017 is disclosed below, based on the carrying amounts of the financial assets the Company believes are subject to credit risk. Within the table financial instruments subject to accounting ECL are distinguished from those that are not. Those financial instruments that bear credit risk but are not subject to ECL are subsequently measured at fair value. Where the Company enters into credit enhancements, including receiving cash and security as collateral and master netting agreements, to manage the credit exposure on these financial instruments the financial effect of the credit enhancements is also disclosed below. The net credit exposure represents the credit exposure remaining after the effect of the credit enhancements. The Company does not have any significant exposure arising from items not recognised on the statement of financial position. Collateral and other credit enhancements The Company employs a range of policies and practices to mitigate credit risk, the most common being acceptance of collateral for funds advanced. The main types of collateral held are cash and marketable securities. The Company has internal policies on the acceptability of specific classes of collateral or credit risk mitigation. The market value of securities received as collateral is monitored on a daily basis and securities received as collateral generally are not recognised on the statement of financial position. The Company monitors the creditworthiness of counterparties on an ongoing basis and requests additional collateral in accordance with collateral arrangements when deemed necessary. 45


  • Page 48

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Collateral and other credit enhancements (continued) At 31 December 2018, the carrying amount of financial assets on which no ECL were recognised because of collateral held was US$1,598,301,000. The Company closely monitors collateral held for financial assets considered to be credit-impaired, as in such cases it is considered more likely that the Company will take possession of collateral to mitigate potential credit losses. The Company does not hold financial assets considered to be credit-impaired. Exposure to credit risk by product 2018 Gross Net credit Credit credit exposure(¹) enhancements exposure US$’000 US$’000 US$’000 Subject to ECL: Cash and short-term deposits 538,485 - 538,485 Loans and advances to customers(3) 1,598,301 (1,598,301) - Investment securities 1,315,300 - 1,315,300 Trade and other receivables(2) 6,172 - 6,172 Not subject to ECL(4): Trading financial assets Derivatives 969 (969) - 3,459,227 (1,599,270) 1,859,957 Maximum exposure to credit risk for 2017 is presented as follows, reflecting the statement of financial position categories used in 2017: 2017 Gross Net credit Credit credit exposure(¹) enhancements exposure US$’000 US$’000 US$’000 Cash and short-term deposits 188,267 - 188,267 Trading financial assets 2,813 (243) 2,570 Loans and advances to customers(3) 1,430,416 (1,430,416) - Investment securities 2,410,435 - 2,410,435 Trade and other receivables(2) 18,781 - 18,781 4,050,712 (1,430,659) 2,620,053 (1) The carrying amount recognised in the statement of financial position best represents the Company's maximum exposure to credit risk. (2) Trade and other receivables include cash collateral pledged against the payable on OTC derivative positions. These derivative liabilities are included within trading financial liabilities in the statement of financial position. (3) The collateral held as security for loan and advances to customers consists of cash of US$379,894,000 (2017: US$358,105,000), securities of US$714,488,000 (2017: US$647,222,000) and other collateral of US$503,919,000 (2017: US$425,089,000). (4) Financial assets measured at FVPL are not subject to ECL. 46


  • Page 49

    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Expected credit loss measurement Assessment of significant increase in credit risk As explained in note 3(f), in order to assess whether an instrument is subject to a 12 month ECL or to a lifetime ECL, and therefore its appropriate staging, the Company determines whether there has been a SICR for the instrument since initial recognition. When making this assessment, the Company considers both quantitative and qualitative information and analysis based on the Company’s historical experience and expert credit risk assessment, including forward-looking information. The PD is derived from internal credit rating grades (based on available information about the borrower) and multiple forward-looking macroeconomic scenarios which are probability weighted. Credit risk is considered to have increased significantly if the PD has significantly increased at the reporting date relative to the PD of the facility, at the date of initial recognition. The assessment of whether a change in PD is “significant” is based both on a consideration of the relative change in PD and on qualitative indicators of the credit risk of the facility, which indicate whether a loan is performing or in difficulty. In addition, as a backstop, the Company considers that SICR has occurred in all cases when an asset is more than 30 DPD. Calculation of ECL ECLs are calculated using three main components: • PD: for accounting purposes, the 12 month and lifetime PD represent the expected point-in-time probability of a default over the next 12 months and over the remaining lifetime of the financial instrument respectively, based on conditions existing at the balance sheet date and future economic conditions. • LGD: the LGD represents expected loss conditional on default, taking into account the mitigating effect of collateral, including the expected value of the collateral when realised and the time value of money. • EAD: this represents the expected EAD, taking into account the expected repayment of principal and interest from the balance sheet date to the default event together with any expected drawdowns of the facility over that period. These parameters are generally derived from internally developed statistical models, incorporating historical, current and forward-looking macro-economic data. The 12 month ECL is equal to the sum over the next 12 months of quarterly PD multiplied by LGD and EAD, with such expected losses being discounted at the EIR. Lifetime ECL is calculated using the discounted present value of total quarterly PDs multiplied by LGD and EAD, over the full remaining life of the facility. Incorporation of forward looking information The Company uses internal macro-economic research and country risk expert judgement to support the calculation of ECL. The macro-economic scenarios are reviewed quarterly. There have been no changes made to estimation techniques or significant assumptions for estimating impairment, during the year. 47


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    MORGAN STANLEY ASIA INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2018 24. FINANCIAL RISK MANAGEMENT (CONTINUED) Exposure to credit risk by internal rating grades Internal credit ratings are derived using methodologies generally consistent with those used by external agencies. Recognised financial instruments subject to ECL The following table provides an analysis of the credit risk exposure by ECL stage per class of recognised financial instrument subject to ECL, based on the following internal credit rating grades: Investment grade: internal grades AAA - BBB Non-investment grade: internal grades BB - CCC Default: internal grades D 31 December 2018 ECL staging Stage 1 Stage 2 12-month Lifetime ECL ECL Total US$’000 US$’000 US$’000 Cash and short-term deposits: Credit grade Investment grade 538,485 - 538,485 Gross carrying amount and carrying amount 538,485 - 538,485 Loans and advances to customers(1): Credit grade Investment grade - 45,500 45,500 Non-investment grade - 1,530,209 1,530,209 Unrated - 22,592 22,592 Gross carrying amount and carrying amount - 1,598,301 1,598,301 48

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