##### Table of Contents



As filed with the Securities and Exchange Commission on May 31, 2007
   SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 20-F
 þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2006
 Commission file number 001-15004
 Kowloon-Canton Railway Corporation
  Not Applicable.
 The Hong Kong Special Administrative Region of the Peoples Republic of China
 KCRC House, 9 Lok King Street, Fo Tan, Shatin, New Territories, Hong Kong
  Title of Each Class
    
    Name of Each Exchange
On Which Registered8.0% Notes due 2010
    
    New York Stock Exchange
 
 
  
  o þ
  o þ
  þ o
  o o þ
  þ o
  o þ




---



##### Table of Contents



TABLE OF CONTENTS
 PageGENERAL INFORMATION
    
    iiiEXCHANGE RATE INFORMATION
    
    iiiFORWARD-LOOKING STATEMENTS
    
    iiiPART I
    
    
    1ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    1ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3. KEY INFORMATION
    
    
    13.A Selected Financial Data
    
    
    13.B Capitalization and Indebtedness
    
    
    43.C Reasons for the Offer and Use of Proceeds
    
    
    43.D
Risk Factors
    
    
    4ITEM 4. INFORMATION ON THE CORPORATION
    
    
    114.A History and Development of the Corporation
    
    
    114.B Business Overview
    
    
    144.C Organizational Structure
    
    
    364.D Property, Plant and Equipment
    
    
    374.E Recent Developments
    
    
    38ITEM 4A. UNRESOLVED STAFF COMMENTS
    
    
    39ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    405.A Operating Results
    
    
    405.B Liquidity and Capital Resources
    
    
    535.C Research and Development, Patents and Licenses
    
    
    585.D Trend Information
    
    
    585.E Off-Balance Sheet Arrangements
    
    
    595.F Tabular Disclosure of Contractual Obligations
    
    
    59ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    606.A Directors and Senior Management
    
    
    606.B Compensation
    
    
    636.C Managing Board Practices
    
    
    646.D Employees
    
    
    65ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    677.A Major Shareholder
    
    
    677.B Related Party Transactions
    
    
    677.C Interests of Experts and Counsel
    
    
    69ITEM 8. FINANCIAL INFORMATION
    
    
    698.A Consolidated Statements and Other Financial Information
    
    
    69ITEM 9. THE OFFER AND LISTING
    
    
    709.A The Offer and Listing Details
    
    
    709.C Markets
    
    
    70ITEM 10. ADDITIONAL INFORMATION
    
    
    7010.B Memorandum and Articles of Association
    
    
    7010.C Material Contracts
    
    
    7210.D Exchange Controls
    
    
    72
 i




---



##### Table of Contents



10.E Taxation
    
    
    7310.H Documents on Display
    
    
    75ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
    
    
    76ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    78PART II
    
    
    78ITEM 13. DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    78ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    78ITEM 15. CONTROLS AND PROCEDURES
    
    
    78ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    79ITEM 16B. CODE OF ETHICS
    
    
    79ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    79ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    80ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    80PART III
    
    
    80ITEM 17. FINANCIAL STATEMENTS
    
    
    80ITEM 18. FINANCIAL STATEMENTS
    
    
    80ITEM 19. EXHIBITS
    
    
    80SIGNATURES
    
    
    S-1INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-1EX-1.4 BOARD GENERAL STANDING ORDERS AND RULESEX-12.1 CEO CERTIFICATION PURSUANT TO SECTION 302EX-12.2 DIRECTOR-FINANCE CERTIFICATION PURSUANT TO SECTION 302EX-13.1 CEO CERTIFICATION PURSUANT TO SECTION 906EX-13.2 DIRECTOR-FINANCE CERTIFICATION PURSUANT TO SECTION 906
  ii




---



##### Table of Contents



GENERAL INFORMATION
  
 EXCHANGE RATE INFORMATION
   
 FORWARD-LOOKING STATEMENTS
   
    
    the proposed merger of operations between us and MTR Corporation Limited
(MTRCL) following, among other things, the approval by the Legislative Council of
Hong Kong (the LegCo) and the minority shareholders of MTRCL;
    
    the general political, social, public health and economic conditions in
Hong Kong and elsewhere in Asia;
    
    population growth and demographic movement of population in Hong Kong;
 iii




---



##### Table of Contents




    
    the terms on which we finance our working capital and capital expenditure requirements;
    
    accidents and natural disasters;
    
    our ability to complete our rail network expansion and upgrade projects on
time and within budget;
    
    cost of equipment that we import as part of our rail network expansion and
upgrade;
    
    competition from alternative modes of transportation, such as buses, tour
coaches, taxis, private cars, trucks, ferries, ocean going vessels and airplanes;
    
    our ability to implement increases in fares or service charges;
    
    the decision of the Government on the award of new railway projects;
    
    our relationship with railway authorities in mainland China;
    
    the level of cross-boundary economic activities;
    
    regulatory, construction and other problems in completing our property developments; and
    
    the level of prevailing interest and foreign exchange rates.
  iv




---



##### Table of Contents



PART I
 
 ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
  
 ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM
3. KEY INFORMATION
 
   Year Ended December 31,2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2006(10)HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(in millions, except share data)Consolidated Income Statement Data:HK GAAP:Revenue
    
    
    4,830
    
    
    
    4,426
    
    
    
    4,976
    
    
    
    5,383
    
    
    
    5,622
    
    
    
    723Operating costs before depreciation and
amortization
    
    
    (2,171
    )
    
    
    (2,129
    )
    
    
    (2,804
    )
    
    
    (3,027
    )
    
    
    (3,042
    )
    
    
    (391
    )Operating profit before depreciation and
amortization
    
    
    2,659
    
    
    
    2,297
    
    
    
    2,172
    
    
    
    2,356
    
    
    
    2,580
    
    
    
    332Depreciation and amortization
    
    
    (725
    )
    
    
    (748
    )
    
    
    (1,681
    )
    
    
    (2,258
    )
    
    
    (2,288
    )
    
    
    (294
    )Operating profit after depreciation and
amortization
    
    
    1,934
    
    
    
    1,549
    
    
    
    491
    
    
    
    98
    
    
    
    292
    
    
    
    38Interest and finance income
    
    
    744
    
    
    
    485
    
    
    
    444
    
    
    
    525
    
    
    
    499
    
    
    
    64Interest and finance expenses
    
    
    (126
    )
    
    
    (132
    )
    
    
    (485
    )
    
    
    (823
    )
    
    
    (815
    )
    
    
    (105
    )Profit from property development
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    427
    
    
    
    55Share of profit of associate
    
    
    16
    
    
    
    7
    
    
    
    15
    
    
    
    15
    
    
    
    27
    
    
    
    3Profit/(loss) before unrealized gains/losses
    
    
    2,662
    
    
    
    1,909
    
    
    
    465
    
    
    
    (185
    )
    
    
    430
    
    
    
    55Gains/(losses) on changes in fair value of
derivative financial instruments and hedged
borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    (198
    )
    
    
    (25
    )Net valuation gains/(losses) on investment
properties
    
    
    (42
    )
    
    
    (17
    )
    
    
    148
    
    
    
    171
    
    
    
    99
    
    
    
    13Profit before taxation
    
    
    2,620
    
    
    
    1,892
    
    
    
    613
    
    
    
    386
    
    
    
    331
    
    
    
    43
 1




---



##### Table of Contents



Year Ended December 31,2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2006(10)HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(in millions, except share data)Income tax
    
    
    (445
    )
    
    
    (527
    )
    
    
    (100
    )
    
    
    (69
    )
    
    
    (53
    )
    
    
    (7
    )Profit after taxation
    
    
    2,175
    
    
    
    1,365
    
    
    
    513
    
    
    
    317
    
    
    
    278
    
    
    
    36Dividend
    
    
    620
    
    
    
    620
    
    
    
    172
    
    
    
    
    
    
    
    82
    
    
    
    11Earnings per share(1)  Basic
    
    
    5,560
    
    
    
    3,489
    
    
    
    1,311
    
    
    
    810
    
    
    
    711
    
    
    
    91Dividend per share
    
    
    1,585
    
    
    
    1,585
    
    
    
    440
    
    
    
    
    
    
    
    210
    
    
    
    27US GAAP:Depreciation
    
    
    737
    
    
    
    774
    
    
    
    1,905
    
    
    
    2,398
    
    
    
    2,430
    
    
    
    312Operating profit/(loss) before net interest
and finance income/expenses and gains/losses
on changes in fair value of derivative
financial instruments and hedged borrowings
    
    
    1,796
    
    
    
    1,389
    
    
    
    221
    
    
    
    (16
    )
    
    
    70
    
    
    
    9Net interest and finance income/(expenses)
and gains/losses on changes in fair value of
derivative financial instruments and hedged
borrowings
    
    
    1,640
    
    
    
    437
    
    
    
    (556
    )
    
    
    117
    
    
    
    (552
    )
    
    
    (71
    )Operating profit/(loss) after net interest
and finance income/expenses and gains/losses
on changes in fair value of derivative
financial instruments and hedged borrowings
    
    
    3,436
    
    
    
    1,826
    
    
    
    (335
    )
    
    
    101
    
    
    
    (482
    )
    
    
    (62
    )Profit from property development
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    280
    
    
    
    36Profit/(loss) before taxation
    
    
    3,473
    
    
    
    1,834
    
    
    
    (319
    )
    
    
    144
    
    
    
    (175
    )
    
    
    (23
    )Net income/(loss)
    
    
    2,989
    
    
    
    1,321
    
    
    
    (246
    )
    
    
    111
    
    
    
    (149
    )
    
    
    (19
    )Earnings/(losses) per share(1)
    
    
    7,641
    
    
    
    3,377
    
    
    
    (629
    )
    
    
    284
    
    
    
    (381
    )
    
    
    (49
    )
 Year Ended December 31,2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2006(10)HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(in millions, except share data)Consolidated Balance Sheet Data:HK GAAP:Working capital(2)
    
    
    1,397
    
    
    
    (748
    )
    
    
    (2,294
    )
    
    
    (1,387
    )
    
    
    (1,633
    )
    
    
    (210
    )Total assets(3)
    
    
    86,108
    
    
    
    89,204
    
    
    
    91,386
    
    
    
    89,752
    
    
    
    87,975
    
    
    
    11,312Fixed assets (including interest in
leasehold land held for own use under
operating leases)
    
    
    14,051
    
    
    
    51,857
    
    
    
    67,746
    
    
    
    66,943
    
    
    
    65,400
    
    
    
    8,409Long-term obligations(3) (4)
    
    
    17,753
    
    
    
    20,771
    
    
    
    20,465
    
    
    
    20,519
    
    
    
    19,752
    
    
    
    2,540Shareholders funds
    
    
    59,490
    
    
    
    60,184
    
    
    
    60,062
    
    
    
    59,653
    
    
    
    59,933
    
    
    
    7,706Issued and outstanding shares
    
    
    391,200
    
    
    
    391,200
    
    
    
    391,200
    
    
    
    391,200
    
    
    
    391,200
    
    
    
    US GAAP:Total assets(3)
    
    
    102,915
    
    
    
    109,306
    
    
    
    111,510
    
    
    
    109,413
    
    
    
    105,876
    
    
    
    13,614Fixed assets (including interest in
leasehold land held for own use under
operating leases)
    
    
    13,449
    
    
    
    56,412
    
    
    
    72,724
    
    
    
    71,586
    
    
    
    69,774
    
    
    
    8,972Long-term obligations(3) (4)
    
    
    27,382
    
    
    
    33,841
    
    
    
    34,499
    
    
    
    33,707
    
    
    
    31,286
    
    
    
    4,023Shareholders equity
    
    
    66,442
    
    
    
    67,006
    
    
    
    66,118
    
    
    
    66,071
    
    
    
    65,925
    
    
    
    8,477
 Year Ended December 31,2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2006(10)HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(in millions, except share data)Other Consolidated Financial Data:HK GAAP:Capital expenditure(5)
    
    
    12,308
    
    
    
    11,122
    
    
    
    9,025
    
    
    
    3,835
    
    
    
    3,317
    
    
    
    427Revenue per employee
    
    
    1.222
    
    
    
    0.950
    
    
    
    0.994
    
    
    
    1.050
    
    
    
    1.058
    
    
    
    0.136Total debt(6)
    
    
    17,753
    
    
    
    20,013
    
    
    
    19,748
    
    
    
    19,474
    
    
    
    19,212
    
    
    
    2,470Debt/equity ratio(6)
    
    
    1:3.4
    
    
    
    1:3.0
    
    
    
    1:3.0
    
    
    
    1:3.1
    
    
    
    1:3.1
    
    
    
    1:3.1
 2




---



##### Table of Contents



Year Ended December 31,2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2006(10)HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    US$(in millions, except share data)Net cash inflow from operating activities
    
    
    2,500
    
    
    
    1,870
    
    
    
    1,932
    
    
    
    2,747
    
    
    
    4,168
    
    
    
    536US GAAP:Net cash provided by operating activities
    
    
    3,087
    
    
    
    1,333
    
    
    
    2,015
    
    
    
    2,008
    
    
    
    2,919
    
    
    
    375Railway Operation Data:Route kilometers (km):East Rail(7)
    
    
    34
    
    
    
    34
    
    
    
    46.5
    
    
    
    46.5
    
    
    
    46.5
    
    
    
    Light Rail
    
    
    31.75
    
    
    
    36.2
    
    
    
    36.2
    
    
    
    36.2
    
    
    
    36.2
    
    
    
    West Rail
    
    
    
    
    
    
    30.5
    
    
    
    30.5
    
    
    
    30.5
    
    
    
    30.5
    
    
    
    Total number of passengers (in millions):East Rail(7)
    
    
    296
    
    
    
    278
    
    
    
    292
    
    
    
    325
    
    
    
    335
    
    
    
    Light Rail
    
    
    114
    
    
    
    106
    
    
    
    132
    
    
    
    136
    
    
    
    136
    
    
    
    West Rail
    
    
    
    
    
    
    1
    
    
    
    48
    
    
    
    65
    
    
    
    73
    
    
    
    Railway operating profit/(loss) per
passenger carried:(8)East Rail(7)
    
    
    5.56
    
    
    
    4.74
    
    
    
    
    (9)
    
    
    
    (9)
    
    
    
    (9)
    
    
    
    (9)Light Rail
    
    
    (1.00
    )
    
    
    (0.88
    )
    
    
    
    (9)
    
    
    
    (9)
    
    
    
    (9)
    
    
    
    (9)West Rail
    
    
    
    
    
    
    
    
    
    
    
    (9)
    
    
    
    (9)
    
    
    
    (9)
    
    
    
    (9)
 
 (1)
    
    See the table below for details of the computation of earnings per share.(2)
    
    Working capital is defined as the sum of stores and spares, interest and other
receivables, and cash and cash equivalents, minus the sum of interest and other payables,
accrued charges and provisions for capital projects.(3)
    
    Total assets and long-term obligations under US GAAP are derived from the
corresponding amounts under HK GAAP, adjusted by the relevant items specified in Note 44 to
our audited consolidated financial statements. Total assets and long-term obligations under
US GAAP include defeased lease deposits and lease payment commitments in respect of certain
lease out and lease back arrangements not recognized under HK GAAP. See Note 44(j) to our
audited consolidated financial statements.(4)
    
    Under HK GAAP, long-term obligations include interest-bearing borrowings, derivative
financial liabilities and lease payment commitments arising from certain lease out and lease
back arrangements, which meet the definition of a liability and are recognized as obligations
in the balance sheet. See Note 2(ac) to our audited consolidated financial statements.(5)
    
    The capital expenditure figures are presented on an accruals basis and a detailed
breakdown of capital expenditure for 2004, 2005 and 2006 is shown in the last table under
Capital Commitments in Item 5.B.(6)
    
    Total debt under HK GAAP represents interest-bearing borrowings.(7)
    
    The data excludes through train operations. From 2004 onwards, route kilometers and
passenger figures include the Tsim Sha Tsui Extension and the Ma On Shan Rail, which commenced
operations on October 24, 2004 and December 21, 2004, respectively.(8)
    
    The railway operating profit/(loss) per passenger carried as calculated for 2002 and
2003 include depreciation but exclude net interest and finance income/expenses. The cost of
feeder bus services is included in the operating costs of the East Rail and the Light Rail.
Furthermore, fare revenues, rather than total divisional revenues of both the East Rail and
the Light Rail, were used for calculating the operating profit/(loss) for consistency.(9)
    
    In December 2003, the East Rail Division and the West Rail/Light Rail Division were
combined to form a single Transport Division. The Transport Division manages all the
transport services including the East Rail, the Light Rail, the West Rail and Freight
services. Consistent with our internal organizational and management structure, a transport
services segment has been created in place of individual segments comprising the East Rail,
the Light Rail, the West Rail and Freight. Since December 2003, most of our operating costs
have been incurred indivisibly for the various railway services segments. Since 2004,
separate profit/(loss) figures for individual business segments have not been available.(10)
    
    Solely for your convenience, we have translated certain Hong Kong dollar amounts
into U.S. dollar amounts at the rate of HK$7.7771 = US$1.00, the noon buying rate in New York
City for cable transfers in Hong Kong dollars as certified for customs purposes by the Federal
Reserve Bank of New York on December 29, 2006. These translations should not be construed as
representations that the Hong Kong dollar amounts could have been, or could be, converted into
U.S. dollar amounts at the rate or at any other certain rate on December 29, 2006, or at any
other date. The U.S. dollar amounts under Consolidated Income Statement Data and
Consolidated Balance Sheet Data are rounded to the nearest million. 3




---



##### Table of Contents



Computation of Earnings per Share :
 2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2006Weighted average number of ordinary shares
    
    
    391,200
    
    
    
    391,200
    
    
    
    391,200
    
    
    
    391,200
    
    
    
    391,200HK GAAP:Profit after taxation (HK$ million)
    
    
    2,175
    
    
    
    1,365
    
    
    
    513
    
    
    
    317
    
    
    
    278
    
    
    
    36Earnings per share  Basic
    
    HK$
    5,560
    
    
    HK$
    3,489
    
    
    HK$
    1,311
    
    
    HK$
    810
    
    
    HK$
    711
    
    
    US$
    91US GAAP:Profit/(loss) after taxation (HK$
million)
    
    
    2,989
    
    
    
    1,321
    
    
    
    (246
    )
    
    
    111
    
    
    
    (149
    )
    
    
    (19
    )Earnings/(losses) per share  Basic
    
    HK$
    7,641
    
    
    HK$
    3,377
    
    
    HK$
    (629
    )
    
    HK$
    284
    
    
    HK$
    (381
    )
    
    US$
    (49
    )
 Exchange Rate Information
   Noon Buying RateAverage(1)
    
    High
    
    Low
    
    Period-EndYear2002
    
    
    7.7996
    
    
    
    7.8080
    
    
    
    7.7970
    
    
    
    7.79882003
    
    
    7.7864
    
    
    
    7.8001
    
    
    
    7.7640
    
    
    
    7.76402004
    
    
    7.7899
    
    
    
    7.8010
    
    
    
    7.7632
    
    
    
    7.77232005
    
    
    7.7755
    
    
    
    7.7999
    
    
    
    7.7514
    
    
    
    7.75332006
    
    
    7.7681
    
    
    
    7.7928
    
    
    
    7.7506
    
    
    
    7.7771Months2006November
    
    
    
    
    
    
    7.7864
    
    
    
    7.7751
    
    
    
    7.7779December
    
    
    
    
    
    
    7.7787
    
    
    
    7.7665
    
    
    
    7.77712007January
    
    
    
    
    
    
    7.8112
    
    
    
    7.7797
    
    
    
    7.8078February
    
    
    
    
    
    
    7.8141
    
    
    
    7.8041
    
    
    
    7.8119March
    
    
    
    
    
    
    7.8177
    
    
    
    7.8093
    
    
    
    7.8137April
    
    
    
    
    
    
    7.8212
    
    
    
    7.8095
    
    
    
    7.8212May (May 1 to May 29)
    
    
    
    
    
    
    7.8236
    
    
    
    7.8116
    
    
    
    7.8194
 
 (1)
    
    Represents the average of the noon buying rates on the last business day of each
month during the relevant year. 
   
   
  Risks Relating to Our Business
 We generate revenues primarily from fares paid by Hong Kong residents and commercial activities
within Hong Kong, including property-related revenues; increase in our operating costs due to
inflation or adverse developments in Hong Kongs social, public health and economic conditions
could reduce these revenues and hurt our business and operating results.
 4




---



##### Table of Contents



Our fare revenues depend, in part, on fare levels, and the Government has the ultimate authority to
change our fares; our inability or a reduction in our ability to raise fares to cover future
operating costs could adversely affect our financial performance.
  Our future financial performance, as well as our ability to meet our debt obligations, will depend
on the level of revenues generated from and the costs of operating our new railway projects, which
are capital-intensive infrastructure projects, the successful development of which involves many
uncertainties.
  5




---



##### Table of Contents



We face competition from other transport providers. The increase in their market shares might
adversely affect our revenue growth. Hence, this might inhibit our ability to raise fares or set
fare levels that will adequately cover our costs if we do not want to lose market share.
    Technological problems attributable to accidents, human error or natural disasters could affect the
performance or perception of our railway and prevent us from generating revenues or reduce our
operating flexibility.
   6




---



##### Table of Contents



We are regulated by the Government, which could modify the scope of our activities or impose
obligations on us or our customers, which could reduce revenues, increase costs or otherwise change
our business from its current scope.
  If we are unable to obtain financing on reasonable terms to fund the substantial capital
expenditure we expect to incur, we may not be able to implement our planned projects.
 7




---



##### Table of Contents




    
    change of project design and configuration;
    
    costs of related property developments;
    
    utility costs, such as electricity and energy, which may increase due to
the increase in fuel costs;
    
    costs of equipment for our railroad network;
    
    regulatory and construction problems;
    
    the terms on which we finance our working capital and capital expenditure requirements;
    
    delays in implementing the projects or commencing operation of the projects; and
    
    the level of prevailing interest rates and foreign exchange rates.
  Because we are undertaking certain U.S. dollar denominated capital expenditure for our expansion
and expect to finance a portion of the cost in U.S. dollars, any devaluation of the Hong Kong
dollar would increase costs associated with our capital expansion or our Hong Kong dollar cost to
repay our indebtedness.
  8




---



##### Table of Contents



Because we are owned by the Government and substantially all of our revenues are derived from
operations in Hong Kong, changes in Hong Kongs political situation may affect the manner in which
our business is conducted as well as business confidence and economic conditions in Hong Kong,
which could affect our business.
  Risks Relating to the Rail Merger
 The Government has entered into a non-binding memorandum of understanding with MTRCL setting out
the terms of a proposed merger of our rail operations and sale to MTRCL of certain rail-related
assets and property interests. The proposed merger of our rail operations would result in
substantially all our revenues being derived from payments from MTRCL.
    9




---



##### Table of Contents



Following the Rail Merger, we would effectively cease our commercial operations and the cash flow
required to service our debt and fund our capital expenditure requirements would be substantially
dependent on payments from MTRCL, interest earned on our investments and borrowings under our
long-term credit facilities or short-term money market facilities. We expect to seek alternative
financing to repay or refinance our debt as it matures. We cannot assure you that such refinancing
will be readily available or on attractive or historically comparable terms or that the cost of
such refinancing will not have a material adverse effect on our business or results of operations.
   10




---



##### Table of Contents



Risk Relating to the Notes
 You may have difficulty in enforcing judgments regarding the Notes you hold against us or our
management outside the United States.
  
 ITEM 4. INFORMATION ON THE CORPORATION
 
      11




---



##### Table of Contents



12




---



##### Table of Contents



th www.kcrc.com
 Business Development
   13




---



##### Table of Contents



Capital Expenditure
    
     14




---



##### Table of Contents



Year Ended December 31,2004
    
    2005
    
    2006Segment
    
    
    
    
    
    Segment
    
    
    
    
    
    SegmentRevenue
    
    result(1)
    
    Revenue
    
    result(1)
    
    Revenue
    
    result(1)HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$(in millions)Passenger Services:East Rail(2)
    
    
    3,415
    
    
    
    
    
    
    
    3,670
    
    
    
    
    
    
    
    3,780
    
    
    
    West Rail/Light Rail
    
    
    798
    
    
    
    
    
    
    
    890
    
    
    
    
    
    
    
    922
    
    
    
    Freight
    
    
    68
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    44
    
    
    
    Transport Services
    
    
    4,281
    
    
    
    1,869
    
    
    
    4,612
    
    
    
    2,004
    
    
    
    4,746
    
    
    
    2,096Property Services(3)
    
    
    695
    
    
    
    532
    
    
    
    771
    
    
    
    580
    
    
    
    876
    
    
    
    699Total
    
    
    4,976
    
    
    
    2,401
    
    
    
    5,383
    
    
    
    2,584
    
    
    
    5,622
    
    
    
    2,795
 
 (1)
    
    Segment result is defined as profit before depreciation and amortization,
unallocated corporate expenses and interest and finance income/expenses; and excludes profit
from property development and net valuation gains/losses on investment properties.(2)
    
    Includes the Tsim Sha Tsui Extension and the Ma On Shan Rail, which commenced
operations on October 24, 2004 and December 21, 2004 respectively.(3)
    
    Includes recurrent commercial property ownership and management revenues from the
Property Division such as leasing, rental, advertising and estate management, but excludes
property development income. Rail Operations
 East Rail
  15




---



##### Table of Contents



verview
   Tsim Sha Tsui Extension and Ma On Shan Rail
  Cross-Boundary and Through Train Services
   16




---



##### Table of Contents



Cross-Boundary Services
   Cross-Boundary Lo Wu
RidershipDaily Average Passenger-trips
    
    Year on year Growth (%)2002
    
    
    251,600
    
    
    
    6.32003
    
    
    224,500
    
    
    
    (10.8
    )2004
    
    
    232,500
    
    
    
    3.62005
    
    
    235,500
    
    
    
    1.32006
    
    
    241,000
    
    
    
    2.3
 Through Train Services
  17




---



##### Table of Contents



Facility Improvements
  Operations and Safety
    18




---



##### Table of Contents



Fare Promotions
  West Rail, Light Rail and Bus
 West Rail
   19




---



##### Table of Contents



Facility Improvements
   Operations and Safety
    20




---



##### Table of Contents



are Promotions
  Light Rail Services
     21




---



##### Table of Contents



Bus Operations
    Performance of the West Rail, Light Rail and Bus
  Freight Services
   22




---



##### Table of Contents



Health and Safety
   23




---



##### Table of Contents



Network Expansion
  Lok Ma Chau Spur Line
  24




---



##### Table of Contents



Kowloon Southern Link
   25




---



##### Table of Contents



Planned Railway Extensions
 Northern Link and Express Rail Link
     Shatin to Central Link
  26




---



##### Table of Contents



Financing of Capital Expenditure
  Pricing of Rail Services
    27




---



##### Table of Contents



Year Ended December 31,2002
    
    2003
    
    2004
    
    2005
    
    2006Annual average passenger fare increase (%)East Rail(1)
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Light Rail
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00West Rail
    
    
    
    
    
    
    
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Increase/(decrease) in CPI(2) (%)
    
    
    (3.20
    )
    
    
    (2.10
    )
    
    
    0.00
    
    
    
    1.10
    
    
    
    1.70Increase/(decrease) in average operating costs(3) per passenger
carried (%)East Rail(1)
    
    
    (1.56
    )
    
    
    3.17
    
    
    
    
    (5)
    
    
    
    (5)
    
    
    
    (5)Light Rail
    
    
    (7.61
    )
    
    
    (2.20
    )
    
    
    
    (5)
    
    
    
    (5)
    
    
    
    (5)West Rail
    
    
    
    
    
    
    
    (4)
    
    
    
    (5)
    
    
    
    (5)
    
    
    
    (5)
 
 (1)
    
    Excluding through train services.(2)
    
    Calculated using Hong Kong Consumer Price Index (A), which covers approximately 50%
of households in Hong Kong with average monthly household expenditure of HK$4,000 to HK$15,499
in 2004/2005, broadly equivalent to HK$4,100 to
HK$15,800 at 2006 prices. The Government has updated the index from the previous
1999/2000-based to the new 2004/2005-based. Following this update, the Census and Statistics
Department announced that the year-on-year and 12-months average rates of changes for the
reference months from October 2005 onwards have been changed because of the new 2004/2005-based
index. As a result, the CPI in 2005 was revised accordingly. Source: Census and Statistics
Department of the Government.(3)
    
    The average operating costs per passenger carried as calculated for 2002 and 2003
are derived before depreciation and amortization and net interest and finance income/expenses.
The cost of feeder buses are included in the operating costs of the East Rail and the Light
Rail.(4)
    
    The West Rail commenced operations on December 20, 2003. Information relating to
total number of passengers, and railway operating profit/(loss) per passenger carried for the
West Rail in 2003 is not shown due to the limited period of operation.(5)
    
    In December 2003, the East Rail Division and the West Rail/Light Rail Division were
combined to form a single Transport Division. The Transport Division manages all the
transport services including the East Rail, the Light Rail, the West Rail and Freight
services. Consistent with our internal organizational and management divisional structure, a
transport services segment has been created in place of individual segments comprising of the
East Rail, the Light Rail, the West Rail and Freight. Since December 2003, most of the
operating costs have been incurred indivisibly for the various railway services segments. As
a result, from 2004 onwards, separate profit/(loss) figures for individual business segments
have not been available.  Future Railway Development of the Government
  28




---



##### Table of Contents




    
    The Kowloon Southern Link, see Item 4. Information on the
CorporationBusiness OverviewKowloon Southern Link.
    
    The Shatin to Central Link, see Item 4. Information on the
CorporationBusiness OverviewShatin to Central Link.
    
    The Port Rail Line, which would provide a direct freight rail link between
mainland China and the proposed Port Rail Terminal at Kwai Chung Container Port,
thereby enhancing connectivity between Hong Kong and its mainland China hinterland and
increasing the volumes of cargo transported by rail to and from Hong Kongs Kwai Chung
Container Port.
    
    The Northern Link, see Item 4. Information on the CorporationBusiness
OverviewNorthern Link and Express Rail Link.
    
    The Regional Express Line, see Item 4. Information on the CorporationBusiness
OverviewNorthern Link and Express Rail Link.
  Property Development and Services
  Property Development
    29




---



##### Table of Contents



Arrangements with Developers
     30




---



##### Table of Contents



Properties Completed and Properties under Development
  Residential
    
    
    Commercialfloor area (sq m)
    
    
    floor area (sq m)Developed propertiesPierhead Garden, Tuen Mun
    
    
    91,400
    
    
    
    9,832Sun Tuen Mun Centre, Tuen Mun
    
    
    200,000
    
    
    
    14,000Manlai Court, Tai Wai
    
    
    43,850
    
    
    
    420Hanford Garden, Tuen Mun
    
    
    88,000
    
    
    
    3,200Sun Yuen Long Centre, Yuen Long
    
    
    66,430
    
    
    
    25,880Royal Ascot, Shatin
    
    
    271,656
    
    
    
    10,000Mong Kok Station
    
    
    
    
    
    
    149,590The Metropolis, Hung Hom
    
    
    
    
    
    
    132,218
    (1)Sub-total
    
    
    761,336
    
    
    
    345,140Property under constructionHo Tung Lau (Site A)
    
    
    120,900
    
    
    
    2,000Tai Wai Maintenance Centre
    
    
    313,955
    
    
    
    Tuen Mun Station
    
    
    119,512
    
    
    
    25,000Wu Kai Sha
    
    
    168,650
    
    
    
    4,000
    (2)Sub-total
    
    
    723,017
    
    
    
    31,000Total
    
    
    1,484,353
    
    
    
    376,140
 
 (1)
    
    Including 35,034 square meters of serviced apartment units.(2)
    
    Including 1,000 square meters of kindergarten. East Rail Property Development
  West Rail Property Development
   31




---



##### Table of Contents



Ma On Shan Rail Property Development
    Commercial Activities, Leasing and Property Management
   32




---



##### Table of Contents



Future Plans
    33




---



##### Table of Contents



Competition
   Government Regulations
 KCRC Ordinance
    34




---



##### Table of Contents



Environmental Matters
   35




---



##### Table of Contents



Jurisdiction of
    
    Proportion ofSubsidiary name
    
    incorporation
    
    ownershipManlai Court Property Management Company Limited(1)
    
    Hong Kong
    
    
    51.0
    %Sun Tuen Mun Centre Management Company Limited
    
    Hong Kong
    
    
    100.0
    %Royal Ascot Management Company Limited
    
    Hong Kong
    
    
    100.0
    %Hanford Garden Property Management Company Limited
    
    Hong Kong
    
    
    100.0
    %Pierhead Garden Management Company Limited
    
    Hong Kong
    
    
    100.0
    %The Metropolis Management Company Limited
    
    Hong Kong
    
    
    51.0
    %V-Connect Limited
    
    Hong Kong
    
    
    100.0
    %Capital System Limited(2)
    
    Hong Kong
    
    
    100.0
    %Buoyant Asset Limited
    
    Hong Kong
    
    
    100.0
    %Advanced Asset Limited
    
    Hong Kong
    
    
    100.0
    %Quality Asset Limited
    
    Hong Kong
    
    
    100.0
    %Kasey Asset Limited
    
    Hong Kong
    
    
    100.0
    %Circuit Asset Limited
    
    Hong Kong
    
    
    100.0
    %Shining Asset Limited
    
    Hong Kong
    
    
    100.0
    %Fluent Asset Limited
    
    Hong Kong
    
    
    100.0
    %Unique Asset Limited(3)
    
    Hong Kong
    
    
    100.0
    %Kudos Asset Limited(3)
    
    Hong Kong
    
    
    100.0
    %Bowman Asset Limited
    
    Cayman Islands
    
    
    100.0
    %Statesman Asset Limited
    
    Cayman Islands
    
    
    100.0
    %Interwind Asset Limited(4)
    
    Hong Kong
    
    
    100.0
    %
 36




---



##### Table of Contents



Jurisdiction of
    
    Proportion ofSubsidiary name
    
    incorporation
    
    ownershipHardy Asset Limited(4)
    
    Hong Kong
    
    
    100.0
    %Roving Asset Limited(4)
    
    Hong Kong
    
    
    100.0
    %Swanky Asset Limited(4)
    
    Hong Kong
    
    
    100.0
    %West Rail Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Subsidiaries
of West Rail Property Development LimitedKam Sheung Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Kwai Fong Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Long Ping Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Long Ping South Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Nam Cheong Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Pat Heung Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Tin Shui Wai Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Tsuen Wan West Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Tsuen Wan West Cityside Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Tsuen Wan West TW6 Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Tsuen Wan West TW7 Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Tuen Mun Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %Yuen Long Property Development Limited(5)
    
    Hong Kong
    
    
    51.0
    %
 
 (1)
    
    At December 31, 2006, the subsidiary was in the process of winding up as a result of
the termination of the business of property management in Manlai Court.(2)
    
    At December 31, 2006, the subsidiary was in the process of winding up as it is no
longer serving any commercial function.(3)
    
    At December 31, 2006, the subsidiaries were in the process of winding up as the
concerned leasing transaction was terminated in 2006.(4)
    
    At December 31, 2006, the subsidiaries were in the process of de-registration as the
proposed leasing transactions have not materialized.(5)
    
    These subsidiaries are held by us for the sole purpose of developing commercial or
residential property along the West Rail Phase I route on behalf of the Government and their
financial statements are excluded from consolidation as we have no effective control over nor
beneficial interests in the net assets of these subsidiaries, other than the amount of capital
provided. 
  Interest in Leasehold Land held for Own Use under Operating Leases
  37




---



##### Table of Contents



Proposed Rail Merger with MTRCL
     38




---



##### Table of Contents



ITEM 4A. UNRESOLVED STAFF COMMENTS
  39




---



##### Table of Contents



ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 You should read the following discussion and analysis in conjunction with the selected
consolidated financial data, the consolidated financial statements and the accompanying notes, and
the other financial information of KCRC that appears elsewhere in this Annual Report. The
following discussion includes various forward-looking statements that involve risks and
uncertainties. See Forward-looking Statements for specific information regarding the
presentation of our forward-looking statements. Financial and operating data appearing in this
section that is not derived from the audited consolidated financial statements of KCRC has been
derived without material adjustment from the unaudited accounting and operating records of KCRC.
 
  Critical Accounting Policies
  Impairment of assets
     40




---



##### Table of Contents



Construction in progress
  Deferred expenditure
  Depreciation
    41




---



##### Table of Contents



Deferred taxation
   Provisions and contingent liabilities
  US GAAP reconciliation
  42




---



##### Table of Contents



Recently Issued Accounting Standards of the United States
      43




---



##### Table of Contents



Policy on Derivative Financial Instruments
  Business Activities
  Transport Services Segment
 East Rail
   
    
    domestic passenger traffic: fares paid by passengers who travel between stations in
Hong Kong;
 44




---



##### Table of Contents




    
    cross-boundary passenger traffic: fares paid by passengers who travel on trains,
which terminate or begin at the Lo Wu boundary crossing; and
    
    through train passenger traffic: fares paid by passengers who travel directly
between Hong Kong and mainland China.
   Cross-Boundary Lo Wu
RidershipDaily Average Passenger-trips
    
    Year on year Growth (%)2002
    
    
    251,600
    
    
    
    6.32003
    
    
    224,500
    
    
    
    (10.8
    )2004
    
    
    232,500
    
    
    
    3.62005
    
    
    235,500
    
    
    
    1.32006
    
    
    241,000
    
    
    
    2.3
 th th
 West Rail, Light Rail, Bus
   45




---



##### Table of Contents



Freight
  Property Segment
 Property Development
     46




---



##### Table of Contents



Property and Commercial Services
  Finance Income/(Expenses)
  Operating Costs
  Major Business Activity Performance
  47




---



##### Table of Contents



Year Ended December 31,2004
    
    2005
    
    2006HK$
    
    HK$
    
    HK$(in millions)Revenue:Passenger ServicesEast Rail(1)
    
    
    3,415
    
    
    
    3,670
    
    
    
    3,780West Rail/Light Rail
    
    
    798
    
    
    
    890
    
    
    
    922Freight
    
    
    68
    
    
    
    52
    
    
    
    44Transport Services
    
    
    4,281
    
    
    
    4,612
    
    
    
    4,746Property Services
    
    
    695
    
    
    
    771
    
    
    
    876Total revenue
    
    
    4,976
    
    
    
    5,383
    
    
    
    5,622Operating profit/(loss) after depreciation and
amortization and net valuation gains/losses on
investment properties:Transport Services
    
    
    239
    
    
    
    (204
    )
    
    
    (137
    )Property Services
    
    
    651
    
    
    
    721
    
    
    
    1,187Total operating profit
    
    
    890
    
    
    
    517
    
    
    
    1,050Unallocated corporate expenses, depreciation and
amortization
    
    
    (251
    )
    
    
    (248
    )
    
    
    (232
    )Interest and finance income
    
    
    444
    
    
    
    525
    
    
    
    499Interests and finance expenses
    
    
    (485
    )
    
    
    (823
    )
    
    
    (815
    )Share of profit of associate
    
    
    15
    
    
    
    15
    
    
    
    27Gains/(losses) on changes in fair value of
derivative financial instruments and hedged
borrowings
    
    
    
    
    
    
    400
    
    
    
    (198
    )Taxation
    
    
    (100
    )
    
    
    (69
    )
    
    
    (53
    )Profit after taxation
    
    
    513
    
    
    
    317
    
    
    
    278
 
 (1)
    
    Includes the Tsim Sha Tsui Extension and the Ma On Shan Rail, which commenced
operations on October 24, 2004 and December 21, 2004, respectively. Contribution of Major Business Activities
  Year Ended December 31,2004
    
    2005
    
    2006%
    
    %
    
    %Revenue/Total Revenue:Passenger ServicesEast Rail
    
    
    68.6
    
    
    
    68.2
    
    
    
    67.2West Rail/Light Rail
    
    
    16.1
    
    
    
    16.5
    
    
    
    16.4Freight
    
    
    1.4
    
    
    
    1.0
    
    
    
    0.8Transport Services
    
    
    86.1
    
    
    
    85.7
    
    
    
    84.4Property Services
    
    
    13.9
    
    
    
    14.3
    
    
    
    15.6Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating profit/(loss)
after depreciation and
amortization and net
valuation gains/losses on
investment properties:Transport Services
    
    
    26.9
    
    
    
    (39.5
    )
    
    
    (13.0
    )Property Services
    
    
    73.1
    
    
    
    139.5
    
    
    
    113.0Total operating profit
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
 Results of Operations
  48




---



##### Table of Contents



Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
    Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
  49




---



##### Table of Contents



Inflation
  Effects of Interest Rate and Foreign Exchange Movements on Our Borrowings
  50




---



##### Table of Contents



Results of Operations under US GAAP
  2004
    
    2005
    
    2006HK$
    
    HK$
    
    HK$(in millions)Depreciation:HK GAAP
    
    
    1,681
    
    
    
    2,258
    
    
    
    2,288US GAAP(1)
    
    
    1,905
    
    
    
    2,398
    
    
    
    2,430Operating profit/(loss) before
net interest and finance
income/expenses and
gains/losses on changes in fair
value of derivative financial
instruments and hedged
borrowings:HK GAAP
    
    
    491
    
    
    
    98
    
    
    
    292US GAAP
    
    
    221
    
    
    
    (16
    )
    
    
    70Net interest and finance
income/(expenses) and gains
/losses on changes in fair
values of derivative financial
instruments and hedged
borrowings:HK GAAP
    
    
    (41
    )
    
    
    102
    
    
    
    (514
    )US GAAP(2)
    
    
    (556
    )
    
    
    117
    
    
    
    (552
    )Operating profit/(loss) after
net interest and finance
income/expenses and
gains/losses on changes in fair
values of derivative financial
instruments and hedged
borrowings:HK GAAP
    
    
    598
    
    
    
    371
    
    
    
    (123
    )US GAAP
    
    
    (335
    )
    
    
    101
    
    
    
    (482
    )Profit from property developmentHK GAAP
    
    
    
    
    
    
    
    
    
    
    427US
GAAP(3)
    
    
    
    
    
    
    25
    
    
    
    280Profit/(loss) before taxation:HK GAAP
    
    
    613
    
    
    
    386
    
    
    
    331US GAAP
    
    
    (319
    )
    
    
    144
    
    
    
    (175
    )
 
 (1)
    
    From 2004 onwards, the differences in depreciation between HK GAAP and US GAAP
were due to the depreciation of certain fixed assets and the depreciation of the interest and
finance income for the capital projects of the West Rail system, the Tsim Sha Tsui Extension
and the Ma On Shan Rail. See Notes 44(c) and 44(d) to our audited consolidated financial
statements for the depreciation of certain fixed assets and the depreciation of interest and
finance income respectively.(2)
    
    Prior to 2005, the major difference between HK GAAP and US GAAP for net interest and
finance income/(expenses) was the different accounting treatment in respect of the interest
and finance income generated from the pre-funding investments, capitalization of interest and
foreign exchange gains and losses from specific borrowings and derivative financial
instruments. From 2005 onwards, the derivative financial instruments do not account for the
difference as with effect from 2005, derivative financial instruments are accounted for under
HK GAAP, in the same manner as that of US GAAP. Details of which are set out in Notes 44(d),
44(g) and 44(i) to our audited consolidated financial statements. 51




---



##### Table of Contents



(3)
    
    The major difference between HK GAAP and US GAAP for profit from property
development is the different accounting treatment in respect of revenue recognition. Under US
GAAP, profit is recognized on a percentage-of-completion basis while for HK GAAP, profit is
recognized with reference to the outstanding risks, if any, retained by our group. See Note
44(e) to our audited consolidated financial statements. Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
       Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
     52




---



##### Table of Contents



Capital Commitments
   East Rail
    
    Kowloon SouthernExtensions
    
    Link
    
    TotalHK$
    
    HK$
    
    HK$(in billions)Anticipated development costs:Construction costs
    
    
    22.9
    
    
    
    8.0
    
    
    
    30.9Land costs
    
    
    1.3
    
    
    
    0.3
    
    
    
    1.6Financing costs
    
    
    3.0
    
    
    
    0.8
    
    
    
    3.8Total
    
    
    27.2
    
    
    
    9.1
    
    
    
    36.3Anticipated financing sources:Government equity
    
    
    8.0
    
    
    
    
    
    
    
    8.0KCRC debt
    
    
    12.6
    
    
    
    7.9
    
    
    
    20.5KCRC internal funds
    
    
    6.6
    
    
    
    1.2
    
    
    
    7.8Total
    
    
    27.2
    
    
    
    9.1
    
    
    
    36.3
  2006
    
    2007
    
    2008
    
    2009 onwards
    
    TotalHK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$(in billions)Construction costs
    
    
    1.8
    
    
    
    1.3
    
    
    
    1.0
    
    
    
    
    
    
    
    4.1Land costs
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.6Financing costs
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4Total
    
    
    2.4
    
    
    
    1.5
    
    
    
    1.1
    
    
    
    0.1
    
    
    
    5.1
  53




---



##### Table of Contents



2006
    
    2007
    
    2008
    
    2009 onwards
    
    TotalHK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$(in billions)Construction costs
    
    
    1.3
    
    
    
    2.2
    
    
    
    1.9
    
    
    
    1.7
    
    
    
    7.1Land costs
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.2Financing costs
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.8Total
    
    
    1.5
    
    
    
    2.4
    
    
    
    2.2
    
    
    
    2.0
    
    
    
    8.1
    Year Ended December 31,2004
    
    2005
    
    2006HK$
    
    HK$
    
    HK$(in millions)Railway related operational equipment(1)
    
    
    18
    
    
    
    25
    
    
    
    29Assets under construction:(2)East Rail Extensions
    
    
    5,321
    
    
    
    1,538
    
    
    
    1,197Kowloon Southern Link/Shatin to Central Link
    
    
    541
    
    
    
    979
    
    
    1,442Others
    
    
    4
    
    
    
    18
    
    
    
    1785,866
    
    
    
    2,535
    
    
    
    2,817Assets in operation:New railways(3)
    
    
    2,671
    
    
    
    746
    
    
    
    130Rolling stock
    
    
    42
    
    
    
    35
    
    
    
    38Investment property, leasehold land and buildings
    
    
    240
    
    
    
    212
    
    
    
    137Others(4)
    
    
    188
    
    
    
    282
    
    
    
    1663,141
    
    
    
    1,275
    
    
    
    471Total capital expenditure(5)
    
    
    9,025
    
    
    
    3,835
    
    
    
    3,317
 
 (1)
    
    Includes signaling systems, telecommunication equipment, automatic revenue
collection system machinery and equipment.(2)
    
    Assets under construction represent project costs of railway related operational
equipment, other railway related assets, and all capital expenditure of the Tsim Sha Tsui
Extension, the Ma On Shan Rail, the Lok Ma Chau Spur Line, the Kowloon Southern Link, the
Shatin to Central Link, the Northern Link and the Express Rail Link.(3)
    
    The assets in operation for the new railways represents the capital expenditure for
the fixed assets of the West Rail, the Ma On Shan Rail and the Tsim Sha Tsui Extension after
commencement of their operation.(4)
    
    Includes lifts, escalators, mobile phone communication equipment, air-conditioning
plant, furniture and fixtures, electronic data processing equipment, computer software, office
equipment, buses, motor vehicles, and tools.(5)
    
    Capital expenditure excludes capitalized finance income and expenses. See Note
2(ae) to our audited consolidated financial statements for our accounting policy on borrowing
costs and investment income. 54




---



##### Table of Contents



Resources for Capital Expenditure
 Earnings.
 Equity Contributions.
  Debt Facilities.
   
    
    In June 1999, we launched a US$1.5 billion Euro medium term note program under which
we may issue notes in any currency and maturity as we may agree with dealers. In
January 2000, the aggregate nominal amount of the program was increased from US$1.5
billion to US$3.0 billion. In July 1999 and November 1999, we issued 7.25% notes due
2009 in the aggregate nominal amount of US$1 billion and 7.77% notes due 2014 in the
aggregate nominal amount of US$50 million, respectively, under this program. The notes
issued under this program are unsecured and repayable in full on their respective due
dates.
 55




---



##### Table of Contents




    
    In July 1999, we entered into a loan agreement with The Export-Import Bank of Japan,
which was renamed as Japan Bank for International Cooperation on October 1, 1999 after
its merger with the Overseas Economic Cooperation Fund, and other lenders in connection
with an export credit facility in a principal amount of US$337.7 million. This
facility was made available for payments to the IKK Consortium (comprising Itochu
Corporation, The Kinki Sharyo Co. Ltd. and Kawasaki Heavy Industries, Ltd.) for the
design, manufacture, supply, testing and commissioning of electric multiple units for
both the West Rail and the East Rail. One-half of the borrowings under the facility
bears interest at 5.6% per year and the balance bears interest on a floating rate basis
at a margin over LIBOR. The outstanding amount of the facility was reduced to US$153.4
million as of December 31, 2006, following the cancellation of the undrawn amount of
US$47.5 million of the facility effective on June 30, 2003, and the subsequent
repayment of US$136.8 million by us. The loans are unsecured and repayable in 17
semi-annual installments commencing in April 2003. As of December 31, 2006,
approximately 95% of the total loan balance bears interest at a rate of 5.6% per annum
and the remaining 5% bears interest at LIBOR plus a margin. We prepaid the facility in
full on April 23, 2007.
    
    In March 2000, we issued 8.0% notes due in 2010 with an aggregate nominal amount of
US$1 billion. The Notes are unsecured senior obligations of KCRC and are rated equally
with all of our other unsecured senior indebtedness. The Notes are repayable in full
on their due date.
    
    In June 2000, we signed a US$42 million export credit loan facility with Export
Development Canada (formerly known as Export Development Corporation). This facility,
with a 12-year maturity, provided financing for the purchase of a train control and
signaling system for the West Rail. As of December 31, 2006, the outstanding balance
of this facility was US$26.8 million. This facility bears interest on a floating rate
basis at a margin over LIBOR and the loans are unsecured and repayable in 17
semi-annual installments commencing in May 2004. We prepaid the facility in full on
May 2, 2007.
    
    In June 2003, we issued Hong Kong dollar retail bonds with an aggregate
nominal amount of HK$1,000 million in two tranches, including 3.0% notes due 2008 in
the aggregate nominal amount of HK$300 million and 4.8% notes due 2013 in the aggregate
nominal amount of HK$700 million. The notes are unsecured and repayable in full on
their respective due dates.
    
    In June 2003, we issued HK$800 million in principal amount of 4.65% notes
due 2013 under the Euro medium term note program set up in June 1999. The notes
issued under this program are unsecured and repayable in full on their due date.
    
    In September 2004, we entered into a HK$8,000 million credit facilities
agreement with 18 banks and financial institutions. These facilities comprise three
tranches: a HK$3,500 million five-year credit facility, a HK$3,500 million seven-year
credit facility and a HK$1,000 million ten-year credit facility. Each facility is
available for drawing on a revolving credit basis for the first five years.
Thereafter, the outstanding amounts under the seven-year and ten-year facilities will
be converted to a term loan structure with bullet repayment upon the maturity of
each facility. Each facility bears interest on a floating rate basis at a margin over
HIBOR. As of December 31, 2006, no amount was drawn under any of the credit facilities.
 56




---



##### Table of Contents



Post-Rail Merger Capital Constraints
    Investments
  Working Capital
  57




---



##### Table of Contents



Claims Impact
   
   
   58




---



##### Table of Contents



59




---



##### Table of Contents



Contractual Obligations
    
    Payments Due by PeriodLess than
    
    1-3
    
    4-5
    
    After 51 year
    
    years
    
    years
    
    years
    
    TotalHK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$(in millions)Interest-bearing borrowings
    
    
    305
    
    
    
    8,772
    
    
    
    8,259
    
    
    
    1,876
    
    
    
    19,212Interest on interest-bearing borrowings(1)
    
    
    1,060
    
    
    
    2,079
    
    
    
    341
    
    
    
    91
    
    
    
    3,571Capital lease obligations(2)
    
    
    2,532
    
    
    
    6,381
    
    
    
    11,521
    
    
    
    
    
    
    
    20,434Operating leases
    
    
    38
    
    
    
    46
    
    
    
    3
    
    
    
    
    
    
    
    87Total
    
    
    3,935
    
    
    
    17,278
    
    
    
    20,124
    
    
    
    1,967
    
    
    
    43,304
 Other Commercial Commitments
    
    Amount of Commitment Expiration Per PeriodLess than
    
    1-3
    
    4-5
    
    After 51 year
    
    years
    
    years
    
    years
    
    TotalHK$
    
    HK$
    
    HK$
    
    HK$
    
    HK$(in millions)Letters of credit for leveraged leases
    
    
    374
    
    
    
    976
    
    
    
    531
    
    
    
    398
    
    
    
    2,279Purchase commitmentsCapital expenditure(3)
    
    
    3,566
    
    
    
    3,579
    
    
    
    754
    
    
    
    6
    
    
    
    7,905Recurrent expenditure
    
    
    601
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    671Total
    
    
    4,541
    
    
    
    4,625
    
    
    
    1,285
    
    
    
    404
    
    
    
    10,855
 
 (1)
    
    Interest on floating rate borrowings has not been included as it cannot be reliably
estimated. Fixed rate borrowings, which have been effectively converted into floating rate
borrowings by means of interest rate swaps are treated as floating rate borrowings. As of
December 31, 2006, floating rate borrowings amounted to HK$4,979 million, of which HK$3,208
million bears interest at a margin over LIBOR and HK$1,771 million at a margin over HIBOR.(2)
    
    Capital lease obligations represent all the lease payment commitments in respect of
certain lease out and lease back arrangements, including those which meet the definition of a
liability and are recognized as obligations in the balance sheet (see Note 27 to our audited
consolidated financial statements) and those not recognized as obligations in the balance
sheet under HK GAAP. See Note 44(j) to our audited consolidated financial statements.(3)
    
    The purchase commitments in connection with capital expenditure relate to capital
works contracted for and capital works authorized but not contracted for as of December 31,
2006. Since these works had not commenced as of December 31, 2006, they were not provided for
in our audited consolidated financial statements. 
 ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
     60




---



##### Table of Contents



Member
    
    Current TermMembers of the Managing Board
    
    Principal Outside Functions
    
    Since
    
    ExpiresMichael P.S. Tien, BBS, JP(1)(2)
Chairman
Chairman of Strategic Human Resource
Committee
    
    Chairman of The G2000
Group since 1979, Chairman
of the Standing Committee
on Language Education and
Research, Chairman of the
Employees Retraining
Board, Member of Education
Commission, Manpower
Development Committee and
Guangdong Chinese Peoples
Political Consultative
Conference.
    
    
    2001
    
    
    July 31, 2007James Blake, OBE, JP(2) (3)
Chief Executive Officer
Member of Capital Projects Committee
Member of Property Committee
Member of Finance Committee
    
    Member of the Election
Committee Engineering
Sub-sector, Co-Chairman of
the Corporate and Employee
Contribution Programme of
The Community Chest of
Hong Kong, Member of the
Construction Industry
Council.
    
    
    2006
    
    
    July 31, 2007Vincent W.S. Lo, BBS,JP(1) (2)
Chairman of Property Committee
    
    Consultant of Messrs.
Gallant Y.T. Ho & Co.,
Chairman of the Hong Kong
Red Cross Blood
Transfusion Service
Governing Committee and
Director of the Red Cross
Council, Member of the
Social Welfare Advisory
Committee and Member of
the Committee on Museums
of the Leisure and
Cultural Services
Department. Chairman of
the Hong Kong Sinfonietta.
    
    
    1999
    
    
    July 31, 2007Patrick B. Paul, CBE(3)
Chairman of Audit Committee
Member of Property Committee
Member of Strategic Human
Resource Committee
    
    Non-Executive Director of
The Hongkong and Shanghai
Hotels Ltd., Johnson
Electric Holdings Ltd.,
Kingsway International
Holdings Ltd. and Pacific
Basin Shipping Ltd.
    
    
    2002
    
    
    July 31, 2007M.Y. Wan, BBS, JP(1)(2)
Chairman of Capital Projects Committee
Member of Audit Committee
    
    Director of M Y Wan and
Associates Limited,
Honorary President of
Youth Outreach, Council
Member of Hong Kong
Federation of Youth
Groups, Manager of Chi Lin
Buddhist Secondary School
(SOS) and HKICC Lee Shau
Kee School of Creativity.
Panel Member of Appeal
Board on Closure Orders
(Immediate Health Hazard).
    
    
    2002
    
    
    July 31, 2007
 61




---



##### Table of Contents



Member
    
    Current TermMembers of the Managing Board
    
    Principal Outside Functions
    
    Since
    
    ExpiresAbraham L.H. Shek, JP(2)
Member of Capital Projects Committee
Member of Audit Committee
Member of Strategic Human Resource
Committee
    
    Member of the Legislative
Council representing the
Real Estate and
Construction Functional
Constituency. Independent
Non-executive Director and
Audit Committee Member of
Midas International
Holdings Ltd, Paliburg
Holdings Ltd., Lifestyle
International Holdings
Ltd., Chuangs Consortium
International Ltd., NWS
Holdings Ltd., See
Corporation Ltd., Eagle
Asset Management (CP)
Ltd., ITC Corporation
Limited and Country Garden
(Holdings) Company
Limited. Independent
Non-executive Director of
Titan Petrochemicals Group
Limited, Regal Portfolio
Management Limited, and
Hop Hing Holdings Limited.
Director of The Hong Kong
Mortgage Corporation Ltd.
Member of the Court of The
University of Hong Kong
and the Council of The
Hong Kong University of
Science and Technology.
    
    
    2004
    
    
    July 31, 2007Richard Y.C. Wong, SBS, JP(1)(2)
Chairman of Finance Committee
Member of Capital Projects Committee
    
    Deputy Vice-Chancellor and
Chair of Economics at the
University of Hong Kong,
Director of the Hong Kong
Centre for Economic
Research, Director of the
Hong Kong Institute of
Economics and Business
Strategy, Member of the
Hong Kong Governments
Commission on Strategic
Development of the
Committee on Economic
Development and Economic
Cooperation with the
Mainland. Non-Executive
Director of ICBC (Asia)
Limited, CK Life Sciences
International (Holdings)
Ltd., Orient Overseas
(International) Ltd.,
Pacific Century Insurance
(Holdings) Ltd., Great
Eagle Holdings Ltd.,
Pacific Century Premium
Developments Ltd. and Sun
Hung Kai Properties Ltd.
    
    
    2004
    
    
    July 31, 2007L.S. Ng, SBS, JP(1)(2)
Member of Property Committee
Member of Finance Committee
    
    Vice Chairman of Chiyu
Banking Corporation,
General Manager, Bank-wide
Operation Department, Bank
of China (HK) Ltd.,
Independent Non-Executive
Director of Smartone
Telephone Holdings Ltd,
and the Fisheries
Development Loan Fund
Advisory Committee,
Director of the Bank of
China (Hong Kong)
Charitable Foundation,
Member of the Court of
Lingnan University, Hong
Kong Deputy to the 10th
National Peoples
Congress, PRC.
    
    
    2004
    
    
    July 31, 2007Sarah S.T. Liao, JP(2)
Member of Capital Projects Committee
Member of Strategic Human Resource
Committee
    
    Secretary for the
Environment, Transport and
Works, the Government of
the Hong Kong Special
Administrative Region (ex
officio).
    
    
    2002
    
    
    No expiry
 62




---



##### Table of Contents



Member
    
    Current TermMembers of the Managing Board
    
    Principal Outside Functions
    
    Since
    
    ExpiresFrederick S.H. Ma, JP(2)
Member of Capital Projects Committee
Member of Finance Committee
Member of Property Committee
Member of Strategic Human Resource
Committee
    
    Secretary for Financial
Services and the Treasury,
the Government of the Hong
Kong Special
Administrative Region (ex
officio).
    
    
    2002
    
    
    No expiry
 
 (1)
    
    The abbreviation SBS means Silver Bauhinia Star and the abbreviation BBS means
Bronze Bauhinia Star. The honor is awarded by the Hong Kong Special Administrative Region.(2)
    
    The abbreviation JP means Justice of the Peace. This title is conferred by the
Chief Secretary for Administration, in exercise of the powers delegated to him or her by the
Chief Executive of Hong Kong.(3)
    
    The abbreviation CBE means Commander of the Most Excellent Order of the British
Empire and the abbreviation OBE means Officer of the Most Excellent Order of the British
Empire. These honors are awarded by the British monarch.  Members of Senior Management
    
    Position
    
    Position Held SinceJames Blake (1)
    
    Chief Executive Officer
    
    
    2006Y.T. Li
    
    Senior Director-Transport
    
    
    2003K.K. Lee
    
    Senior Director-Capital Projects
    
    
    2004Daniel C. Lam, BBS, JP(2)(3)
    
    Director-Property
    
    
    2000Lawrence C.P. Li
    
    Director-Finance
    
    
    2004Mimi Cunningham
    
    Director-Human Resource
    
    
    2004David A. Fleming
    
    Company Secretary and General Counsel
    
    
    1997
 
 (1)
    
    James Blake joined us as Chief Executive Officer (Designate) on March 22, 2006 and
as Chief Executive Officer on May 1, 2006.(2)
    
    The abbreviation JP means Justice of the Peace. This title is conferred by the
Chief Secretary of Administration, in exercise of the powers delegated to him or her by the
Chief Executive of Hong Kong.(3)
    
    The abbreviation BBS means Bronze Bauhinia Star. The honor is awarded by the Hong
Kong Special Administrative Region.  
   2006HK$(in thousands)ChairmanMichael P.S. Tien
    
    
    220MembersDr. Sarah S.T. Liao in the capacity of Secretary
For the Environment, Transport and Works
    
    
    110Vincent W.S. Lo
    
    
    110Frederick S.H. Ma in the capacity of Secretary
for Financial Services and the Treasury
    
    
    110
 63




---



##### Table of Contents



2006HK$(in thousands)L.S. Ng
    
    
    110Patrick B. Paul
    
    
    110Abraham L.H. Shek
    
    
    110M.Y. Wan
    
    
    110Richard Y.C. Wong
    
    
    110Total
    
    
    1,100
  2006
    
    
    2005HK$ million
    
    
    HK$ millionBase pay,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Base pay,allowances,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    allowances,gratuities
    
    
    Contribution
    
    
    
    
    
    
    
    
    
    
    gratuities
    
    
    Contributionand
    
    
    to retirement
    
    
    
    
    
    
    
    
    
    
    and
    
    
    to retirementbenefits-in-
    
    
    benefit
    
    
    Variable (5)
    
    
    
    
    
    benefits-in-
    
    
    benefit
    
    
    Variable(5)kind
    
    
    scheme
    
    
    remuneration
    
    
    Total
    
    
    kind
    
    
    scheme
    
    
    remuneration
    
    
    TotalSamuel M.H. Lai(1)
(Acting Chief Executive
Officer)
    
    
    3.04
    
    
    
    0.13
    
    
    
    
    
    
    
    3.17
    
    
    
    3.58
    
    
    
    0.38
    
    
    
    0.95
    
    
    
    4.91James Blake(2)
(Chief Executive Officer)
    
    
    3.00
    
    
    
    
    
    
    
    1.19
    
    
    
    4.19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Y.T. Li
(Senior Director-Transport)
    
    
    3.22
    
    
    
    0.29
    
    
    
    0.81
    
    
    
    4.32
    
    
    
    3.11
    
    
    
    0.28
    
    
    
    0.71
    
    
    
    4.10K.K. Lee
(Senior Director-Capital
Projects)
    
    
    3.12
    
    
    
    0.32
    
    
    
    0.91
    
    
    
    4.35
    
    
    
    3.05
    
    
    
    0.32
    
    
    
    0.79
    
    
    
    4.16Ian M. Thoms(3)
(Director-West Rail)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.96
    
    
    
    0.01
    
    
    
    
    
    
    
    1.97Daniel C. Lam
(Director-Property)
    
    
    3.24
    
    
    
    0.01
    
    
    
    0.92
    
    
    
    4.17
    
    
    
    3.25
    
    
    
    0.01
    
    
    
    0.82
    
    
    
    4.08Lawrence C.P. Li(4)
(Director-Finance)
    
    
    2.28
    
    
    
    0.22
    
    
    
    0.44
    
    
    
    2.94
    
    
    
    2.18
    
    
    
    0.21
    
    
    
    0.39
    
    
    
    2.78Mimi Cunningham
(Director-Human Resource)
    
    
    3.18
    
    
    
    0.01
    
    
    
    0.86
    
    
    
    4.05
    
    
    
    3.03
    
    
    
    0.01
    
    
    
    0.76
    
    
    
    3.80Total
    
    
    21.08
    
    
    
    0.98
    
    
    
    5.13
    
    
    
    27.19
    
    
    
    20.16
    
    
    
    1.22
    
    
    
    4.42
    
    
    
    25.80
 
 (1)
    
    Samuel M.H. Lai resigned on March 22, 2006 and left us on April 30, 2006. His
remuneration includes an end-of-service payment of HK$1.1 million.(2)
    
    James Blake joined us as Chief Executive Officer (Designate) on March 22, 2006 and
as Chief Executive Officer on May 1, 2006.(3)
    
    Ian M. Thoms retired on July 1, 2005.(4)
    
    With effect from January 1, 2005, a portion of total remuneration was converted to
variable remuneration related to performance.(5)
    
    Variable remuneration mainly comprises amounts withheld from employees basic salary
package and released for payment upon their satisfactory performance being confirmed by the
Managing Board. The total variable remuneration is calculated according to a formula devised
when the scheme was introduced at the request of the Managing Board.  
   64




---



##### Table of Contents



65




---



##### Table of Contents



66




---



##### Table of Contents



ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
    
  Kowloon Southern Link Project Agreement
     East Rail Extensions Project Agreement
  67




---



##### Table of Contents



Entrustment Agreements
  Octopus Cards Limited
    68




---



##### Table of Contents



Shareholding in and Loan to WRPDL
    Indebtedness of Managing Board and Management
  
   
 ITEM 8.FINANCIAL INFORMATION
 
   Legal Proceedings
  69




---



##### Table of Contents



Dividend Policy
   Significant Changes
  
 ITEM 9.THE OFFER AND LISTING
 
   
   
 ITEM 10.ADDITIONAL INFORMATION
 
  Organization and Register
    70




---



##### Table of Contents



Corporate Governance
       71




---



##### Table of Contents



Shares
      
   
   
 72




---



##### Table of Contents



The following summary of the material Hong Kong and United States federal income tax
consequences of beneficial ownership of the Notes is based upon laws, regulations, rulings, income
tax conventions (treaties), administrative practice and judicial decisions in effect on the date of
this Annual Report. Subsequent legislative, judicial or administrative changes or interpretations
may be retroactive and could affect these tax consequences.
 Your tax treatment as a holder of Notes may vary depending upon your particular situation, and
you may be subject to special rules not discussed below. State, local and foreign (other than Hong
Kong) tax consequences of ownership and disposition of the Notes are not discussed.
 You should consult your own tax advisors about the particular tax consequences of the
ownership and disposition of a Note, including the applicability and effect of any state, local or
foreign tax laws.
 Hong Kong Taxation
  (a)
    
    carry a right of conversion into stock or to the acquisition of any stock (as
defined in the Stamp Duty Ordinance (Cap. 117 of the Laws of Hong Kong)); or(b)
    
    carry (or did not carry) a right to interest the amount of which (1) exceeds a
reasonable commercial return on the nominal amount of the capital; or (2) falls or has
fallen to be determined to any extent by reference to the results of, or of any part
of, a business or to the value of any property; or(c)
    
    carry a right on repayment to an amount, which exceeds the nominal amount of
the capital and is not reasonably comparable with what is generally repayable in
respect of a similar nominal amount of capital under the terms of issue of loan capital
listed on The Stock Exchange of Hong Kong Limited.
  
    
    interest on the Notes is derived from Hong Kong and is received by or
accrues to a company carrying on a trade, profession or business in Hong Kong; or
    
    interest on the Notes is derived from Hong Kong and is received by or
accrues to a person, other than a company, carrying on a trade, profession or business
in Hong Kong and is in respect of the funds of the trade, profession or business; or
    
    interest on the Notes is received by or accrues to a financial
institution, as defined in the Inland Revenue Ordinance, and arises through or from the
carrying on by the financial institution of its business in Hong Kong.
 73




---



##### Table of Contents



United States Taxation
   
    
    a citizen or resident of the United States;
    
    a corporation, partnership or other business entity created or organized
under the laws of the United States or any political subdivision thereof;
    
    an estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
    
    a trust subject to the primary supervision of a court within the United
States and the control of one or more U.S. persons or that has otherwise validly
elected to be treated as a U.S. person.
  Taxation of U.S. Holders
 de minimis
   74




---



##### Table of Contents



Taxation of Non-U.S. Holders
  
    
    the gain is effectively connected with the holders conduct of a trade or business
in the United States; or
    
    the holder is an individual present in the United States for at least 183 days
during the taxable year of disposition and certain other conditions are met.
 Information Reporting and Backup Withholding
   
  http://www.sec.gov
  75




---



##### Table of Contents



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
    Interest Rate Risk
  As of December 31, 2006Expected Maturity Date
    
    As of December 31, 2005Aggregate
    
    
    
    
    
    Aggregate2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Thereafter
    
    Total
    
    Fair Value (1)
    
    Total
    
    Fair Value (1)(HK$ equivalent in millions, other than interest rates)Investment securities:Fixed rate:Principal amount (HK$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average interest ratePrincipal amount (US$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    70Average interest ratePrincipal amount (EUR)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average interest rateVariable rate:Principal amount (HK$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    20Average interest ratePrincipal amount (US$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    311
    
    
    
    310Average interest rateDebt instruments:Fixed rate:Medium term notePrincipal amount(US$)
    
    
    
    
    
    
    
    
    
    
    (7,804
    )
    
    
    
    
    
    
    
    
    
    
    (390
    )
    
    
    (8,194
    )
    
    
    (8,511
    )
    
    
    (8,172
    )
    
    
    (8,675
    )Average interest rate
    
    
    
    
    
    
    
    
    
    
    7.4
    %
    
    
    
    
    
    
    
    
    
    
    7.9
    %Principal amount(HK$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (800
    )
    
    
    (800
    )
    
    
    (808
    )
    
    
    (800
    )
    
    
    (789
    )Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.7
    %The NotesPrincipal amount(US$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,804
    )
    
    
    
    
    
    
    
    
    
    
    (7,804
    )
    
    
    (8,323
    )
    
    
    (7,783
    )
    
    
    (8,522
    )Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.2
    %Export credit loanPrincipal amount
(US$)
    
    
    (199.9
    )
    
    
    (266.4
    )
    
    
    (266.4
    )
    
    
    (266.4
    )
    
    
    (133.2
    )
    
    
    
    
    
    
    (1,132.3
    )
    
    
    (1,131.5
    )
    
    
    (1,130
    )
    
    
    (1,135
    )Average interest rate
    
    
    5.7
    %
    
    
    5.7
    %
    
    
    5.7
    %
    
    
    5.7
    %
    
    
    5.7
    %Retail bondPrincipal amount (HK$)
    
    
    
    
    
    
    (300
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (700
    )
    
    
    (1,000
    )
    
    
    (1,010
    )
    
    
    (1,000
    )
    
    
    (989
    )Average interest rate
    
    
    
    
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.9
    %Variable rate:
 76




---



##### Table of Contents



As of December 31, 2006Expected Maturity Date
    
    As of December 31, 2005Aggregate
    
    
    
    
    
    Aggregate2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Thereafter
    
    Total
    
    Fair Value (1)
    
    Total
    
    Fair Value (1)(HK$ equivalent in millions, other than interest rates)Export credit loanPrincipal amount US$)
    
    
    (103.3
    )
    
    
    (38.0
    )
    
    
    (38.0
    )
    
    
    (38.0
    )
    
    
    (38.0
    )
    
    
    (19.0
    )
    
    
    (274.3
    )
    
    
    (274.3
    )
    
    
    (571
    )
    
    
    (571
    )Average interest rate
    
    
    6
    %
    
    
    6.1
    %
    
    
    6.1
    %
    
    
    6.1
    %
    
    
    6.1
    %
    
    
    6.1
    %Interest rate swaps(1):Fixed to variable rate:Notional amount (US$)
    
    
    
    
    
    
    
    
    
    
    1,560.8
    
    
    
    1,365.7
    
    
    
    
    
    
    
    
    
    
    
    2,926.5
    
    
    
    42.3
    
    
    
    2,918.7
    
    
    
    82.9Interest pay rate
    
    
    
    
    
    
    
    
    
    
    5.7
    %
    
    
    9.3
    %Interest receive rate
    
    
    
    
    
    
    
    
    
    
    7.3
    %
    
    
    8
    %Notional amount (HK$)
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    1,800
    
    
    
    7
    
    
    
    1,800
    
    
    
    (35
    )Interest pay rate
    
    
    
    
    
    
    3.9
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.4
    %Interest receive rate
    
    
    
    
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.7
    %
 
 (1)
    
    Fair value for derivative financial instruments represent the amounts we would
receive or pay to close out the transactions. Foreign Currency Exchange Rate Risk
  As of December 31, 2006Expected Maturity Date
    
    As of December 31, 2005Aggregate
    
    
    
    
    
    Aggregate2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Thereafter
    
    Total
    
    Fair Value (1)
    
    Total
    
    Fair Value (1)(HK$ equivalent in millions, other than interest rates and exchange rates)Investment securities:Fixed rate:Principal amount (US$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    70Average interest rateVariable rate:Principal amount (US$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    310Average interest rateDebt instruments:Fixed rate:Medium term notePrincipal amount (US$)
    
    
    
    
    
    
    
    
    
    
    (7,804
    )
    
    
    
    
    
    
    
    
    
    
    (390
    )
    
    
    (8,194
    )
    
    
    (8,511
    )
    
    
    (8,172
    )
    
    
    (8,675
    )Average interest rate
    
    
    
    
    
    
    
    
    
    
    7.4
    %
    
    
    
    
    
    
    
    
    
    
    7.9
    %The NotesPrincipal amount (US$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,804
    )
    
    
    
    
    
    
    
    
    
    
    (7,804
    )
    
    
    (8,323
    )
    
    
    (7,783
    )
    
    
    (8,522
    )Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.2
    %Export credit loanPrincipal amount (US$)
    
    
    (199.9
    )
    
    
    (266.4
    )
    
    
    (266.4
    )
    
    
    (266.4
    )
    
    
    (133.2
    )
    
    
    
    
    
    
    (1,132.3
    )
    
    
    (1,131.5
    )
    
    
    (1,130
    )
    
    
    (1,135
    )Average interest rate
    
    
    5.7
    %
    
    
    5.7
    %
    
    
    5.7
    %
    
    
    5.7
    %
    
    
    5.7
    %
    
    
    0.0
    %Variable rate:Export credit loanPrincipal amount(US$)
    
    
    (103.3
    )
    
    
    (38.0
    )
    
    
    (38.0
    )
    
    
    (38.0
    )
    
    
    (38.0
    )
    
    
    (19.0
    )
    
    
    (274.3
    )
    
    
    (274.3
    )
    
    
    (571
    )
    
    
    (571
    )Average interest rate
    
    
    6.1
    %
    
    
    6.1
    %
    
    
    6.1
    %
    
    
    6.1
    %
    
    
    6.1
    %
    
    
    6.1
    %Foreign exchange agreements (1):Receive EUR/pay HK$
    
    
    36.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36.5
    
    
    
    1.1
    
    
    
    39.7
    
    
    
    (2.0
    )Average contractual exchange rate
    
    
    10.0Receive GBP/pay HK$
    
    
    3.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.6
    
    
    
    0.2
    
    
    
    6.8
    
    
    
    (0.1
    )Average contractual exchange rate
    
    
    14.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 77




---



##### Table of Contents



As of December 31, 2006Expected Maturity Date
    
    As of December 31, 2005Aggregate
    
    
    
    
    
    Aggregate2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    Thereafter
    
    Total
    
    Fair Value (1)
    
    Total
    
    Fair Value (1)(HK$ equivalent in millions, other than interest rates and exchange rates)Receive JPY/pay HK$
    
    
    268.7
    
    
    
    288.6
    
    
    
    16.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    573.6
    
    
    
    (41.7
    )
    
    
    0.8
    
    
    
    (0.1
    )Average contractual exchange rate
    
    
    0.07
    
    
    
    0.07
    
    
    
    0.08
    
    
    
    
    
    
    
    
    
    
    
    Receive US$/pay HK$
    
    
    755.2
    
    
    
    503.0
    
    
    
    8.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,266.4
    
    
    
    (0.2
    )
    
    
    1,176.3
    
    
    
    4.8Average contractual exchange rate
    
    
    7.7
    
    
    
    7.7
    
    
    
    7.7
    
    
    
    
    
    
    
    
    
    
    
    Currency Swap (1)Notional amount (Receive US$/ pay HK$)
    
    
    
    
    
    
    
    
    
    
    7,776.4
    
    
    
    7,017.4
    
    
    
    
    
    
    
    390
    
    
    
    15,183.8
    
    
    
    (456
    )
    
    
    15,184
    
    
    
    (283
    )Average interest rate
    
    
    
    
    
    
    
    
    
    
    0.9
    %
    
    
    0.5
    %
    
    
    
    
    
    
    0.3
    %
 
 (1)
    
    Fair value for derivative financial instruments represent the amounts we would
receive or pay to close out the transactions.  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART II
 
 ITEM 13.DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Managements Annual Report on Internal Control over Financial Reporting
  78




---



##### Table of Contents



Attestation Report of the Registered Public Accounting Firm
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Fees
    
    Fees
    
    
    
    
    
    Percentage of Servicesfor
    
    for
    
    Percentage of Services
    
    Delivered by Part-time Staff of2005
    
    2006
    
    Approved for 2006
    
    the Accounting Firm(HK$ million)Audit services
    
    
    3
    
    
    
    3
    
    
    
    100
    %
    
    
    Audit-related services
    
    
    1
    
    
    
    1
    
    
    
    100
    %
    
    
    Tax services
    
    
    1
    
    
    
    
    
    
    
    100
    %
    
    
    Other services
    
    
    4
    
    
    
    1
    
    
    
    100
    %
    
    
    
  Policy
  79




---



##### Table of Contents



Procedures
  
    
    The independent registered public accounting firm shall be required to
submit to the Audit Committee as and when required, proposals specifying the nature and
extent of services, which it will provide for the forthcoming year and the fees it
intends to charge for such services.
    
    The Audit Committee shall, in consultation with the independent registered
public accounting firm, consider the proposal, determine what services shall be
provided and the fees to be charged for such services, and approve the same.
    
    When exercising its power to approve the proposal, the Audit Committee
shall not approve any appointment or re-appointment of the independent registered
public accounting firm for audit services rendered pursuant to Section 14B of the KCRC
Ordinance but will consider any submissions made by the independent registered public
accounting firm in this regard and make recommendations to the Managing Board.
 
 ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
  
 PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
 *1.1
    
    Kowloon-Canton Railway Corporation Ordinance (Cap. 372).*1.2
    
    Kowloon-Canton Railway Corporation Regulations (Cap. 372A).*1.3
    
    Kowloon-Canton Railway Corporation By-laws (Cap. 372B).1.4
    
    Board General Standing Orders and Rules for Conduct of Corporation Business and Committees of
the Managing Board (as amended).***1.5
    
    Kowloon-Canton Railway Corporation (Amendment) Ordinance 2001.
 80




---



##### Table of Contents



*2.1
    
    Form of Indenture between the Registrant and The Bank of New York, as Trustee, including the form of the Notes.**2.2
    
    Instruments defining the rights of holders of KCRCs Medium Term Note Program.****4.1
    
    Project Agreement dated October 6, 2005 between KCRC and the Government of the Hong Kong
Special Administrative Region for the construction and financing of the Kowloon Southern Link
Project.8.1
    
    Subsidiaries of the Registrant: See Item 4. Information on the CorporationOrganizational
Structure.12.1
    
    Certification of the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.12.2
    
    Certification of the Director-Finance pursuant to section 302 of the Sarbanes-Oxley Act of
2002.13.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.13.2
    
    Certification of the Director-Finance pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Incorporated by reference to Registrants Registration Statement on Form F-1, filed February
28, 2000 (Registration No. 33-11564)**
    
    Incorporated by reference to Registrants Annual Report on Form 20-F, filed May 30, 2001
(Registration No. 1-15004)***
    
    Incorporated by reference to Registrants Annual Report on Form 20-F, filed June 28, 2002
(Registration No. 1-15004)****
    
    Incorporated by reference to Registrants Annual Report on Form 20-F, filed July 14, 2006
(Registration No. 1-15004).
    
    Portions of the exhibit have been omitted pursuant to an application for confidential
treatment, which has been filed separately with the Commission. 81




---



##### Table of Contents



SIGNATURE PAGE
  Kowloon-Canton Railway CorporationBy:
    /s/ James BlakeJames BlakeChief Executive Officer  S-1




---



##### 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
KOWLOON-CANTON RAILWAY CORPORATION
 Audited Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Income Statements for the years ended December 31, 2004, 2005 and 2006
    
    F-3Consolidated Balance Sheets as of December 31, 2005 and 2006
    
    F-4Consolidated Statements of Changes in Equity for the years ended December 31, 2004, 2005 and 2006
    
    F-5Consolidated Cash Flow Statements for the years ended December 31, 2004, 2005 and 2006
    
    F-6Notes to the Audited Consolidated Financial Statements
    
    F-7
  F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 F-2




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
 
 CONSOLIDATED INCOME STATEMENTS
 Year Ended December 31,2004
    
    
    2005
    
    
    2006Note
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)Revenue
    
    
    3
    
    
    
    4,976
    
    
    
    5,383
    
    
    
    5,622Operating costs before depreciation and amortization
    
    
    4
    
    
    
    2,804
    
    
    
    3,027
    
    
    
    3,042Operating profit before depreciation and amortization
    
    
    5
    
    
    
    2,172
    
    
    
    2,356
    
    
    
    2,580Depreciation and amortization
    
    
    6
    
    
    
    1,681
    
    
    
    2,258
    
    
    
    2,288Operating profit after depreciation and amortization
    
    
    
    
    
    
    491
    
    
    
    98
    
    
    
    292Interest and finance income
    
    
    7
    (a)
    
    
    444
    
    
    
    525
    
    
    
    499Interest and finance expenses
    
    
    7
    (b)
    
    
    (485
    )
    
    
    (823
    )
    
    
    (815
    )Profit from property development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    427Share of profit of associate
    
    
    
    
    
    
    15
    
    
    
    15
    
    
    
    27Profit/(loss) before unrealized gains/losses
    
    
    
    
    
    
    465
    
    
    
    (185
    )
    
    
    430Gains/(losses) on changes in fair value of derivative financial
instruments and hedged borrowings
    
    
    8
    
    
    
    
    
    
    
    400
    
    
    
    (198
    )Net valuation gains on investment properties
    
    
    13
    
    
    
    148
    
    
    
    171
    
    
    
    99Profit before taxation
    
    
    
    
    
    
    613
    
    
    
    386
    
    
    
    331Income tax
    
    
    9
    (a)
    
    
    (100
    )
    
    
    (69
    )
    
    
    (53
    )Profit for the year wholly attributable to the sole
shareholder of the Corporation
    
    
    10
    
    
    
    513
    
    
    
    317
    
    
    
    278Dividend payable to the sole shareholder of the Corporation
attributable to the year proposed after the balance sheet
date
    
    
    11
    (a)
    
    
    172
    
    
    
    
    
    
    
    82
  F-3




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 As of December 31,Note
    
    2005
    
    
    2006HK$
    
    
    HK$(in millions)AssetsFixed assets
    
    
    13- Property, plant and equipment
    
    
    
    
    
    
    60,127
    
    
    
    58,498- Investment properties
    
    
    
    
    
    
    1,171
    
    
    
    1,37861,298
    
    
    
    59,876Interest in leasehold land held for own use
under operating leases
    
    
    13
    
    
    
    5,645
    
    
    
    5,524Construction in progress
    
    
    14
    
    
    
    10,411
    
    
    
    13,644Deferred expenditure
    
    
    15
    
    
    
    1,210
    
    
    
    1,389Properties under development
    
    
    16
    
    
    
    1,537
    
    
    
    449Interest in associate
    
    
    18
    
    
    
    72
    
    
    
    99Loans to third party
    
    
    19
    
    
    
    684
    
    
    
    Loan to non-controlled subsidiary
    
    
    20
    
    
    
    3,863
    
    
    
    4,022Derivative financial assets
    
    
    32
    (e)
    
    
    129
    
    
    
    92Investments
    
    
    21
    
    
    
    449
    
    
    
    Stores and spares
    
    
    22
    
    
    
    343
    
    
    
    362Interest and other receivables
    
    
    23
    
    
    
    717
    
    
    
    571Cash and cash equivalents
    
    
    24
    
    
    
    3,394
    
    
    
    1,94789,752
    
    
    
    87,975LiabilitiesInterest and other payables
    
    
    25
    
    
    
    2,803
    
    
    
    2,459Accrued charges and provisions for capital projects
    
    
    26
    
    
    
    3,038
    
    
    
    2,054Lease payable
    
    
    27
    
    
    
    684
    
    
    
    Derivative financial liabilities
    
    
    32
    (e)
    
    
    361
    
    
    
    540Interest-bearing borrowings
    
    
    28
    
    
    
    19,474
    
    
    
    19,212Deferred income
    
    
    29
    
    
    
    541
    
    
    
    527Deferred tax liabilities
    
    
    9
    (d)
    
    
    3,198
    
    
    
    3,25030,099
    
    
    
    28,042Net Assets
    
    
    
    
    
    
    59,653
    
    
    
    59,933Capital and ReservesShare capital
    
    
    30
    
    
    
    39,120
    
    
    
    39,120Reserves
    
    
    31
    
    
    
    20,533
    
    
    
    20,813Total equity
    
    
    
    
    
    
    59,653
    
    
    
    59,933
  F-4




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 Year Ended December 31,Note
    
    
    2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Total equity at January 1
    
    
    
    
    
    
    60,184
    
    
    
    60,062
    
    
    
    59,653Opening
balance adjustments arising from changes in accounting
policies under HKAS 32 and HKAS 39
    
    
    31
    
    
    
    
    
    
    
    (568
    )59,494Net expenses for the year recognized directly in equity:Deficit on revaluation of available-for-sale securities
    
    
    31
    
    
    
    (54
    )
    
    
    (15
    )
    
    
    Net profit for the year:
    
    
    31
    
    
    
    513
    
    
    
    317
    
    
    
    278Revaluation deficit transferred to the income statement on
redemption and disposal of available-for-sale securities
    
    
    31
    
    
    
    39
    
    
    
    29
    
    
    
    2Dividend approved and paid during the year
    
    
    11
    (b)
    
    
    (620
    )
    
    
    (172
    )
    
    
    Total equity at December 31
    
    
    
    
    
    
    60,062
    
    
    
    59,653
    
    
    
    59,933
  F-5




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
 
 CONSOLIDATED CASH FLOW STATEMENTS
 Year Ended December 31,Note
    
    2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Operating activitiesNet cash inflow from operations
    
    
    33
    
    
    
    2,309
    
    
    
    2,408
    
    
    
    2,664Net cash inflow/(outflow) from property
development
    
    
    
    
    
    
    (376
    )
    
    
    340
    
    
    
    1,505Hong Kong profits tax paid
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Net cash inflow from operating activities
    
    
    
    
    
    
    1,932
    
    
    
    2,747
    
    
    
    4,168Investing activitiesDecrease / (increase) in deposits with banks with
maturity more than three months when placed
    
    
    
    
    
    
    (740
    )
    
    
    (615
    )
    
    
    1,084Payments for capital expenditure:- East Rail Extensions project
    
    
    
    
    
    
    (4,534
    )
    
    
    (2,821
    )
    
    
    (2,038
    )- Kowloon Southern Link project
    
    
    
    
    
    
    (105
    )
    
    
    (709
    )
    
    
    (1,344
    )- other capital projects and purchase of fixed
assets
    
    
    
    
    
    
    (2,345
    )
    
    
    (1,459
    )
    
    
    (1,140
    )Interest received
    
    
    
    
    
    
    1,358
    
    
    
    750
    
    
    
    237Dividend received from associate
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    Repayment from/(loan to) non-controlled subsidiary
    
    
    
    
    
    
    (24
    )
    
    
    (84
    )
    
    
    38Loan to associate
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    Receipts on sales of fixed assets
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    5Receipts on redemption and disposal of
available-for-sale securities
    
    
    
    
    
    
    6,740
    
    
    
    3,311
    
    
    
    411Net cash inflow/(outflow) from investing activities
    
    
    
    
    
    
    350
    
    
    
    (1,623
    )
    
    
    (2,747
    )Net cash inflow before financing
    
    
    
    
    
    
    2,282
    
    
    
    1,124
    
    
    
    1,421Financing activitiesNet cash outflow on repayment of loans
    
    
    
    
    
    
    (273
    )
    
    
    (279
    )
    
    
    (298
    )Dividend paid
    
    
    
    
    
    
    (620
    )
    
    
    (172
    )
    
    
    Interest paid
    
    
    
    
    
    
    (1,387
    )
    
    
    (1,392
    )
    
    
    (1,388
    )Net cash inflow/(outflow) relating to
derivative financial instruments
    
    
    
    
    
    
    138
    
    
    
    (13
    )
    
    
    (77
    )Finance expenses paid
    
    
    
    
    
    
    (26
    )
    
    
    (20
    )
    
    
    (21
    )Net cash outflow from financing activities
    
    
    
    
    
    
    (2,168
    )
    
    
    (1,876
    )
    
    
    (1,784
    )Net increase/(decrease) in cash and cash equivalents
    
    
    
    
    
    
    114
    
    
    
    (752
    )
    
    
    (363
    )Cash and cash equivalents at January 1
    
    
    
    
    
    
    2,477
    
    
    
    2,591
    
    
    
    1,839Cash and cash equivalents at December 31
    
    
    
    
    
    
    2,591
    
    
    
    1,839
    
    
    
    1,476Analysis of the balances of cash and cash
equivalentsCash at bank and in hand
    
    
    24
    
    
    
    36
    
    
    
    42
    
    
    
    71Deposits with banks with maturity of less than
three months when placed
    
    
    24
    
    
    
    2,555
    
    
    
    1,797
    
    
    
    1,4052,591
    
    
    
    1,839
    
    
    
    1,476
  F-6




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
 
 NOTES TO THE FINANCIAL STATEMENTS
 DECEMBER 31, 2004, 2005 AND 2006
 1 Establishment of the Corporation
   2 Significant accounting policies
        F-7




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 2 Significant accounting policies (continued)
            F-8




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 2 Significant accounting policies (continued)
   (i)
    
    temporary investment of funds from the equity injection received and borrowings
obtained specifically for the construction of the East Rail Extensions and Kowloon
Southern Link before the funds are used for such purposes (pre-funding investments);
and(ii)
    
    investment of surplus funds from the Groups operations (other investments).
  (i)
    
    changes in fair value of pre-funding investments, together with all income
generated from such investments, including interest income, exchange gains or losses,
impairment losses, realized gains or losses arising from transactions in derivative
financial instruments entered into for hedging foreign currency pre-funding
investments and gains or losses arising from the derecognition of such investments,
are capitalized to the related projects;(ii)
    
    changes in fair value of other investments are recognized directly in the
investments revaluation reserve, except for the related impairment losses and foreign
exchange gains and losses of monetary items such as debt securities, which are
recognized directly in the income statement. Where these investments are
interest-bearing, interest calculated using the effective interest method is
recognized in the income statement. When these investments are derecognized, the
cumulative gain or loss previously recognized directly in the investments revaluation
reserve is recognized in the income statement.
     (i)
    
    Cash flow hedgesThe currency swaps are designated as hedges of the variability in cash flows
attributable to the foreign exchange risk of certain of the Groups interest-bearing
borrowings denominated in foreign currencies and recognized in the financial statements.Changes in fair value of currency swaps that hedge recognized monetary liabilities in
foreign currencies are recognized in the income statement as required under HKAS 39.(ii)
    
    Fair value hedgesThe interest rate swaps are designated as hedges of the variability in the fair value
attributable to interest rate risk of certain of the Groups fixed rate interest-bearing
borrowings recognized in the financial statements.Changes in fair value of derivative financial instruments designated as hedging
instruments in a fair value hedge are recognized in the income statement.When a hedging relationship ceases to meet the requirements of hedge accounting, any
adjustment to the carrying amount of the then hedged item is amortized to the income
statement over the remaining life of the item based on a recalculated effective interest
rate at the date amortization begins.
 F-9




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 2 Significant accounting policies (continued)
      (i)
    
    Property, plant and equipment is stated in the balance sheet at cost less
accumulated depreciation and impairment losses, if any.Property, plant and equipment utilized in the operation of rail networks and
ancillary commercial activities comprises:
 -
    
    buildings held for own use which are situated on leasehold land, where
the fair value of the building could be measured separately from the fair value of
the leasehold land at the inception of the lease; and-
    
    other items of plant and equipment.
 The cost of property, plant and equipment vested by the Government has been determined
as follows:
 -
    
    for property, plant and equipment vested on February 1, 1983  as
determined by the Financial Secretary; and-
    
    for property, plant and equipment vested subsequent to February 1, 1983-
    
    based on actual cost as reflected in the Governments records.
 The cost of property, plant and equipment acquired by the Group comprises:
 -
    
    its purchase price, including import duties and non-refundable purchase
taxes, after deducting trade discounts and rebates;-
    
    any costs, such as the costs of material, direct labor, an appropriate
proportion of production overheads and interest and finance income/expenses
directly attributable to bringing the asset to the location and condition capable
of operating in the manner intended by management; and-
    
    the initial estimate of the costs of dismantling and removing the item
and restoring the site on which it is located, where the obligation is incurred by
the Group when the item is acquired.
 Expenditure on property, plant and equipment, which is below $20,000 per item or
expected to be fully used within one year, is expensed to the income statement as
incurred.(ii)
    
    Subsequent expenditure on existing property, plant and equipment is added to
the carrying amount of the asset if, either future economic benefits will flow to the
Group, or the condition of the asset will improve beyond its originally assessed
standard of performance.Expenditure on repairs or maintenance of existing property, plant and equipment to
restore or maintain the originally assessed standard of performance of the asset is
recognized as an expense when incurred.(iii)
    
    Gains or losses arising from the retirement or disposal of an item of
property, plant and equipment are determined as the difference between the net disposal
proceeds and the carrying amount of the item and are recognized in the income statement
on the date of retirement or disposal.
 F-10




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 2 Significant accounting policies (continued)
  (i)
    
    Depreciation is calculated to write off the cost of an item of property, plant
and equipment less its estimated residual value, if any, using the straight-line basis
over its estimated useful life as follows:
 No. of yearsTunnels, bridges and roads (see note 2(j)(iii))
    
    
    43-65Buildings (see note 2(j)(iii))
    
    
    50Rolling stock
    
    
    30-40Locomotives and wagons
    
    
    15-35Lifts and escalators
    
    
    20Permanent way comprising rails, ballast, sleepers and concrete civil works
(see note 2(j)(iii))
    
    
    10-50Machinery and equipment
    
    
    10-30Telecommunication and signalling systems and air-conditioning plant
    
    
    5-15Fare collection systems
    
    
    15Mobile phone systems
    
    
    7-10Furniture and fixtures
    
    
    3-15Computer and office equipment (including computer software)
    
    
    3-5Buses
    
    
    10-17Other motor vehicles
    
    
    4-15
 (ii)
    
    Where parts of an item of property, plant and equipment have different useful
lives, the cost of the item is allocated on a measurable basis between the parts and
each part is depreciated separately. Both the useful life of an asset and its residual
value, if any, are reviewed annually. The residual value of an asset is the estimated
amount that the Group would currently obtain from disposal of the asset, after
deducting the estimated costs of disposal, if the asset was already of the age and in
the condition expected at the end of its useful life.(iii)
    
    Tunnels, bridges, roads, concrete civil works and buildings situated on
leasehold land are depreciated over the shorter of the unexpired term of the related
lease and their estimated useful lives.
  (i)
    
    Classification of leased assetsLeases of assets under which the lessee assumes substantially all the risks and rewards
of ownership are classified as finance leases. Leases of assets under which the lessor
has not transferred substantially all the risks and rewards of ownership are classified
as operating leases, except that property held under an operating lease that would
otherwise meet the definition of an investment property may be classified as an
investment property on a property-by-property basis.(ii)
    
    Assets leased out under operating leasesWhere the Group leases out assets under operating leases, the assets are included in the
balance sheet according to their nature and, where applicable, are depreciated in
accordance with the Groups depreciation policies.
 F-11




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 2 Significant accounting policies (continued)
  (iii)
    
    Operating lease chargesWhere the Group has the use of assets held under operating leases, payments made under
the leases are charged to the income statement in equal instalments over the accounting
periods covered by the lease term, except where an alternative basis is more
representative of the pattern of benefits to be derived from the leased asset.Land lease premiums, land resumption costs and other costs directly associated with the
acquisition of leasehold land held for own use under operating leases are amortized on a
straight-line basis over the period of the lease term. The cost in relation to
leasehold land vested by the Government has been determined as follows:
 -
    
    vested on February 1, 1983  as determined by the Financial Secretary; and-
    
    vested subsequent to February 1, 1983  based on actual cost as
reflected in the Governments records or the costs incurred by the Corporation
directly associated with the acquisition of leasehold land.
  (i)
    
    Impairment of financial assetsAll financial assets are reviewed at each balance sheet date to determine whether there
is objective evidence of impairment. If any such evidence exists, an impairment loss is
determined and recognized as follows:
 -
    
    For interest and other receivables carried at cost, an impairment
loss is measured as the difference between the assets carrying amount and the
estimated future cash flows (taking into account bad and doubtful debts),
discounted at the current market rate of return of a similar financial asset where
the effect of discounting is material.-
    
    For loans to third party and loan to non-controlled subsidiary
carried at amortized cost, an impairment loss is measured as the difference
between the assets carrying amount and the present value of estimated future cash
flows (taking into account bad and doubtful debts), discounted at the financial
assets original effective interest rate (i.e. the effective interest rate
computed at the date of initial recognition of these assets), except where the
present value is not determinable as there are no fixed repayment terms.-
    
    For investments, losses on revaluation are initially recognized
directly in equity, or capitalised to the construction in progress or deferred
expenditure where the losses are attributable to pre-funding investments relating
to the equity injection received and borrowings obtained specifically for railway
projects. If evidence of impairment exists, the cumulative loss that had been
recognized directly in equity is removed from equity and is recognized in the
income statement as an impairment loss. However, an impairment loss relating to
the cumulative loss that had been capitalised to construction in progress or
deferred expenditure is not charged to the income statement. The impairment loss
recognized in subsequent years is accounted for as the difference between the
acquisition cost (net of any principal repayment and amortization) and current
fair value, less any impairment loss previously recognized in the income statement
and/or related cumulative loss capitalised to the construction in progress or
deferred expenditure.-
    
    Impairment losses are reversed if the subsequent increase in fair
value can be objectively related to an event occurring after the impairment loss
was recognized. Reversals of impairment losses in such circumstances are
recognized in the income statement to the extent that the cumulative impairment
loss has been charged to the income statement.
 (ii)
    
    Impairment of other assetsInternal and external sources of information are reviewed at each balance sheet date to
identify indications that the following assets may be impaired or an impairment loss
previously recognized no longer exists or may have decreased:
 -
    
    property, plant and equipment;-
    
    interest in leasehold land held for own use under operating leases;-
    
    construction in progress;-
    
    deferred expenditure;-
    
    properties under development; and-
    
    interest in associate.
 F-12




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 2 Significant accounting policies (continued)
  (ii)
    
    Impairment of other assets (continued)If any such indication exists, the assets recoverable amount is estimated.
 -
    
    Calculation of recoverable amountThe recoverable amount of an asset is the greater of its net selling price and value
in use. In assessing value in use, the estimated future cash flows are discounted to
their present value using a pre-tax discount rate that reflects current market
assessments of time value of money and the risks specific to the asset. Where an
asset does not generate cash inflows largely independent of those from other assets,
the recoverable amount is determined for the smallest group of assets that generates
cash inflows independently (i.e. a cash-generating unit).-
    
    Recognition of impairment lossesAn impairment loss is recognized in the income statement whenever the carrying
amount of an asset, or the cash-generating unit to which it belongs, exceeds its
recoverable amount. Impairment losses recognized in respect of cash-generating
units are allocated to reduce the carrying amount of the other assets in the unit
(or group of units) on a pro rata basis, except that the carrying value of an asset
will not be reduced below its individual fair value less costs to sell, or value in
use, if determinable.
 -
    
    Reversals of impairment lossesAn impairment loss is reversed if there has been a favourable change in the
estimates used to determine the recoverable amount.A reversal of an impairment loss is limited to the assets carrying amount that
would have been determined had no impairment loss been recognized in prior years.
Reversals of impairment losses are credited to the income statement in the year in
which the reversals are recognized.
    -
    
    where the proposed projects are at a preliminary review stage with no certainty
of the proposed project proceeding, the costs concerned are written off to the income
statement as incurred; and-
    
    where the proposed projects are at a detailed study stage, having demonstrated
an acceptable financial viability and having obtained the Managing Boards approval to
proceed further, the costs concerned are initially dealt with as deferred expenditure
and then transferred to construction in progress after the relevant project agreements
are reached with the Government.
 F-13




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 2 Significant accounting policies (continued)
      -
    
    where the Group receives payments from property developers as a consequence of
their participation in a project to develop a property, such payments are set off
against the balance in properties under development in respect of that project. Any
surplus amounts of payments received from property developers in excess of the balance
in properties under development are transferred to deferred income. In such
circumstances, further costs subsequently incurred by the Group in respect of that
project are charged against the related balance of deferred income and any excess is
charged to properties under development to the extent it is considered to be
recoverable. The balance of deferred income is credited to income statement when the
property enabling works are completed and acceptable for development, and after taking
into account the outstanding risks and obligations in connection with the development,
if any, retained by the Group. The balance of properties under development not
previously offset by payments received from property developers is charged to the
income statement where the costs are considered to be irrecoverable, together with
provision for losses, if any, borne by the Group in respect of the development;-
    
    where the Group receives a share of profits from the sale of properties,
profits are recognized upon the issue of occupation permits provided the amounts of
profits can be measured reliably; and-
    
    where the Group retains certain assets of the development, profits are measured
based on the fair value of such assets and are recognized at the time of receipt after
taking into account the costs incurred by the Group in respect of the development and
the outstanding risks, if any, retained by the Group in connection with the
development.
      F-14




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 2 Significant accounting policies (continued)
                 F-15




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 2 Significant accounting policies (continued)
  (i)
    
    Short term employee benefits and contributions to defined contribution retirement plansSalaries, annual bonuses, paid annual leave, contributions to defined contribution
retirement plans and the cost of non-monetary benefits are accrued in the year in which
the associated services are rendered by employees.(ii)
    
    Termination benefitsTermination benefits are recognized when, and only when, the Group demonstrably commits
itself to terminate employment or to provide benefits as a result of voluntary
redundancy by having a detailed formal plan which is without realistic possibility of
withdrawal.
  (i)
    
    Income tax for the year comprises current tax and movements in deferred tax
assets and liabilities. Current tax and movements in deferred tax assets and
liabilities are recognized in the income statement except to the extent that they
relate to items recognized directly to equity, in which case they are recognized in
equity.(ii)
    
    Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantively enacted at the balance sheet date and any
adjustment to tax payable in respect of previous years.(iii)
    
    Deferred tax assets and liabilities arise from deductible and taxable
temporary differences respectively, being the differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts for tax
purposes. Deferred tax assets also arise from unused tax losses and unused tax
credits.All deferred tax assets, to the extent that it is probable that future taxable profits
will be available against which the assets can be utilized, are recognized. All
deferred tax liabilities are recognized.The amount of deferred tax provided is based on the expected manner of realization or
settlement of the carrying amount of the assets and liabilities, using tax rates enacted
or substantively enacted at the balance sheet date. Deferred tax assets and liabilities
are not discounted.The carrying amount of a deferred tax asset is reviewed at each balance sheet date and
is reduced to the extent that it is no longer probable that sufficient taxable profits
will be available to allow the related tax benefit to be utilized. Such reduction is
reversed to the extent that it becomes probable that sufficient taxable profits will be
available.(iv)
    
    Current tax balances and deferred tax balances, and movements therein, are
presented separately from each other and are not offset. Current tax assets are offset
against current tax liabilities, and deferred tax assets against deferred tax
liabilities if the Group has the legally enforceable right to set off current tax
assets against current tax liabilities and the following additional conditions are met:
 -
    
    in the case of current tax assets and liabilities, the Group intends
either to settle on a net basis, or to realize the asset and settle the liability
simultaneously; or-
    
    in the case of deferred tax assets and liabilities, they relate to
income taxes levied by the same taxation authority on either:-
    
    the same taxable entity; or-
    
    different taxable entities which intend to realize the current tax
assets and settle the current tax liabilities on a net basis in the same period.
 F-16




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 2 Significant accounting policies (continued)
      (i)
    
    Passenger and freight services
 -
    
    Revenue is recognized when the services are provided.
 (ii)
    
    Rental and licence income
 -
    
    Rental and licence income receivable under operating leases is
recognized in the income statement in equal instalments over the periods covered
by the lease term, except where an alternative basis is more representative of the
pattern of benefits to be derived from the use of the leased asset. Lease
incentives granted are recognized in the income statement as an integral part of
the aggregate net lease payment receivable. Contingent rentals are recognized as
income in the accounting period in which they are earned.
 (iii)
    
    Interest income
 -
    
    Interest income is recognized as it accrues using the effective interest method.
 (iv)
    
    Other income
 -
    
    Other income is recognized once the related services or goods are
delivered and the related risks and rewards of ownership have been transferred.
         F-17




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 2 Significant accounting policies (continued)
  (i)
    
    Interest and finance income includes:
 (i)
    
    interest income from bank deposits, investments and loans to other
parties;(ii)
    
    realized gains arising from derivative financial instruments designated as hedges for borrowings;(iii)
    
    net gains on redemption and disposal of investments; and(iv)
    
    net exchange gains arising from foreign currency transactions.
 (ii)
    
    The Groups interest and finance income arising from non-derivative financial
assets is not classified as at fair value through the income statement.Interest and finance income is credited to the income statement in the period in which
it is earned, except for the portion generated from pre-funding investments which
is credited to construction in progress or deferred expenditure, as appropriate.Interest and finance expenses include:
 (i)
    
    interest payable on borrowings and lease payable;(ii)
    
    finance expenses including amortization of discounts/premiums and
ancillary costs incurred in connection with the arrangement of borrowings
calculated using the effective interest rate;(iii)
    
    realized losses arising from derivative financial instruments
designated as hedges for borrowings;(iv)
    
    net realized losses on redemption and disposal of investments; and(v)
    
    net exchange losses arising from foreign currency transactions.
 (iii)
    
    The Groups interest and finance expenses relate to non-derivative financial
liabilities are not classified as at fair value through the income statement.Interest and finance expenses are expensed in the income statement in the period in
which they are incurred, except to the extent that they are capitalized as being
directly attributable to the acquisition, construction or production of an asset which
necessarily takes a substantial period of time to get ready for its intended use or
sale.
        F-18




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 3 Revenue
  2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Transport servicesPassenger services- East Rail
    
    
    3,415
    
    
    
    3,670
    
    
    
    3,780- West Rail and Light Rail
    
    
    798
    
    
    
    890
    
    
    
    922Freight services
    
    
    68
    
    
    
    52
    
    
    
    444,281
    
    
    
    4,612
    
    
    
    4,746Property services
    
    
    695
    
    
    
    771
    
    
    
    8764,976
    
    
    
    5,383
    
    
    
    5,622
 4 Operating costs before depreciation and amortization
 2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Staff costs- Gross amount including retirement costs of HK$136
million (2005: HK$135 million; 2004: HK$138
million) after a forfeiture of unvested
contributions of $1 million (2005: HK$2
million; 2004: HK$3 million)
    
    
    2,154
    
    
    
    2,068
    
    
    
    2,092- Staff costs capitalized
    
    
    (692
    )
    
    
    (547
    )
    
    
    (549
    )1,462
    
    
    
    1,521
    
    
    
    1,543Electricity and fuel
    
    
    456
    
    
    
    495
    
    
    
    484Repairs and maintenance
    
    
    180
    
    
    
    265
    
    
    
    274Stores and spares consumed
    
    
    158
    
    
    
    181
    
    
    
    217General supplies
    
    
    32
    
    
    
    33
    
    
    
    31Government rent and rates
    
    
    68
    
    
    
    82
    
    
    
    78Octopus cards usage fees
    
    
    33
    
    
    
    36
    
    
    
    38Cost of services acquired
    
    
    144
    
    
    
    150
    
    
    
    148Property ownership and management expenses
    
    
    63
    
    
    
    84
    
    
    
    66Expenses to prepare for the proposed merger with
MTRCL (including staff costs of HK$2 million )
    
    
    
    
    
    
    
    
    
    
    20Others
    
    
    208
    
    
    
    180
    
    
    
    1432,804
    
    
    
    3,027
    
    
    
    3,042
 F-19




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 5 Operating profit before depreciation and amortization
  2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Fixed assets written off on disposal
    
    
    24
    
    
    
    43
    
    
    
    24Auditors remuneration- Audit services
    
    
    4
    
    
    
    4
    
    
    
    4- Tax compliance services
    
    
    1
    
    
    
    1
    
    
    
    - Advisory services on control documentation
    
    
    
    
    
    
    4
    
    
    
    1Operating lease charges (minimum lease payments)- Hire of plant and machinery
    
    
    29
    
    
    
    28
    
    
    
    28- Rental of property
    
    
    13
    
    
    
    8
    
    
    
    9Remuneration of Members of the Managing Board and
Executive Directors who are not Members of the
Managing Board- Fees for Members of the Managing Board
including the Chairman but excluding the Chief
Executive Officer
    
    
    1
    
    
    
    1
    
    
    
    1- Contributions to retirement benefit schemes
for the Chief Executive Officer and Executive
Directors who are not Members of the Managing
Board
    
    
    1
    
    
    
    1
    
    
    
    1- Emoluments of the Chief Executive Officer
and Executive Directors who are not Members of
the Managing Board
    
    
    34
    
    
    
    25
    
    
    
    26and after crediting:Rentals receivable from operating leases less direct
outgoings of HK$20 million (2005: HK$16
million; 2004: HK$17 million) (including
contingent rentals of HK$63 million (2005: HK$39
million; 2004: HK$29 million))
    
    
    551
    
    
    
    642
    
    
    
    756Rentals receivable from investment properties less
direct outgoings of HK$11 million (2005: HK$14
million; 2004: HK$18 million)
    
    
    62
    
    
    
    38
    
    
    
    75
 F-20




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
 NOTES TO THE FINANCIAL STATEMENTS
 DECEMBER 31, 2004, 2005 AND 2006
 5 Operating profit before depreciation and amortization (continued)
  2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in thousands)ChairmanMr Michael P S Tien
    
    
    220
    
    
    
    220
    
    
    
    220MembersMr Vincent H C Cheng *
    
    
    96
    
    
    
    
    
    
    
    Dr Sarah S T Liao in the capacity of Secretary
for the Environment, Transport and Works
    
    
    110
    
    
    
    110
    
    
    
    110Mr Vincent W S Lo
    
    
    110
    
    
    
    110
    
    
    
    110Mr Frederick S H Ma in the capacity of Secretary
for Financial Services and the Treasury
    
    
    110
    
    
    
    110
    
    
    
    110Mr L S Ng **
    
    
    14
    
    
    
    110
    
    
    
    110Mr Patrick B Paul
    
    
    110
    
    
    
    110
    
    
    
    110The Honourable Abraham L H Shek ***
    
    
    101
    
    
    
    110
    
    
    
    110Mr Victor H W So #
    
    
    9
    
    
    
    
    
    
    
    Mr M Y Wan
    
    
    110
    
    
    
    110
    
    
    
    110Mr Patrick S C Wang ##
    
    
    9
    
    
    
    
    
    
    
    Professor Richard Y C Wong ###
    
    
    101
    
    
    
    110
    
    
    
    1101,100
    
    
    
    1,100
    
    
    
    1,100
 
 *
    
    Mr Vincent H C Cheng resigned on November 15, 2004.**
    
    Mr L S Ng was appointed on November 16, 2004.***
    
    The Honourable Abraham L H Shek was appointed on February 1, 2004.#
    
    Mr Victor H W So resigned on January 31, 2004.##
    
    Mr Patrick S C Wang resigned on January 31, 2004.###
    
    Professor Richard Y C Wong was appointed on February 1, 2004. F-21




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 5 Operating profit before depreciation and amortization (continued)
  2006(in millions)Fixed remuneration
    
    
    Contribution to
    
    
    Variableand
    
    
    retirement benefit
    
    
    remunerationbenefits-in-kind
    
    
    scheme
    
    
    ###
    
    
    TotalHK$
    
    
    HK$
    
    
    HK$
    
    
    HK$Mr James Blake ##
(Chief Executive Officer)
    
    
    3.00
    
    
    
    
    
    
    
    1.19
    
    
    
    4.19Mr K K Lee
(Senior Director-Capital
Projects)
    
    
    3.12
    
    
    
    0.32
    
    
    
    0.91
    
    
    
    4.35Mr Y T Li
(Senior Director-Transport)
    
    
    3.22
    
    
    
    0.29
    
    
    
    0.81
    
    
    
    4.32Mr Daniel C Lam 
(Director-Property)
    
    
    3.24
    
    
    
    0.01
    
    
    
    0.92
    
    
    
    4.17Mr Lawrence C P Li
(Director-Finance)
    
    
    2.28
    
    
    
    0.22
    
    
    
    0.44
    
    
    
    2.94Mrs Mimi Cunningham
(Director-Human Resource)
    
    
    3.18
    
    
    
    0.01
    
    
    
    0.86
    
    
    
    4.05Mr Samuel M H Lai *** 
(Acting Chief Executive
Officer)
    
    
    3.04
    
    
    
    0.13
    
    
    
    
    
    
    
    3.1721.08
    
    
    
    0.98
    
    
    
    5.13
    
    
    
    27.19
 2005(in millions)Fixed remuneration
    
    
    Contribution to
    
    
    Variableand
    
    
    retirement benefit
    
    
    remunerationbenefits-in-kind
    
    
    scheme
    
    
    ###
    
    
    TotalHK$
    
    
    HK$
    
    
    HK$
    
    
    HK$Mr K K Lee 
(Senior Director-Capital
Projects)
    
    
    3.05
    
    
    
    0.32
    
    
    
    0.79
    
    
    
    4.16Mr Y T Li
(Senior Director-Transport)
    
    
    3.11
    
    
    
    0.28
    
    
    
    0.71
    
    
    
    4.10Mr Daniel C Lam 
(Director-Property)
    
    
    3.25
    
    
    
    0.01
    
    
    
    0.82
    
    
    
    4.08Mr Lawrence C P Li **
(Director-Finance)
    
    
    2.18
    
    
    
    0.21
    
    
    
    0.39
    
    
    
    2.78Mrs Mimi Cunningham 
(Director-Human Resource)
    
    
    3.03
    
    
    
    0.01
    
    
    
    0.76
    
    
    
    3.80Mr Samuel M H Lai 
(Acting Chief Executive
Officer)
    
    
    3.58
    
    
    
    0.38
    
    
    
    0.95
    
    
    
    4.91Mr Ian M Thoms @@
(Director-West Rail)
    
    
    1.96
    
    
    
    0.01
    
    
    
    
    
    
    
    1.9720.16
    
    
    
    1.22
    
    
    
    4.42
    
    
    
    25.80
 F-22




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 5 Operating profit before depreciation and amortization (continued)
 2004(in millions)Fixed remuneration
    
    
    Contribution to
    
    
    Variableand
    
    
    retirement benefit
    
    
    remunerationbenefits-in-kind
    
    
    scheme
    
    
    ###
    
    
    TotalHK$
    
    
    HK$
    
    
    HK$
    
    
    HK$Mr Samuel M H Lai * 
(Acting Chief Executive
Officer)
    
    
    4.51
    
    
    
    0.38
    
    
    
    0.51
    
    
    
    5.40Mr K K Lee * 
(Senior Director-Capital
Projects)
    
    
    3.52
    
    
    
    0.31
    
    
    
    0.40
    
    
    
    4.23Mr Y T Li * 
(Senior Director-Transport)
    
    
    3.63
    
    
    
    0.28
    
    
    
    0.37
    
    
    
    4.28Mr Ian M Thoms
(Director-West Rail)
    
    
    3.48
    
    
    
    0.01
    
    
    
    0.39
    
    
    
    3.88Mr Daniel C Lam *
(Director-Property)
    
    
    3.71
    
    
    
    0.01
    
    
    
    0.41
    
    
    
    4.13Mr Lawrence C P Li
(Director-Finance)
    
    
    2.59
    
    
    
    0.21
    
    
    
    
    
    
    
    2.80Mrs Mimi Cunningham * @
(Director-Human Resource)
    
    
    2.17
    
    
    
    0.01
    
    
    
    0.38
    
    
    
    2.56Mr Jonathan H G Yu #
(Director-Operations)
    
    
    5.81
    
    
    
    0.31
    
    
    
    
    
    
    
    6.12Mr Kenneth K S Leung @@
(Director-New Railway
Projects)
    
    
    2.03
    
    
    
    
    
    
    
    
    
    
    
    2.0331.45
    
    
    
    1.52
    
    
    
    2.46
    
    
    
    35.43
 
 *
    
    With effect from July 1, 2004, a portion of total remuneration was converted to variable
remuneration related to performance.**
    
    With effect from January 1, 2005, a portion of total remuneration was converted to variable
remuneration related to performance.***
    
    Mr Samuel M H Lais remuneration includes an end-of-service payment of $1.1 million. He left
the Corporation on May 1, 2006.@
    
    Mrs Mimi Cunningham assumed her post with effect from May 2004.@@
    
    Mr Kenneth K S Leung retired on July 1, 2004 and Mr Ian M Thoms retired on July 1, 2005.#
    
    Mr Jonathan H G Yu left the Corporation on January 3, 2005.##
    
    Mr. James Blake joined the Corporation on March 22, 2006.###
    
    Variable remuneration mainly comprises amounts withheld from employees basic salary package
and released for payment upon their satisfactory performance being confirmed by the Managing
Board. The total variable remuneration is calculated according to a formula devised when the
scheme was introduced at the request of the Managing Board.  F-23




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 6 Depreciation and amortization
 2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Depreciation :- assets leased out under operating leases
    
    
    16
    
    
    
    32
    
    
    
    32- other assets
    
    
    1,559
    
    
    
    2,111
    
    
    
    2,141- depreciation charge capitalized
    
    
    (6
    )
    
    
    (3
    )
    
    
    (4
    )1,569
    
    
    
    2,140
    
    
    
    2,169Amortization:- amortization of interest in leasehold land held for own
use under operating leases
    
    
    112
    
    
    
    118
    
    
    
    1191,681
    
    
    
    2,258
    
    
    
    2,288
 7 Interest and finance income / expenses
  2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Interest income from deposits
    
    
    48
    
    
    
    128
    
    
    
    143Interest income from investments
    
    
    166
    
    
    
    60
    
    
    
    4Interest income from loans to third party
    
    
    53
    
    
    
    51
    
    
    
    Interest income from loan to non-controlled subsidiary
    
    
    241
    
    
    
    266
    
    
    
    320Interest income from non-derivative financial assets
    
    
    508
    
    
    
    505
    
    
    
    467Realized gains arising from derivative financial
instruments
    
    
    197
    
    
    
    85
    
    
    
    32Exchange gains (net)
    
    
    15
    
    
    
    33
    
    
    
    720
    
    
    
    623
    
    
    
    499Less: Amount capitalized *
    
    
    (276
    )
    
    
    (98
    )
    
    
    444
    
    
    
    525
    
    
    
    499
 
 *
    
    Interest income capitalized for 2005 was earned at average interest rates ranging between
2.26% (2004: 1.37%) and 4.20% (2004: 2.54%) per annum.  2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Interest expense on lease payable
    
    
    52
    
    
    
    50
    
    
    
    Interest expenses on other loans
    
    
    1,384
    
    
    
    1,394
    
    
    
    1,407Finance expenses
    
    
    20
    
    
    
    18
    
    
    
    9Interest and finance expenses on non-derivative
financial liabilities
    
    
    1,456
    
    
    
    1,462
    
    
    
    1,416Realized losses arising from derivative financial
instruments
    
    
    102
    
    
    
    106
    
    
    
    126Exchange loss (net)
    
    
    
    
    
    
    
    
    
    
    40Realized losses on redemption and disposal
of investments (including HK$2 million (2005: HK$29 million; 2004: HK$39 million))
transferred from the investments revaluation
reserve)
    
    
    67
    
    
    
    35
    
    
    
    31,625
    
    
    
    1,603
    
    
    
    1,585Less: Amount capitalized #
    
    
    (1,140
    )
    
    
    (780
    )
    
    
    (770
    )485
    
    
    
    823
    
    
    
    815
 
 #
    
    Interest expenses capitalized were charged at average interest rates ranging between 7.10%
(2005: 6.83%; 2004: 6.02%) and 7.98% (2005: 7.54%; 2004: 6.88%) per annum. F-24




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 8 Gains/(losses) on changes in fair value of derivative financial instruments and hedged
borrowings
 2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Net gain/(loss) arising from derivative financial instruments
    
    
    
    
    
    
    227
    
    
    
    (216
    )Net gain arising from hedged interest-bearing borrowings
    
    
    
    
    
    
    173
    
    
    
    18
    
    
    
    400
    
    
    
    (198
    )
 9 Income tax
  2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Current taxProvision for Hong Kong profits tax at 17.5%
of the estimated assessable profits for the year
    
    
    1
    
    
    
    1
    
    
    
    1Deferred taxOrigination and reversal of temporary differences
    
    
    99
    
    
    
    68
    
    
    
    52100
    
    
    
    69
    
    
    
    53
   2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Profit before taxation
    
    
    613
    
    
    
    386
    
    
    
    331Tax on accounting profit before taxation at 17.5%
    
    
    107
    
    
    
    67
    
    
    
    58Tax effect of non-deductible expenses
    
    
    30
    
    
    
    33
    
    
    
    31Tax effect of non-taxable revenue
    
    
    (37
    )
    
    
    (31
    )
    
    
    (36
    )Actual tax expense
    
    
    100
    
    
    
    69
    
    
    
    53
 F-25




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 9 Income tax (continued)
  2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Provision for Hong Kong
profits tax for the year
    
    
    1
    
    
    
    1
    
    
    
    1Provisional profits tax paid
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
   Deferred tax (assets) / liabilitiesDepreciationallowances inFuture
    
    
    excess of the
    
    
    Revaluation ofbenefit
    
    
    related
    
    
    investmentof tax losses
    
    
    depreciation
    
    
    properties
    
    
    TotalHK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)At January 1, 2005
    
    
    (1,371
    )
    
    
    4,454
    
    
    
    47
    
    
    
    3,130Charged / (credited) to the
income statement
    
    
    (336
    )
    
    
    374
    
    
    
    30
    
    
    
    68At December 31, 2005
    
    
    (1,707
    )
    
    
    4,828
    
    
    
    77
    
    
    
    3,198At January 1, 2006
    
    
    (1,707
    )
    
    
    4,828
    
    
    
    77
    
    
    
    3,198Charged / (credited) to the
income statement
    
    
    (189
    )
    
    
    224
    
    
    
    17
    
    
    
    52At December 31, 2006
    
    
    (1,896
    )
    
    
    5,052
    
    
    
    94
    
    
    
    3,250
  F-26




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 10 Profit for the year wholly attributable to the sole shareholder of the Corporation
  11 Proposed dividend
  2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Final dividend proposed after the balance sheet date
of HK$209.61 per share (2005: nil per share;
2004: HK$439.67 per share)
    
    
    172
    
    
    
    
    
    
    
    82
   2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Final dividend in respect of the previous financial
year, approved and paid during the year,
of nil per share (2005: HK$439.67 per share; 2004: HK$1,584.87 per share)
    
    
    620
    
    
    
    172
    
    
    
    
 F-27




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 12 Segmental reporting
   2006  Operating results
 Transportservices
    
    
    Property
    
    
    Consolidatedsegment
    
    
    segment
    
    
    totalHK$
    
    
    HK$
    
    
    HK$(in millions)Revenue
    
    
    4,746
    
    
    
    876
    
    
    
    5,622Operating costs before depreciation and
amortization
    
    
    (2,690
    )
    
    
    (137
    )
    
    
    (2,827
    )Inter-segment charges (1)
    
    
    40
    
    
    
    (40
    )
    
    
    Depreciation and amortization
    
    
    (2,233
    )
    
    
    (38
    )
    
    
    (2,271
    )Result after depreciation and amortization
    
    
    (137
    )
    
    
    661
    
    
    
    524Profit from property development
    
    
    
    
    
    
    427
    
    
    
    427Net valuation gains on investment properties
    
    
    
    
    
    
    99
    
    
    
    99Result
    
    
    (137
    )
    
    
    1,187
    
    
    
    1,050Unallocated corporate
expenses, depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    (232
    )Interest and finance income
    
    
    
    
    
    
    
    
    
    
    499Interest and finance expenses
    
    
    
    
    
    
    
    
    
    
    (815
    )Share of profit of associate
    
    
    
    
    
    
    
    
    
    
    27Losses on changes in fair value of
derivative financial instruments
and hedged borrowings
    
    
    
    
    
    
    
    
    
    
    (198
    )Income tax
    
    
    
    
    
    
    
    
    
    
    (53
    )Profit after taxation
    
    
    
    
    
    
    
    
    
    
    278
 
 (1)
    
    Inter-segment charges represent cost recoveries from other segments for services rendered. F-28




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 12 Segmental reporting (continued)
 2006
 Assets and liabilities
 Transportservices
    
    
    Property
    
    
    Consolidatedsegment
    
    
    segment
    
    
    totalHK$
    
    
    HK$
    
    
    HK$(in millions)Assets
    
    
    63,786
    
    
    
    2,049
    
    
    
    65,835Properties under development
    
    
    
    
    
    
    449
    
    
    
    449Interest in associate
    
    
    
    
    
    
    
    
    
    
    99Railways under construction @
    
    
    
    
    
    
    
    
    
    
    14,722Unallocated assets #
    
    
    
    
    
    
    
    
    
    
    6,87063,786
    
    
    
    2,498
    
    
    
    87,975Liabilities
    
    
    339
    
    
    
    714
    
    
    
    1,053Deferred income
    
    
    325
    
    
    
    202
    
    
    
    527Unallocated liabilities *
    
    
    
    
    
    
    
    
    
    
    26,462664
    
    
    
    916
    
    
    
    28,042
 
 @
    
    Comprising construction and land costs of Lok Ma Chau and Kowloon Southern Link (HK$13,333
million) and planning and design costs of Shatin to Central Link and Express Rail
Link/Northern Link (HK$1,389 million).#
    
    Comprising corporate assets and construction in progress for corporate office (HK$317
million ), derivative financial assets (HK$92 million), loan to non-controlled subsidiary
(HK$4,022 million), interest and other receivables (HK$492 million) and cash and cash
equivalents (HK$1,947 million).*
    
    Comprising interest-bearing borrowings (HK$19,212 million), accrued charges and
provisions for capital projects (HK$1,983 million), interest and other payables (HK$1,477
million), deferred tax liabilities (HK$3,250 million ) and derivative financial
liabilities (HK$540 million). Other information
 Transportservices
    
    
    Property
    
    
    Consolidatedsegment
    
    
    segment
    
    
    totalHK$
    
    
    HK$
    
    
    HK$(in millions)Capital expenditure: Operational railways
    
    
    414
    
    
    
    74
    
    
    
    488 Railways under
construction
    
    
    
    
    
    
    
    
    
    
    2,817 Unallocated capital
expenditure
    
    
    
    
    
    
    
    
    
    
    12414
    
    
    
    74
    
    
    
    3,317
 F-29




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 12 Segmental reporting (continued)
 2005
Operating results
 Transportservices
    
    
    Property
    
    
    Consolidatedsegment
    
    
    segment
    
    
    totalHK$
    
    
    HK$
    
    
    HK$(in millions)Revenue
    
    
    4,612
    
    
    
    771
    
    
    
    5,383Operating costs before depreciation and amortization
    
    
    (2,646
    )
    
    
    (153
    )
    
    
    (2,799
    )Inter-segment charges (1)
    
    
    38
    
    
    
    (38
    )
    
    
    Depreciation and amortization
    
    
    (2,208
    )
    
    
    (30
    )
    
    
    (2,238
    )Result after depreciation and amortization
    
    
    (204
    )
    
    
    550
    
    
    
    346Net valuation gains on investment properties
    
    
    
    
    
    
    171
    
    
    
    171Result
    
    
    (204
    )
    
    
    721
    
    
    
    517Unallocated corporate
expenses, depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    (248
    )Interest and finance income
    
    
    
    
    
    
    
    
    
    
    525Interest and finance expenses
    
    
    
    
    
    
    
    
    
    
    (823
    )Share of profit of associate
    
    
    
    
    
    
    
    
    
    
    15Gains on changes in fair value of
derivative financial instruments
and hedged borrowings
    
    
    
    
    
    
    
    
    
    
    400Income tax
    
    
    
    
    
    
    
    
    
    
    (69
    )Profit after taxation
    
    
    
    
    
    
    
    
    
    
    317
 
 (1)
    
    Inter-segment charges represent cost recoveries from other segments for services rendered. F-30




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 12 Segmental reporting (continued)
 2005
Assets and liabilities
 Transportservices
    
    
    Property
    
    
    Consolidatedsegment
    
    
    Segment
    
    
    totalHK$
    
    
    HK$
    
    
    HK$(in millions)Assets
    
    
    65,509
    
    
    
    1,971
    
    
    
    67,480Properties under development
    
    
    
    
    
    
    1,537
    
    
    
    1,537Interest in associate
    
    
    
    
    
    
    
    
    
    
    72Railways under construction @
    
    
    
    
    
    
    
    
    
    
    11,165Unallocated assets #
    
    
    
    
    
    
    
    
    
    
    9,49865,509
    
    
    
    3,508
    
    
    
    89,752Liabilities
    
    
    645
    
    
    
    671
    
    
    
    1,316Deferred income
    
    
    350
    
    
    
    191
    
    
    
    541Unallocated liabilities *
    
    
    
    
    
    
    
    
    
    
    28,242995
    
    
    
    862
    
    
    
    30,099
 
 @
    
    Comprising construction and land costs of Lok Ma Chau and Kowloon Southern Link (HK$9,955
million) and planning and design costs of Shatin to Central Link and Express Rail
Link/Northern Link (HK$1,210 million).#
    
    Comprising corporate assets and construction in progress for corporate office (HK$341
million), derivative financial assets (HK$129 million), investments (HK$449 million),
loans to third party ($684 million), loan to non-controlled subsidiary (HK$3,863 million),
interest and other receivables (HK$638 million) and cash and cash equivalents (HK$3,394
million).*
    
    Comprising interest-bearing borrowings (HK$19,474 million), accrued charges and
provisions for capital projects (HK$2,912 million), lease payable (HK$684 million),
interest and other payables (HK$1,613 million), deferred tax liabilities (HK$3,198
million) and derivative financial liabilities (HK$361 million). Other information
 Transportservices
    
    
    Property
    
    
    Consolidatedsegment
    
    
    segment
    
    
    totalHK$
    
    
    HK$
    
    
    HK$(in millions)Capital expenditure: Operational railways
    
    
    1,165
    
    
    
    127
    
    
    
    1,292 Railways under
construction
    
    
    
    
    
    
    
    
    
    
    2,535 Unallocated capital
expenditure
    
    
    
    
    
    
    
    
    
    
    81,165
    
    
    
    127
    
    
    
    3,835
 F-31




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 12 Segmental reporting (continued)
 2004
 Operating results
 Transportservices
    
    
    Property
    
    
    Consolidatedsegment
    
    
    segment
    
    
    totalHK$
    
    
    HK$
    
    
    HK$(in millions)Revenue
    
    
    4,281
    
    
    
    695
    
    
    
    4,976Operating costs before depreciation
    
    
    (2,447
    )
    
    
    (128
    )
    
    
    (2,575
    )Inter-segment charges (1)
    
    
    35
    
    
    
    (35
    )
    
    
    Depreciation and amortization
    
    
    (1,630
    )
    
    
    (29
    )
    
    
    (1,659
    )Result after depreciation and amortization
    
    
    239
    
    
    
    503
    
    
    
    742Valuation gains on investment
properties
    
    
    
    
    
    
    148
    
    
    
    148Result
    
    
    239
    
    
    
    651
    
    
    
    890Unallocated corporate
expenses, depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    (251
    )Interest and finance income
    
    
    
    
    
    
    
    
    
    
    444Interest and finance expenses
    
    
    
    
    
    
    
    
    
    
    (485
    )Share of profit of associate
    
    
    
    
    
    
    
    
    
    
    15Income tax
    
    
    
    
    
    
    
    
    
    
    (100
    )Profit after taxation
    
    
    
    
    
    
    
    
    
    
    513
 
 (1)
    
    Inter-segment charges represent cost recoveries from other segments for services
rendered. F-32




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 12 Segmental reporting (continued)
 2004
  Transportservices
    
    
    Property
    
    
    Consolidatedsegment
    
    
    segment
    
    
    totalHK$
    
    
    HK$
    
    
    HK$(in millions)Assets
    
    
    66,530
    
    
    
    1,682
    
    
    
    68,212Properties under development
    
    
    
    
    
    
    1,892
    
    
    
    1,892Interest in associate
    
    
    
    
    
    
    
    
    
    
    57Railways under construction @
    
    
    
    
    
    
    
    
    
    
    7,981Unallocated assets #
    
    
    
    
    
    
    
    
    
    
    13,24466,530
    
    
    
    3,574
    
    
    
    91,386Liabilities
    
    
    367
    
    
    
    636
    
    
    
    1,003Deferred income
    
    
    584
    
    
    
    124
    
    
    
    708Unallocated liabilities *
    
    
    
    
    
    
    
    
    
    
    29,613951
    
    
    
    760
    
    
    
    31,324
 
 @
    
    Comprising construction and land costs of Lok Ma Chau (HK$6,519 million) and planning and
design costs of Shatin to Central Link, Kowloon Southern Link and Northern Link (HK$1,462
million).#
    
    Comprising corporate assets and construction in progress for corporate office (HK$409
million), investments (HK$4,323 million), loans to third party (HK$733 million), loan to
non-controlled subsidiary (HK$3,576 million), interest and other receivables (HK$672 million)
and cash and cash equivalents (HK$3,531 million).*
    
    Comprising interest-bearing borrowings (HK$19,748 million), accrued charges and provisions
for capital projects (HK$3,875 million), lease payable (HK$717 million), interest and other
payables (HK$2,022 million) and deferred tax liabilities (HK$3,251 million). Other information
 Transportservices
    
    
    Property
    
    
    Consolidatedsegment
    
    
    segment
    
    
    totalHK$
    
    
    HK$
    
    
    HK$(in millions)Capital expenditure Operational railways
    
    
    6,678
    
    
    
    61
    
    
    
    6,739 Railways under
construction
    
    
    
    
    
    
    
    
    
    
    2,278 Unallocated capital
expenditure
    
    
    
    
    
    
    
    
    
    
    86,678
    
    
    
    61
    
    
    
    9,025
 F-33




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 13 Fixed assets and interest in leasehold land held for own use under operating leases
 Tunnels,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest inbridges,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    leaseholdroads and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    landInvestment
    
    
    permanent
    
    
    
    
    
    
    Rolling
    
    
    Other
    
    
    fixed
    
    
    held forproperties
    
    
    way
    
    
    Buildings
    
    
    stock
    
    
    equipment
    
    
    assets
    
    
    own useHK$
    
    
    HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)Cost or valuation:At January 1, 2005
    
    
    1,026
    
    
    
    19,914
    
    
    
    28,858
    
    
    
    9,282
    
    
    
    11,089
    
    
    
    70,169
    
    
    
    5,913Transfer from
construction
in progress
    
    
    
    
    
    
    43
    
    
    
    282
    
    
    
    (4
    )
    
    
    314
    
    
    
    635
    
    
    
    Additions/(reversal
of over-accruals)
    
    
    
    
    
    
    284
    
    
    
    313
    
    
    
    (7
    )
    
    
    37
    
    
    
    627
    
    
    
    72Disposals
    
    
    (26
    )
    
    
    (16
    )
    
    
    (6
    )
    
    
    
    
    
    
    (68
    )
    
    
    (116
    )
    
    
    Fair value adjustment
    
    
    171
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    At December 31, 2005
    
    
    1,171
    
    
    
    20,225
    
    
    
    29,447
    
    
    
    9,271
    
    
    
    11,372
    
    
    
    71,486
    
    
    
    5,985At January 1, 2006
    
    
    1,171
    
    
    
    20,225
    
    
    
    29,447
    
    
    
    9,271
    
    
    
    11,372
    
    
    
    71,486
    
    
    
    5,985Transfer from
construction
in progress
    
    
    112
    
    
    
    11
    
    
    
    41
    
    
    
    4
    
    
    
    265
    
    
    
    433
    
    
    
    7Additions/(reversal
of over-accruals)
    
    
    
    
    
    
    (6
    )
    
    
    199
    
    
    
    1
    
    
    
    54
    
    
    
    248
    
    
    
    (9
    )Disposals
    
    
    (4
    )
    
    
    (20
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (49
    )
    
    
    (77
    )
    
    
    Fair value adjustment
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    At December 31, 2006
    
    
    1,378
    
    
    
    20,210
    
    
    
    29,686
    
    
    
    9,273
    
    
    
    11,642
    
    
    
    72,189
    
    
    
    5,983Accumulated
depreciation and
amortization:At January 1, 2005
    
    
    
    
    
    
    384
    
    
    
    1,417
    
    
    
    2,244
    
    
    
    4,069
    
    
    
    8,114
    
    
    
    222Charge for the year
    
    
    
    
    
    
    464
    
    
    
    600
    
    
    
    275
    
    
    
    804
    
    
    
    2,143
    
    
    
    118Written back on
disposals
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )
    
    
    
    
    
    
    (66
    )
    
    
    (69
    )
    
    
    At December 31, 2005
    
    
    
    
    
    
    847
    
    
    
    2,015
    
    
    
    2,519
    
    
    
    4,807
    
    
    
    10,188
    
    
    
    340At January 1, 2006
    
    
    
    
    
    
    847
    
    
    
    2,015
    
    
    
    2,519
    
    
    
    4,807
    
    
    
    10,188
    
    
    
    340Charge for the year
    
    
    
    
    
    
    473
    
    
    
    610
    
    
    
    274
    
    
    
    816
    
    
    
    2,173
    
    
    
    119Written back on
disposals
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (3
    )
    
    
    (43
    )
    
    
    (48
    )
    
    
    At December 31, 2006
    
    
    
    
    
    
    1,318
    
    
    
    2,625
    
    
    
    2,790
    
    
    
    5,580
    
    
    
    12,313
    
    
    
    459Carrying amounts:At December 31, 2006
    
    
    1,378
    
    
    
    18,892
    
    
    
    27,061
    
    
    
    6,483
    
    
    
    6,062
    
    
    
    59,876
    
    
    
    5,524At December 31, 2005
    
    
    1,171
    
    
    
    19,378
    
    
    
    27,432
    
    
    
    6,752
    
    
    
    6,565
    
    
    
    61,298
    
    
    
    5,645
 F-34




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 13 Fixed assets and interest in leasehold land held for own use under operating leases
(continued)
      Gross
    
    
    Related
    
    
    Gross
    
    
    Relatedcarrying
    
    
    accumulated
    
    
    carrying
    
    
    accumulatedamount
    
    
    depreciation
    
    
    amount
    
    
    depreciation2005
    
    
    2005
    
    
    2006
    
    
    2006HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)Goods yard at Hung Hom Bay
    
    
    85
    
    
    
    11
    
    
    
    84
    
    
    
    13Hung Hom Station Car Park
    
    
    56
    
    
    
    24
    
    
    
    55
    
    
    
    25Offices at Hung Hom Station
    
    
    23
    
    
    
    6
    
    
    
    23
    
    
    
    7Offices at Hung Hom
freight building
    
    
    6
    
    
    
    1
    
    
    
    6
    
    
    
    1Citylink Plaza at Sha Tin
Station
    
    
    144
    
    
    
    63
    
    
    
    144
    
    
    
    68Goods yard at Mongkok
Station
    
    
    45
    
    
    
    7
    
    
    
    45
    
    
    
    8Shops at stations
    
    
    764
    
    
    
    81
    
    
    
    802
    
    
    
    93Mobile phone coverage system
    
    
    84
    
    
    
    43
    
    
    
    84
    
    
    
    48Trackside Villas
    
    
    30
    
    
    
    7
    
    
    
    36
    
    
    
    91,237
    
    
    
    243
    
    
    
    1,279
    
    
    
    272
  F-35




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 13
    
    Fixed assets and interest in leasehold land held for own use under operating leases (continued)
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Within one year
    
    
    663
    
    
    
    896After one year but within five years
    
    
    704
    
    
    
    1,739After five years
    
    
    15
    
    
    
    1551,382
    
    
    
    2,790
    F-36




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 13
    
    Fixed assets and interest in leasehold land held for own use under operating leases (continued)
  -
    
    HK$21 million (2005: HK$18 million) for land resumption work on the West Rail, Ma
On Shan Rail and Tsim Sha Tsui Extension projects undertaken by the Government on behalf
of the Group and for lease of land required for construction sites.-
    
    Refund of HK$25 million (accrual for 2005: HK$50 million) for land premiums payable
by the Group in respect of the East Rail Extensions project.
  Increase indepreciationOriginal
    
    
    Revised
    
    
    charge foruseful
    
    
    useful
    
    
    the yearlife
    
    
    life
    
    
    HK$(Years)
    
    
    (Years)
    
    
    (in millions)Asset categorySignalling system for Tsim Sha Tsui Extension
    
    
    10
    
    
    
    5
    
    
    
    7Permanent way  East Rail
    
    
    17
    
    
    
    12
    
    
    
    512
  F-37




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 14 Construction in progress
  2006
 Kowloon
    
    
    
    
    
    
    
    
    
    
    TotalSouthern
    
    
    East Rail
    
    
    Other
    
    
    constructionLink
    
    
    Extensions
    
    
    assets
    
    
    in progressHK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)Balance as at January 1, 2006
    
    
    1,307
    
    
    
    8,648
    
    
    
    456
    
    
    
    10,411Costs incurred during the year
    
    
    1,533
    
    
    
    1,845
    
    
    
    295
    
    
    
    3,673Transfer to fixed assets or
leasehold land
    
    
    
    
    
    
    
    
    
    
    (440
    )
    
    
    (440
    )Balance as at December 31, 2006
    
    
    2,840
    
    
    
    10,493
    
    
    
    311
    
    
    
    13,644
 2005
 Kowloon
    
    
    
    
    
    
    
    
    
    
    TotalSouthern
    
    
    East Rail
    
    
    Other
    
    
    constructionLink
    
    
    Extensions
    
    
    assets
    
    
    in progressHK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)Balance as at January 1, 2005
    
    
    
    
    
    
    6,514
    
    
    
    472
    
    
    
    6,986Transfer from deferred expenditure
    
    
    875
    
    
    
    
    
    
    
    
    
    
    
    875Costs incurred during the year
    
    
    432
    
    
    
    2,304
    
    
    
    449
    
    
    
    3,185Transfer to fixed assets or
leasehold land
    
    
    
    
    
    
    (170
    )
    
    
    (465
    )
    
    
    (635
    )Balance as at December 31, 2005
    
    
    1,307
    
    
    
    8,648
    
    
    
    456
    
    
    
    10,411
   -
    
    HK$46 million (2005: HK$13 million) for the lease of land required for
construction sites for the East Rail Extensions and Kowloon Southern Link projects. The
land does not have a measurable value as it cannot be assigned and can only be used by
the Group and/or its contractors.-
    
    HK$19 million (2005: HK$9 million) for land resumption work undertaken by the
Government and compensation in respect of resumed land paid and payable by the
Government on behalf of the Group in respect of the East Rail Extensions and Kowloon
Southern Link projects. The Group is obligated to reimburse such sums to the
Government.
  F-38




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 15 Deferred expenditure
  2006
 Shatin to
    
    
    ExpressCentral
    
    
    Rail Link/
    
    
    Total deferredLink
    
    
    Northern Link
    
    
    expenditureHK$
    
    
    HK$
    
    
    HK$(in millions)Balance as at January 1, 2006
    
    
    1,188
    
    
    
    22
    
    
    
    1,210Expenditure during the year
    
    
    
    
    
    
    179
    
    
    
    179Balance as at December 31, 2006
    
    
    1,188
    
    
    
    201
    
    
    
    1,389
 2005
 Shatin to
    
    
    Kowloon
    
    
    ExpressCentral
    
    
    Southern
    
    
    Rail Link/
    
    
    Total deferredLink
    
    
    Link
    
    
    Northern Link
    
    
    expenditureHK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)Balance as at January 1, 2005
    
    
    1,178
    
    
    
    279
    
    
    
    4
    
    
    
    1,461Expenditure during the year
    
    
    10
    
    
    
    569
    
    
    
    18
    
    
    
    597Interest and finance
income/expenses
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    27Transfer to construction
in progress
    
    
    
    
    
    
    (875
    )
    
    
    
    
    
    
    (875
    )Balance as at December 31, 2005
    
    
    1,188
    
    
    
    
    
    
    
    22
    
    
    
    1,210
 (a)
    
    The planning, design and construction of the Shatin to Central Link was
suspended in 2005 pending the announcement by the Government of its decision on how
and by whom the Shatin to Central Link, to which the Government remains committed in
principle, would in fact be constructed. The Corporations expenditure on the Shatin
to Central Link is carried in the balance sheet at cost and if the Corporation in due
course constructs the Shatin to Central Link, this amount will form part of the final
cost of the completed project. If, however, another party were to construct the
Shatin to Central Link, it is uncertain whether the Corporation would be able to
recover any or all of the expenditure it has incurred on the project, and any
shortfall in recovery would be written off to the Corporations income statement in
the appropriate future accounting period.(b)
    
    As at December 31, 2006, land related costs totalling approximately HK$6
million (2005: HK$6 million) directly associated with the acquisition of leasehold
land for the purpose of the Shatin to Central Link are included in the balance of
deferred expenditure. These costs will be transferred to interest in leasehold land
when the land is vested in the Corporation by the Government, at which time the costs
begin to be amortized in accordance with the relevant policies.
 F-39




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 16 Properties under development
 2005
    
    
    2006HK$
    
    
    HK$(in millions)Balance as at January 1
    
    
    1,892
    
    
    
    1,537Expenditure incurred during the year
    
    
    35
    
    
    
    6Amounts recovered during the year
    
    
    (390
    )
    
    
    (1,094
    )Balance as at December 31
    
    
    1,537
    
    
    
    449
   17 Investments in subsidiaries
  Number of
    
    
    
    
    
    
    PercentagePlace of
    
    
    issued and
    
    
    
    
    
    
    of shares heldincorporation and
    
    
    fully paid
    
    
    Par value of

    
    by theName of company
    
    operation
    
    
    ordinary shares
    
    
    shares

    
    CorporationProperty ManagementManlai Court Property
    
    Hong Kong
    
    
    25,500 A
    
    
    HK$1
    
    
    100
    %Management Company Limited#
    
    
    
    
    
    
    24,500 B
    
    
    HK$1
    
    NilSun Tuen Mun Centre
    
    Hong Kong
    
    
    25,000 A
    
    
    HK$1
    
    
    100
    %Management Company Limited
    
    
    
    
    
    
    25,000 B
    
    
    HK$1
    
    
    100
    %Royal Ascot Management
    
    Hong Kong
    
    
    25,000 A
    
    
    HK$1
    
    
    100
    %Company Limited
    
    
    
    
    
    
    25,000 B
    
    
    HK$1
    
    
    100
    %Hanford Garden Property
    
    Hong Kong
    
    
    10,000
    
    
    HK$1
    
    
    100
    %Management Company LimitedPierhead Garden Management
    
    Hong Kong
    
    
    25,000 A
    
    
    HK$1
    
    
    100
    %Company Limited
    
    
    
    
    
    
    25,000 B
    
    
    HK$1
    
    
    100
    %The Metropolis Management
    
    Hong Kong
    
    
    25,500 A
    
    
    HK$1
    
    
    100
    %Company Limited
    
    
    
    
    
    
    24,500 B
    
    
    HK$1
    
    NilCapital System Limited##
    
    Hong Kong
    
    
    5,000
    
    
    HK$1
    
    
    100
    %Asset LeasingBuoyant Asset Limited
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Advanced Asset Limited
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Quality Asset Limited
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %
 F-40




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 17 Investments in subsidiaries (continued)
 Number of
    
    
    
    
    
    
    
    PercentagePlace of

    
    issued and
    
    
    
    
    
    
    
    of shares heldincorporation and

    
    fully paid
    
    
    Par value of
    
    
    
    by theName of company
    
    operation

    
    ordinary shares
    
    
    shares
    
    
    
    CorporationKasey Asset Limited
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Circuit Asset Limited
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Shining Asset Limited
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Fluent Asset Limited
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Kudos Asset Limited&
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Unique Asset Limited&
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Bowman Asset Limited
    
    Cayman Islands
    
    
    1,000
    
    
    US$1

    
    
    100
    %Statesman Asset Limited
    
    Cayman Islands
    
    
    1,000
    
    
    US$1
    
    
    100
    %Interwind Asset Limited@
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Hardy Asset Limited@
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Roving Asset Limited@
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Swanky Asset Limited@
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %TelecommunicationV-Connect Limited
    
    Hong Kong
    
    
    100
    
    
    HK$10
    
    
    100
    %Property Development
(non-controlled subsidiaries)West Rail Property
    
    Hong Kong
    
    
    51 A
    
    
    HK$10
    
    
    100
    %Development
Limited, and its 13 wholly owned subsidiaries *
    
    
    
    
    
    
    49 B
    
    
    HK$10
    
    Nil
 
 #
    
    At December 31, 2006, the subsidiary is in the process of winding up as a result of the
termination of the business of property management in Manlai Court.##
    
    At December 31, 2006, the subsidiary is in the process of winding up as it is no longer serving
any commercial function.&
    
    At December 31, 2006, the subsidiaries are in the process of winding up as the concerned leasing
transaction was terminated in 2006.@
    
    At December 31, 2006, the subsidiaries are in the process of de-registration as the proposed
leasing transactions have not materialized.*
    
    These subsidiaries are held by the Corporation for the sole purpose of developing commercial or
residential property along the West Rail, Phase I route on behalf of the Government. Their
financial statements are excluded from consolidation as the Corporation has no effective control
over nor beneficial interests in the net assets of these subsidiaries, other than the amount of
capital provided. F-41




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 17 Investments in subsidiaries (continued)
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Assets
    
    
    3,861
    
    
    
    4,046Liabilities
    
    
    3,863
    
    
    
    4,048Equity
    
    
    (2
    )
    
    
    (2
    )Revenue
    
    
    
    
    
    
    Profit / (loss) after tax for the year
    
    
    
    
    
    
    
 18 Interest in associate
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Share of net assets
    
    
    39
    
    
    
    66Loan to associate
    
    
    33
    
    
    
    3372
    
    
    
    99
  Number of issuedand fully paid
    
    
    Par value
    
    
    Percentage ofName of company
    
    ordinary shares
    
    
    of shares
    
    
    shares heldOctopus Holdings Limited
    
    
    42,000,000
    
    
    HK$1
    
    
    22.1%
     F-42




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 18 Interest in associate (continued)
  2005
    
    
    2005
    
    
    2006
    
    
    2006HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)Groups
    
    
    
    
    
    
    Groupseffective
    
    
    
    
    
    
    effective100%
    
    
    interest (22.1%)

    
    100%
    
    
    interest (22.1%)Assets
    
    
    1,833
    
    
    
    405
    
    
    
    2,180
    
    
    
    482Liabilities
    
    
    1,653
    
    
    
    366
    
    
    
    1,882
    
    
    
    416Equity
    
    
    180
    
    
    
    39
    
    
    
    298
    
    
    
    66Revenue
    
    
    354
    
    
    
    78
    
    
    
    405
    
    
    
    90Profit after tax for the year
    
    
    69
    
    
    
    15
    
    
    
    118
    
    
    
    27
 19 Loans to third party
  20 Loan to non-controlled subsidiary
   F-43




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 20 Loan to non-controlled subsidiary (continued)
   2005
    
    
    2006HK$
    
    
    HK$(in millions)Within one year
    
    
    1,202
    
    
    
    153After one year
    
    
    2,661
    
    
    
    3,8693,863
    
    
    
    4,022
 21 Investments
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Available-for-sale debt securities- Listed outside Hong Kong
    
    
    31
    
    
    
    - Unlisted
    
    
    369
    
    
    
    Interest-bearing deposits
temporarily placed with the custodian bank
    
    
    49
    
    
    
    Total fair value of investments
    
    
    449
    
    
    
    Total market value of listed investments
    
    
    31
    
    
    
    
 22 Stores and spares
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Within one year
    
    
    159
    
    
    
    133After one year
    
    
    184
    
    
    
    229343
    
    
    
    362
 F-44




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 23 Interest and other receivables
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Interest receivable
    
    
    42
    
    
    
    8Amount due from the Government
    
    
    432
    
    
    
    312Debtors, deposits, prepayments and
revenue in arrears
    
    
    243
    
    
    
    251717
    
    
    
    571
   2005
    
    
    2006HK$
    
    
    HK$(in millions)Within one year
    
    
    651
    
    
    
    531After one year
    
    
    66
    
    
    
    40717
    
    
    
    571
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Current
    
    
    573
    
    
    
    440Less than one month overdue
    
    
    3
    
    
    
    2One to three months overdue
    
    
    3
    
    
    
    3More than three months overdue
    
    
    5
    
    
    
    1Total debtors
    
    
    584
    
    
    
    446Deposits, prepayments and revenue in arrears
    
    
    133
    
    
    
    125717
    
    
    
    571
  F-45




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 24 Cash and cash equivalents
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Deposits with banks- Within three months to maturity
when placed
    
    
    1,797
    
    
    
    1,405- More than three months to
maturity when placed
    
    
    1,555
    
    
    
    471Cash at bank and in hand
    
    
    42
    
    
    
    71Cash and cash equivalents in the
balance sheets
    
    
    3,394
    
    
    
    1,947Less: deposits with banks with
more than three months
to maturity when placed
    
    
    (1,555
    )
    
    
    (471
    )Cash and cash equivalents
in the consolidated cash
flow statement
    
    
    1,839
    
    
    
    1,476
 25 Interest and other payables
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Interest payable
    
    
    486
    
    
    
    462Deposits and advances
    
    
    1,075
    
    
    
    1,151Creditors and accrued charges
    
    
    1,242
    
    
    
    8462,803
    
    
    
    2,459
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Within one year
    
    
    2,132
    
    
    
    1,697After one year
    
    
    671
    
    
    
    7622,803
    
    
    
    2,459
 F-46




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 25 Interest and other payables (continued)
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Due within one month or
on demand
    
    
    641
    
    
    
    557Due between one month to three
months
    
    
    234
    
    
    
    219Due between three months to
six months
    
    
    45
    
    
    
    43Due after six months
    
    
    255
    
    
    
    199Total creditors
    
    
    1,175
    
    
    
    1,018Deposits and advances
    
    
    1,075
    
    
    
    1,151Accrued charges
    
    
    553
    
    
    
    2902,803
    
    
    
    2,459
 26 Accrued charges and provisions for capital projects
     2005
    
    
    2006HK$
    
    
    
    HK$(in millions)Within one year
    
    
    1,814
    
    
    
    1,080After one year
    
    
    1,224
    
    
    
    9743,038
    
    
    
    2,054
 F-47




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 27 Lease payable
  28 Interest-bearing borrowings
  Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fairamount
    
    
    value
    
    
    amount
    
    
    value2005
    
    
    2005
    
    
    2006
    
    
    2006HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)Capital market instrumentsHK dollar Retail notes due
2008 and 2013 - see (c) below
    
    
    989
    
    
    
    989
    
    
    
    963
    
    
    
    1,010US dollar notes due 2010
- see (d) below
    
    
    7,753
    
    
    
    8,522
    
    
    
    7,779
    
    
    
    8,323US dollar notes due 2009
- see (e) below
    
    
    7,856
    
    
    
    8,231
    
    
    
    7,866
    
    
    
    8,078HK dollar notes due 2013
- see (e) below
    
    
    789
    
    
    
    789
    
    
    
    808
    
    
    
    808US dollar notes due 2014
- see (e) below
    
    
    387
    
    
    
    444
    
    
    
    389
    
    
    
    43317,774
    
    
    
    18,975
    
    
    
    17,805
    
    
    
    18,652Export
credit loans - see (f) below
    
    
    1,700
    
    
    
    1,706
    
    
    
    1,407
    
    
    
    1,40619,474
    
    
    
    20,681
    
    
    
    19,212
    
    
    
    20,058
 (b)
    
    The fair values of capital market instruments and export credit loans were determined using
discounted cash flow techniques.(c)
    
    The Corporation issued 3% notes due 2008 with an aggregate nominal value of HK$300 million at
a premium and 4.8% notes due 2013 with an aggregate nominal value of HK$700 million at a
premium on June 6, 2003. All the notes issued are unsecured and rank equally with all of the
Corporations other unsecured senior indebtedness. F-48




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 28 Interest-bearing borrowings (continued)
       Capital market
    
    
    Export creditTotal
    
    
    instruments
    
    
    loans
    
    
    Total2005
    
    
    2006
    
    
    2006
    
    
    2006HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)Within one year
    
    
    299
    
    
    
    
    
    
    
    305
    
    
    
    305After one year but
within two years
    
    
    304
    
    
    
    293
    
    
    
    307
    
    
    
    600After two years but
within five years
    
    
    16,817
    
    
    
    15,645
    
    
    
    786
    
    
    
    16,431After five years
    
    
    2,054
    
    
    
    1,867
    
    
    
    9
    
    
    
    1,87619,474
    
    
    
    17,805
    
    
    
    1,407
    
    
    
    19,212
 F-49




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 29 Deferred income
   2005
    
    
    2006HK$
    
    
    HK$(in millions)Balance at January 1
    
    
    708
    
    
    
    541Net amount received and receivable
    
    
    76
    
    
    
    445Provision for amount payable upon
termination of a lease arrangement
    
    
    (196
    )
    
    
    Recognized in the income statement
    
    
    (47
    )
    
    
    (459
    )Balance at December 31
    
    
    541
    
    
    
    527
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Within one year
    
    
    32
    
    
    
    32After one year
    
    
    509
    
    
    
    495541
    
    
    
    527
 30 Share capital
 2004
    
    
    2005
    
    
    2006No. of
    
    
    HK$
    
    
    No. of
    
    
    HK$
    
    
    No. of
    
    
    HK$shares
    
    
    (in millions)
    
    
    shares
    
    
    (in millions)
    
    
    shares
    
    
    (in millions)Share capital:Authorised:Shares of
HK$100,000 each
    
    
    425,000
    
    
    
    42,500
    
    
    
    425,000
    
    
    
    42,500
    
    
    
    425,000
    
    
    
    42,500Issued and fully paid:At December 31
    
    
    391,200
    
    
    
    39,120
    
    
    
    391,200
    
    
    
    39,120
    
    
    
    391,200
    
    
    
    39,120
 F-50




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 31
    
    Reserves
 InvestmentsDevelopment
    
    
    revaluation
    
    
    Retainedreserve
    
    
    reserve
    
    
    profits
    
    
    TotalHK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)Balance at January 1, 2004
    
    
    6,535
    
    
    
    (1
    )
    
    
    14,530
    
    
    
    21,064Dividend approved in respect of
the previous year
    
    
    
    
    
    
    
    
    
    
    (620
    )
    
    
    (620
    )Net surplus/(deficit) arising from
revaluation
    
    
    
    
    
    
    (54
    )
    
    
    
    
    
    
    (54
    )Net deficit transferred to the
income statement on
redemption and disposal
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    39Profit for the year
    
    
    
    
    
    
    
    
    
    
    513
    
    
    
    513Balance at December 31, 2004
    
    
    6,535
    
    
    
    (16
    )
    
    
    14,423
    
    
    
    20,942Balance at January 1, 2005- before opening balance adjustments
    
    
    6,535
    
    
    
    (16
    )
    
    
    14,423
    
    
    
    20,942- opening balance adjustments
    
    
    
    
    
    
    
    
    
    
    (568
    )
    
    
    (568
    )- after opening balance adjustments
    
    
    6,535
    
    
    
    (16
    )
    
    
    13,855
    
    
    
    20,374Transfer to retained profits
    
    
    (6,535
    )
    
    
    
    
    
    
    6,535
    
    
    
    Net deficit arising from revaluation
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    (15
    )Net deficit transferred to the
income statement on
redemption and disposal
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    29Dividend approved in respect of
the previous year
    
    
    
    
    
    
    
    
    
    
    (172
    )
    
    
    (172
    )Profit for the year
    
    
    
    
    
    
    
    
    
    
    317
    
    
    
    317Balance at December 31, 2005
    
    
    
    
    
    
    (2
    )
    
    
    20,535
    
    
    
    20,533Balance at January 1, 2006
    
    
    
    
    
    
    (2
    )
    
    
    20,535
    
    
    
    20,533Net deficit transferred to the
income statement on
redemption and disposal
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Profit for the year
    
    
    
    
    
    
    
    
    
    
    278
    
    
    
    278Balance at December 31, 2006
    
    
    
    
    
    
    
    
    
    
    20,813
    
    
    
    20,813
     F-51




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 31
    
    Reserves
 (d)
    
    With effect from January 1, 2005 in order to comply with HKAS 32 and HKAS 39, the Group has
changed its accounting policies relating to financial assets and liabilities. Details of the
changes are as follow.
 (i)
    
    InvestmentsIn prior years, investments were classified as investments held for non-trading
purposes and were stated at fair value with changes in fair value recognized in the
investments revaluation reserve.With effect from January 1, 2005, and in accordance with HKAS 39, all investments are
classified as available-for sale securities and carried at fair value. Changes in
fair value of available-for-sale securities are recognized in investments revaluation
reserve except to the extent that they are capitalized as being directly attributable
to the acquisition, construction or production of an asset when necessarily takes a
substantial period of time to get ready for its intended use. There is no financial
effect of this change in accounting policy.(ii)
    
    Interest-bearing borrowingsIn prior years, the discount/premium and ancillary costs arising from interest-bearing
borrowings were amortized to the income statement on a straight-line basis.With effect from January 1, 2005, and in accordance with HKAS 39, the discount/premium
and ancillary costs arising from interest-bearing borrowings are amortized to the
income statement using the effective interest rate.(iii)
    
    Derivative financial assets and liabilitiesIn prior years, derivative financial instruments entered into by management to hedge
the interest rate risk and foreign currency risk of a recognized liability were
recognized with reference to the timing of recognition of the corresponding hedged
transaction. Derivative financial instruments entered into for the purpose of hedging
the foreign currency risk of a recognized foreign currency liability were revalued at
the balance sheet date at the exchange rates ruling at that date with the resultant
gains and losses used to offset gains and losses resulting from currency fluctuations
inherent in the underlying foreign currency liabilities.With effect from January 1, 2005, and in accordance with HKAS 39, all derivative
financial instruments entered into by the Group are stated at fair value. Changes in
the fair value of derivative financial instruments designated as hedging instruments in
a cash flow hedge are recognized directly in the income statement in the same period or
periods during which the liability affects the income statement (such as when the
interest income or expense is recognized).Changes in fair value of derivative financial instruments designated as hedging
instruments in a fair value hedge are recognized in the income statement. Changes in
fair value of derivative financial instruments which do not qualify as hedging
instruments are recognized in the income statement.(iv)
    
    Effect of the changes in accounting policiesThe changes in accounting policies relating to accounting for investments in securities
and derivative financial assets and liabilities were adopted by way of opening balance
adjustments to certain reserves as at January 1, 2005. Comparative amounts have not
been restated as this is prohibited by the transitional arrangements in HKAS 39.
 F-52




---



##### Table of Contents



32
    
    Financial assets and liabilities
    (a)
    
    Credit risk
    F-53




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 32
    
    Financial assets and liabilities (continued)
 (b)
    
    Interest rate risk
          F-54




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 32
    
    Financial assets and liabilities (continued)(b)
    
    Interest rate risk (continued)
   2006
 Effective
    
    
    
    
    
    
    One year
    
    
    
    
    
    
    
    
    
    
    More thaninterest
    
    
    Total
    
    
    or less
    
    
    1-2 years
    
    
    2-5 years
    
    
    5 yearsrate
    
    
    HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$%
    (in millions)Period in which
assets/(liabilities) are
repriced before maturityLoan to non-controlled
subsidiary
    
    
    8.55
    
    
    
    4,022
    
    
    
    4,022
    
    
    
    
    
    
    
    
    
    
    
    Interest-bearing borrowings
    
    
    5.97
    
    
    
    (274
    )
    
    
    (274
    )
    
    
    
    
    
    
    
    
    
    
    3,748
    
    
    
    3,748
    
    
    
    
    
    
    
    
    
    
    
    Period in which
assets/(liabilities) are not
repriced before maturityCash and cash equivalents
    
    
    4.74
    
    
    
    1,947
    
    
    
    1,947
    
    
    
    
    
    
    
    
    
    
    
    Interest-bearing borrowings
    
    
    7.30
    
    
    
    (18,938
    )
    
    
    (200
    )
    
    
    (559
    )
    
    
    (16,311
    )
    
    
    (1,868
    )Effect of interest rate swaps
    
    
    (0.08
    )
    
    
    
    
    
    
    4,705
    
    
    
    (293
    )
    
    
    (2,934
    )
    
    
    (1,478
    )(16,991
    )
    
    
    6,452
    
    
    
    (852
    )
    
    
    (19,245
    )
    
    
    (3,346
    )
 2005
 Effective
    
    
    
    
    
    
    One year
    
    
    
    
    
    
    
    
    
    
    More thaninterest
    
    
    Total
    
    
    or less
    
    
    1-2 years
    
    
    2-5 years
    
    
    5 yearsrate
    
    
    HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$%
        (in millions)Period in which
assets/(liabilities) are
repriced before maturityInvestments
    
    
    3.87
    
    
    
    331
    
    
    
    331
    
    
    
    
    
    
    
    
    
    
    
    Loan to non-controlled
subsidiary
    
    
    8.24
    
    
    
    3,863
    
    
    
    3,863
    
    
    
    
    
    
    
    
    
    
    
    Interest-bearing borrowings
    
    
    4.94
    
    
    
    (571
    )
    
    
    (571
    )
    
    
    
    
    
    
    
    
    
    
    3,623
    
    
    
    3,623
    
    
    
    
    
    
    
    
    
    
    
    
 F-55




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 32
    
    Financial assets and liabilities (continued)
 (b)
    
    Interest rate risk (continued)
  Effective
    
    
    
    
    
    
    One year or
    
    
    
    
    
    
    
    
    
    
    More than 5interest
    
    
    Total
    
    
    less
    
    
    1-2 years
    
    
    2-5 years
    
    
    yearsrate
    
    
    HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$%
    (in millions)Period in which
assets/(liabilities) are not
repriced before maturityLoans to third party
    
    
    6.96
    
    
    
    684
    
    
    
    34
    
    
    
    36
    
    
    
    124
    
    
    
    490Investments
    
    
    2.95
    
    
    
    118
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    Cash and cash equivalents
    
    
    4.03
    
    
    
    3,394
    
    
    
    3,394
    
    
    
    
    
    
    
    
    
    
    
    Lease payable
    
    
    6.96
    
    
    
    (684
    )
    
    
    (34
    )
    
    
    (36
    )
    
    
    (124
    )
    
    
    (490
    )Interest-bearing borrowings
    
    
    7.15
    
    
    
    (18,903
    )
    
    
    
    
    
    
    (199
    )
    
    
    (16,698
    )
    
    
    (2,006
    )Effect of interest rate swaps
    
    
    (0.74
    )
    
    
    
    
    
    
    4,781
    
    
    
    
    
    
    
    (3,295
    )
    
    
    (1,486
    )(15,391
    )
    
    
    8,293
    
    
    
    (199
    )
    
    
    (19,993
    )
    
    
    (3,492
    )
 (c)
    
    Foreign exchange risk
    (i)
    
    Recognized assets and liabilitiesChanges in the fair value of currency swaps that economically hedge monetary assets and
liabilities in foreign currencies are recognized in the income statement. The net fair
value of currency swaps used by the Group as economic hedges of monetary assets and
liabilities in foreign currencies at December 31, 2006 and recognized as derivative
financial liabilities was HK$456 million (2005: HK$283 million), which was recognized as
derivative financial liabilities.(ii)
    
    Fair value through income statementChanges in the fair value of forward exchange contracts for which no hedge accounting is
applied are recognized in the income statement. The net fair value of forward exchange
contracts recognized as a net derivative financial liability was HK$41 million (2005:
HK$3 million of net derivative financial assets), which comprises assets of HK$2 million
(2005: HK$5 million) and liabilities of HK$43 million (2005: HK$2 million).In respect of other receivables and other payables denominated in currencies other than
the functional currency of the operations, the Group ensures that the net exposure is
kept to an acceptable level by buying or selling foreign currencies at spot or forward
rates where necessary.All the Groups borrowings are denominated in either Hong Kong dollars or United States
dollars. Given this, management does not expect that there will be any significant
currency risk associated with the Groups borrowings.
 F-56




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 32 Financial assets and liabilities (continued)
  (iii)
    
    The financial assets and liabilities denominated in currencies other than the
functional currency of the Corporation are shown as follows:
 2005
    
    
    2006(expressed in foreign currency)(in millions)US dollarsNon-derivative financial assets- Loans to third party
    
    
    88
    
    
    
    - Investments
    
    
    55
    
    
    
    - Interest and other receivables
    
    
    6
    
    
    
    1- Cash and cash equivalents
    
    
    292
    
    
    
    178441
    
    
    
    179Derivative financial assets- Interest rate swaps
    
    
    16
    
    
    
    10- Forward exchange contracts
    
    
    1
    
    
    
    17
    
    
    
    10Non-derivative financial liabilities- Interest and other payables
    
    
    87
    
    
    
    56- Accrued charges and provisions
for capital projects
    
    
    5
    
    
    
    1- Lease payable
    
    
    88
    
    
    
    - Interest-bearing borrowings
    
    
    2,274
    
    
    
    2,2352,454
    
    
    
    2,292Derivative financial liabilities- Interest rate swaps
    
    
    5
    
    
    
    5- Currency swaps
    
    
    36
    
    
    
    5841
    
    
    
    63EurosNon-derivative financial assets- Cash and cash equivalents
    
    
    1
    
    
    
    2Japanese yenNon-derivative financial assets- Cash and cash equivalents
    
    
    
    
    
    
    87Non-derivative financial liabilities- Accrued charges and provisions for capital projects
    
    
    
    
    
    
    916Derivative financial liabilities- Forward exchange contracts
    
    
    1
    
    
    
    630Swiss francsNon-derivative financial assets- Cash and cash equivalents
    
    
    8
    
    
    
    7
   F-57




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 32
    
    Financial assets and liabilities (continued)
   Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fairamount
    
    
    value
    
    
    amount
    
    
    value2005
    
    
    2005
    
    
    2006
    
    
    2006HK$
    
    
    HK$
    
    
    HK$
    
    
    HK$(in millions)Non-derivative financial assets- Loans to third party
    
    
    684
    
    
    
    668
    
    
    
    
    
    
    
    - Loan to non-controlled
subsidiary
    
    
    3,863
    
    
    
    4,105
    
    
    
    4,022
    
    
    
    4,4684,547
    
    
    
    4,773
    
    
    
    4,022
    
    
    
    4,468Derivative financial assets- Interest rate swaps
    
    
    124
    
    
    
    124
    
    
    
    90
    
    
    
    90- Forward exchange contracts
    
    
    5
    
    
    
    5
    
    
    
    2
    
    
    
    2129
    
    
    
    129
    
    
    
    92
    
    
    
    92Non-derivative financial liabilities- Lease payable
    
    
    (684
    )
    
    
    (668
    )
    
    
    
    
    
    
    - Interest-bearing borrowings
    
    
    (19,474
    )
    
    
    (20,681
    )
    
    
    (19,212
    )
    
    
    (20,058
    )(20,158
    )
    
    
    (21,349
    )
    
    
    (19,212
    )
    
    
    (20,058
    )Derivative financial liabilities- Interest rate swaps
    
    
    (76
    )
    
    
    (76
    )
    
    
    (41
    )
    
    
    (41
    )- Currency swaps
    
    
    (283
    )
    
    
    (283
    )
    
    
    (456
    )
    
    
    (456
    )- Forward exchange contracts
    
    
    (2
    )
    
    
    (2
    )
    
    
    (43
    )
    
    
    (43
    )(361
    )
    
    
    (361
    )
    
    
    (540
    )
    
    
    (540
    )
   (i)
    
    InvestmentsThe fair value of financial assets traded in active markets was based on quoted market
prices at the balance sheet date.(ii)
    
    Interest rate swaps, currency swaps and forward exchange contractsThe fair value of interest rate swaps and currency swaps was based on the present value
of the estimated amount that the Group would receive or pay to terminate the swap at the
balance sheet date, taking into account prevailing interest rates, foreign exchange
rates and creditworthiness of the swap counterparties. The fair value of forward
exchange contracts was based on the quoted market price at the balance sheet date, being
the present value of the quoted forward price. Discounted cash flows techniques were
used in determining the fair value of swaps.(iii)
    
    Loan to non-controlled subsidiary and interest-bearing borrowingsWhere applicable, fair value was calculated based on discounted cash flows of expected
future principal and interest payments.(iv)
    
    Loans to third party and lease payableThe fair value was estimated based on the present value of future cash flows.
 F-58




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 32 Financial assets and liabilities (continued)
  (v)
    
    Discount rates used for determining fair valueThe Group used the applicable yield curve at the balance sheet date plus an adequate
constant credit spread to discount financial assets and liabilities. The interest rates
used were as follows:
 2005
    
    
    2006Interest rate swaps, currency swaps
    
    
    4.22% - 5.43
    %
    
    
    3.99% - 5.54
    %Loan to non-controlled subsidiary and
interest-bearing borrowings
    
    
    4.05% - 5.82
    %
    
    
    3.69% - 6.39
    %Loans to third party and lease payable
    
    
    7.43% - 7.83
    %
    
    
    
 33
    
    Notes to the consolidated cash flow statementReconciliation of operating profit after depreciation and amortization to net cash inflow from operations
 2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Operating profit after depreciation and amortization
    
    
    491
    
    
    
    98
    
    
    
    292Depreciation and amortization
    
    
    1,681
    
    
    
    2,258
    
    
    
    2,288Fixed assets written off
    
    
    24
    
    
    
    43
    
    
    
    24Increase in stores and spares
    
    
    (65
    )
    
    
    (24
    )
    
    
    (19
    )Decrease/(increase) in other receivables
    
    
    (262
    )
    
    
    194
    
    
    
    210Increase/(decrease) in other payables and
deferred income
    
    
    440
    
    
    
    (177
    )
    
    
    (131
    )Decrease in loans to third party
    
    
    
    
    
    
    16
    
    
    
    Net cash inflow from operations
    
    
    2,309
    
    
    
    2,408
    
    
    
    2,664
 34 Related parties
   F-59




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 34
    
    Related parties (continued)
  (i)
    
    On September 15, 1998, the Government approved the construction of West Rail,
Phase I to be undertaken by the Corporation. The West Rail Project Agreement, which
set out how the project was to be undertaken and the respective obligations of the
Government and the Corporation in terms of the financing, design, construction and
operation of West Rail, Phase I, was signed on October 23, 1998. On February 24,
2000, the Corporation and the Government entered into a shareholding agreement for
undertaking all property developments along the West Rail, Phase I route (note 20).(ii)
    
    The Corporation entered into a project agreement for the East Rail Extensions
with the Government in February 28, 2003. The project agreement provided for the
financing, design, construction and operations of the East Rail Extensions and related
services and facilities.(iii)
    
    The Corporation entered into a project agreement for the financing, design,
construction and operation of Kowloon Southern Link (KSL) with the Government on
October 6, 2005. Under the terms of the KSL Project Agreement, the Corporation will be
responsible for, and will finance the entire capital cost of constructing the Kowloon
Southern Link, along with the costs of the removal, replacement, modification or
improvement of existing facilities affected by or required as a consequence of the
construction of the Kowloon Southern Link.(iv)
    
    The Corporation accepted an offer from the Government to allow the Corporation
to proceed with the development of the site at Ho Tung Lau and Wu Kai Sha in March 2003
and October 2005 respectively.
  (i)
    
    The Corporation accepted an offer from the Government to allow the Corporation
to proceed with the development of the site at Tai Wai Maintenance Centre in July 2006.(ii)
    
    In the construction of the new railway projects, certain essential project
works are embedded within the infrastructure works to be undertaken by the Government
or its related parties. The Government and its related parties have entered into
entrustment agreements and certain services agreements with the Corporation under which
the Corporation has agreed to carry out works on behalf of the Government and provide
operational services such as maintenance and building management services. The works
done and services provided by the Corporation are reimbursable and the details of
amounts payable and receivable as at December 31, 2006 are provided in notes 14 and 23
respectively.(iii)
    
    Octopus Cards Limited earned fees for the use of the Octopus cards system from
the Corporation and paid ticket loading agent fees, handling fees and interest to the
Corporation. Details of the transactions are disclosed in note 18 to the financial
statements.
 F-60




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 35 Outstanding commitments
  2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Investment properties- authorized and contracted for
    
    
    1
    
    
    
    41
    
    
    
    2- authorized but not contracted for
    
    
    51
    
    
    
    7
    
    
    
    2Property, plant and equipment- authorized and contracted for
    
    
    2,601
    
    
    
    4,093
    
    
    
    3,860- authorized but not contracted for
    
    
    1,964
    
    
    
    3,778
    
    
    
    3,784Interest in leasehold land held for own use
under operating leases- authorized and contracted for
    
    
    349
    
    
    
    291
    
    
    
    219- authorized but not contracted for
    
    
    
    
    
    
    30
    
    
    
    38Balance at December 31,
    
    
    4,966
    
    
    
    8,240
    
    
    
    7,905
  2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Within one year
    
    
    40
    
    
    
    46
    
    
    
    38After one year but within five years
    
    
    18
    
    
    
    94
    
    
    
    49Balance at December 31,
    
    
    58
    
    
    
    140
    
    
    
    87
  F-61




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 36 Retirement benefit scheme
       37 Debt facilities and programmes
  2005
    
    
    2006HK$
    
    
    HK$(in millions)HK$2,200 million (2005: HK$2,200
million) short-term uncommitted revolving credit
facilities
    
    
    2,200
    
    
    
    2,200HK$20 million (2005: HK$20 million)
letters of credit
    
    
    20
    
    
    
    20HK$25 million (2005: HK$25 million)
overdraft facilities
    
    
    25
    
    
    
    25HK$8,000 million (2005:HK$8,000
million) syndicated loan facilities
    
    
    8,000
    
    
    
    8,000US$3,000 million (2005: US$3,000 million)
medium term note programme
    
    
    14,377
    
    
    
    14,418US$292 million (2005: US$292 million) letters of credit
for leveraged leases
    
    
    2,273
    
    
    
    2,279US$182 million (2005: US$220 million) export credit
loan facilities
    
    
    11
    
    
    
    1026,906
    
    
    
    26,952
  2005
    
    
    2006HK$
    
    
    HK$(in millions)Floating rate- expiring within one year
    
    
    2,245
    
    
    
    2,620- expiring after one year
    
    
    10,284
    
    
    
    9,914Fixed/floating rate to be determined when issued- expiring after one year
    
    
    14,377
    
    
    
    14,41826,906
    
    
    
    26,952
 F-62




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 38 Contingent liabilities
  39 Impairment of assets
      40 Proposed merger of the Corporation and MTR Corporation Limited (MTRCL)
  F-63




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 40 Proposed merger of the Corporation and MTR Corporation Limited (MTRCL) (continued)
    41 Comparative figures
  42 Accounting estimates and judgements
     F-64




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 43 Possible impact of amendments, new standards and interpretations issued but not yet
effective for the annual accounting period ended December 31, 2006
    Effective for accounting periodsbeginning on or afterAmendment to HKAS 1, Presentation of financial
statements: capital disclosures
    
    January 1, 2007HKFRS 7, Financial instruments: disclosures
    
    January 1, 2007
 F-65




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 44 Summary of differences between accounting principles generally accepted in Hong Kong and the
United States
           Property, plant and equipment situated on leasehold land
   F-66




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 44 Summary of differences between accounting principles generally accepted in Hong Kong and the
United States (continued)
    Permanent way
      F-67




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 44 Summary of differences between accounting principles generally accepted in Hong Kong and the
United States (continued)
         F-68




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 44 Summary of differences between accounting principles generally accepted in Hong Kong and the
United States (continued)
           F-69




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 44 Summary of differences between accounting principles generally accepted in Hong Kong and the
United States (continued)
            F-70




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 44 Summary of differences between accounting principles generally accepted in Hong Kong
and the United States (continued)
           F-71




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
 NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 44 Summary of differences between accounting principles generally accepted in Hong Kong and the
United States (continued)
    2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Net cash provided / (used) by:Operating activities
    
    
    2,015
    
    
    
    2,008
    
    
    
    2,919Investing activities
    
    
    (1,008
    )
    
    
    (2,373
    )
    
    
    (2,984
    )Financing activities
    
    
    (893
    )
    
    
    (387
    )
    
    
    (298
    )Change in cash and cash equivalents
    
    
    114
    
    
    
    (752
    )
    
    
    (363
    )Cash and cash equivalents at January 1,
    
    
    2,477
    
    
    
    2,591
    
    
    
    1,839Cash and cash equivalents at December 31,
    
    
    2,591
    
    
    
    1,839
    
    
    
    1,476
   2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Balance at January 1,
    
    
    67,006
    
    
    
    66,118
    
    
    
    66,071Net profit/(loss) for the year
    
    
    (246
    )
    
    
    111
    
    
    
    (149
    )Other comprehensive income / (loss)Decrease in fair value of investments in
available for sale securities
    
    
    (103
    )
    
    
    (11
    )
    
    
    Amounts transferred to net profit for the
year on redemption and disposal of
investments in available for sale
securities
    
    
    79
    
    
    
    34
    
    
    
    3Unrealized loss of VIE for the year
    
    
    
    
    
    
    (33
    )
    
    
    Cummulative effect of change in accounting
principle (FIN 46R) upon adoption on
January 1, 2005
    
    
    
    
    
    
    26
    
    
    
    Net increase in deferred tax benefits
    
    
    2
    
    
    
    (2
    )
    
    
    Dividend approved during the year
    
    
    (620
    )
    
    
    (172
    )
    
    
    Balance as at December 31,
    
    
    66,118
    
    
    
    66,071
    
    
    
    65,925
 F-72




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 44 Summary of differences between accounting principles generally accepted in Hong Kong and the
United States (continued)
   2005
    
    
    2006Note

    
    HK$
    
    
    HK$(in millions)Fixed assets- investment property revaluation and depreciation
    
    
    44
    (b)
    
    
    (580
    )
    
    
    (694
    )- accumulated depreciation on certain fixed assets
    
    
    44
    (c)
    
    
    (191
    )
    
    
    (186
    )- interest and finance income capitalized under HKGAAP
    
    
    44
    (d)
    
    
    6,039
    
    
    
    6,039- accumulated depreciation on interest and finance income
capitalized
    
    
    44
    (d)
    
    
    (248
    )
    
    
    (393
    )- revenue recognition on property development
    
    
    44
    (e)
    
    
    (61
    )
    
    
    (61
    )- capitalization of certain costs net of related depreciation
    
    
    44
    (f)
    
    
    (502
    )
    
    
    (508
    )- capitalization of interest net of related amortization
    
    
    44
    (g)
    
    
    222
    
    
    
    213- capitalized net foreign exchange losses
    
    
    44
    (g)
    
    
    (36
    )
    
    
    (36
    )4,643
    
    
    
    4,374Construction in progress- interest and finance income capitalized under HKGAAP
    
    
    44
    (d)
    
    
    1,987
    
    
    
    1,987- valuation of investment portfolio
    
    
    44
    (d)
    
    
    (1
    )
    
    
    - capitalization of certain costs net of related
depreciation
    
    
    44
    (f)
    
    
    (88
    )
    
    
    (115
    )- capitalized net foreign exchange losses
    
    
    44
    (g)
    
    
    4
    
    
    
    (15
    )- rental costs for leasehold land held under operating leases
    
    
    44
    (l)
    
    
    
    
    
    
    (6
    )1,902
    
    
    
    1,851Deferred expenditure- interest and finance income capitalized under HKGAAP
    
    
    44
    (d)
    
    
    22
    
    
    
    22- capitalization of certain costs net of related
depreciation
    
    
    44
    (f)
    
    
    (82
    )
    
    
    (83
    )- capitalized net foreign exchange losses
    
    
    44
    (g)
    
    
    2
    
    
    
    2(58
    )
    
    
    (59
    )Loans to third party- recognition of loans to variable interest entity
    
    
    44
    (j)
    
    
    1,823
    
    
    
    - consolidation of variable interest entity
    
    
    44
    (k)
    
    
    (1,830
    )
    
    
    (7
    )
    
    
    Lease deposits- recognition of lease deposits
    
    
    44
    (j)
    
    
    11,371
    
    
    
    11,521Derivative financial assets- consolidation of variable interest entity
    
    
    44
    (k)
    
    
    152
    
    
    
    152
    
    
    
    Investments- consolidation of variable interest entity
    
    
    44
    (k)
    
    
    1,627
    
    
    
    Interest and other receivables- revenue recognition on property development
    
    
    44
    (e)
    
    
    25
    
    
    
    214- consolidation of variable interest entity
    
    
    44
    (k)
    
    
    6
    
    
    
    31
    
    
    
    214
 F-73




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 44 Summary of differences between accounting principles generally accepted in Hong Kong and the
United States (continued)
  2005
    
    
    2006Note

    
    HK$
    
    
    HK$(in millions)Interest and other payables- consolidation of variable interest entity
    
    
    44
    (k)
    
    
    (63
    )
    
    
    Lease payable- recognition of lease payable
    
    
    44
    (j)
    
    
    13,194
    
    
    
    11,521Interest-bearing borrowings- carrying amount adjustments arising on hedge
accounting
    
    
    44
    (i)
    
    
    (6
    )
    
    
    13Deferred income- revenue recognition on property development
    
    
    44
    (e)
    
    
    
    
    
    
    336Accumulated other comprehensive income- valuation of investment portfolio
    
    
    44
    (d)
    
    
    (1
    )
    
    
    - consolidation of variable interest entity
    
    
    44
    (k)
    
    
    (7
    )
    
    
    (8
    )
    
    
    Retained earnings
    
    
    
    
    
    
    6,426
    
    
    
    5,992
  Year ended December 31,Note

    
    2004
    
    
    2005
    
    
    2006HK$
    
    
    HK$
    
    
    HK$(in millions)Consolidated profit after taxation for the year in accordance
with HK GAAP
    
    
    
    
    
    
    513
    
    
    
    317
    
    
    
    278Adjustments required under US GAAPDepreciation on investment properties
    
    
    44
    (b)
    
    
    (14
    )
    
    
    (14
    )
    
    
    (17
    )Disposal on investment properties
    
    
    44
    (b)
    
    
    
    
    
    
    6
    
    
    
    2Valuation gains on investment properties
    
    
    44
    (b)
    
    
    (148
    )
    
    
    (171
    )
    
    
    (99
    )Depreciation on certain fixed assets
    
    
    44
    (c)
    
    
    (121
    )
    
    
    3
    
    
    
    5Depreciation on interest and finance income capitalized
    
    
    44
    (d)
    
    
    (105
    )
    
    
    (143
    )
    
    
    (145
    )Interest and finance income capitalized under HK GAAP
    
    
    44
    (d)
    
    
    76
    
    
    
    27
    
    
    
    Revenue recognition of property development
    
    
    44
    (e)
    
    
    
    
    
    
    25
    
    
    
    (147
    )Capitalization of certain costs net of related depreciation
    
    
    44
    (f)
    
    
    (21
    )
    
    
    (39
    )
    
    
    (34
    )Amortization of capitalized interest
    
    
    44
    (g)
    
    
    (9
    )
    
    
    (9
    )
    
    
    (9
    )Capitalized net foreign exchange differences
    
    
    44
    (g)
    
    
    10
    
    
    
    17
    
    
    
    (19
    )Derivative financial instruments
    
    
    44
    (i)
    
    
    (601
    )
    
    
    28
    
    
    
    (19
    )Reversal of provision for the estimated losses arising from the
early termination of lease out and lease back transaction
and loan to VIE
    
    
    44
    (k)
    
    
    
    
    
    
    82
    
    
    
    Realized loss of VIE for the year
    
    
    44
    (k)
    
    
    
    
    
    
    (18
    )
    
    
    (18
    )Rental costs for leasehold land held under operating leases
    
    
    44
    (l)
    
    
    
    
    
    
    
    
    
    
    (6
    )Tax effect of the above adjustments
    
    
    
    
    
    
    174
    
    
    
    39
    
    
    
    79Consolidated net income/(loss) for the year in accordance
with US GAAP before change in accounting principle
(FIN 46R)
    
    
    
    
    
    
    (246
    )
    
    
    150
    
    
    
    (149
    )Cumulative effect of change in accounting principle
(FIN 46R) upon adoption on January 1, 2005
    
    
    44
    (k)
    
    
    
    
    
    
    (39
    )
    
    
    Consolidated net income/(loss) for the year in accordance
with US GAAP after change in accounting principle
(FIN 46R)
    
    
    
    
    
    
    (246
    )
    
    
    111
    
    
    
    (149
    )
 F-74




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 44 Summary of differences between accounting principles generally accepted in Hong Kong and the
United States (continued)
  As of December 31,Note

    
    2005
    
    
    2006HK$
    
    
    HK$(in millions)Consolidated total equity in accordance with HK GAAP
    
    
    
    
    
    
    59,653
    
    
    
    59,933Adjustments required under US GAAPAccumulated depreciation on investment properties
    
    
    44
    (b)
    
    
    (144
    )
    
    
    (159
    )Accumulated valuation gains on investment properties
    
    
    44
    (b)
    
    
    (436
    )
    
    
    (535
    )Accumulated depreciation on certain fixed assets
    
    
    44
    (c)
    
    
    (191
    )
    
    
    (186
    )Accumulated depreciation on interest and finance income
capitalized
    
    
    44
    (d)
    
    
    (248
    )
    
    
    (393
    )Valuation of investment portfolio
    
    
    44
    (d)
    
    
    (1
    )
    
    
    Interest and finance income capitalized under HK GAAP
    
    
    44
    (d)
    
    
    8,048
    
    
    
    8,048Revenue recognition on property development
    
    
    44
    (e)
    
    
    (36
    )
    
    
    (183
    )Capitalization of certain costs net of related depreciation
    
    
    44
    (f)
    
    
    (672
    )
    
    
    (706
    )Capitalization of interest net of related amortization
    
    
    44
    (g)
    
    
    222
    
    
    
    213Capitalized net foreign exchange differences
    
    
    44
    (g)
    
    
    (30
    )
    
    
    (49
    )Derivative financial instruments
    
    
    44
    (i)
    
    
    6
    
    
    
    (13
    )Lease obligations
    
    
    44
    (j)
    
    
    (13,194
    )
    
    
    (11,521
    )Lease deposits and loan receivable
    
    
    44
    (j)
    
    
    13,194
    
    
    
    11,521Reversal of provision for the estimated losses arising from the
early termination of lease out and lease back transaction
and loan to VIE
    
    
    44
    (k)
    
    
    82
    
    
    
    Realized loss of VIE for the year
    
    
    44
    (k)
    
    
    (18
    )
    
    
    Accumulated other comprehensive loss of VIE
    
    
    44
    (k)
    
    
    (7
    )
    
    
    Cumulative effect of change in accounting principle
(FIN 46R) upon adoption on January 1, 2005
    
    
    44
    (k)
    
    
    (39
    )
    
    
    Accumulated rental costs for leasehold land held under operating leases
    
    
    44
    (l)
    
    
    
    
    
    
    (6
    )Deferred tax liabilities
    
    
    
    
    
    
    (118
    )
    
    
    (39
    )Consolidated shareholders equity in accordance with US GAAP
    
    
    
    
    
    
    66,071
    
    
    
    65,925
     Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (SAB 108)
  F-75




---



##### Table of Contents



KOWLOON-CANTON RAILWAY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2005 AND 2006
 44 Summary of differences between accounting principles generally accepted in Hong Kong and the
United States (continued)
  Accounting for Certain Hybrid Financial Instruments (SFAS No. 155)
  Fair Value Measurements (SFAS No. 157)
  Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS No.
158)
 
 The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No.
159)
  F-76